Screendoor opens to accelerate diversity within VC and tech

Most venture firms define success through their growth and generational longevity. We don’t. When Hunter and I started Homebrew it was with the idea that we’d always stay small and focused. That meant we’d never grow the partnership beyond the two of us and that when we were done investing, there wouldn’t be a next set of Homebrew partners to continue the firm’s work. We made this decision to be the best version of ourselves and to commit all our time to our founders, but it didn’t come without tradeoffs. Namely, we haven’t been able to contribute to the important efforts undertaken by many others to increase representation amongst the ranks of Partners at venture capital firms. While everyone on our team besides the two partners is female (and all have carry in our funds), we’ve been limited in the direct impact we can have on diversity in the VC industry. That changes with the launch of Screendoor

Screendoor is an investment vehicle that will provide $50+ million of institutional capital and experienced counsel to underrepresented venture capital investors who are raising their first funds. Over the past few years, many emerging underrepresented GPs have approached us for fundraising advice and LP introductions. And the message from them has been clear — they’re over-mentored and undercapitalized. Hunter and I, along with a group of peer GPs (who are almost all underrepresented themselves) want to put those new, underrepresented GPs in business. We believe there is no better (or faster) way to change the composition of the venture capital and technology industries than enabling more underrepresented investors to allocate capital in the tech ecosystem. We’re all investors in the fund and aren’t taking any fees or carried interest. Instead, we’re devoting our time and money to the goal of generating outsized returns by backing the future leaders of the VC industry.

Historically, participants in the technology and VC industries have benefited from an incredible virtuous cycle of wealth creation. VCs provide capital to founders, founders hire teams and all of those people generate wealth when companies are successful. That success leads to more capital and advice funneling back into the ecosystem. But unfortunately, huge segments of the population have been absent from the flywheel, leading to massive, missed economic opportunities for them and the broader ecosystem. 

Screendoor’s theory of change is centered on recreating this virtuous cycle for underrepresented groups. It’s empirically true that underrepresented investors are more likely to fund underrepresented founders, who in turn are more likely to hire underrepresented team members. By providing capital to underrepresented investors, we hope to kickstart the virtuous cycle of generational wealth creation for underrepresented groups, leading to more dollars, advice and talent flowing back into the ecosystem.

There has been some progress made with representation in the venture capital industry over the past few years. But it’s clear that change has been slow and not as significant as the industry needs. Change will continue to be slow if the industry waits for large venture firms to add underrepresented investors to their ranks and put them on the traditional path to becoming check writers who make 1-2 investments per year. Adding more underrepresented investors to the industry is the right goal. But there are faster and more scalable ways of bringing greater representation to the VC and tech industries. Our hope is that Screendoor will be one of many models that help accelerate progress towards a more representative industry. 

Growing up in the heat of Las Vegas, screendoors were a feature of many homes. They were essential for letting the breeze in while still protecting the home. But most importantly, they were an invitation to come in and get respite from the heat. In our neighborhood, if you could peer into a house through the screendoor, it was a sign that you were welcome to come grab a cold drink, use the bathroom or just get a few minutes of cooler air. The “thwack” of a screendoor would announce you were coming in, and the reception was always one of warmth, safety and sustenance. With Screendoor, we hope to provide that same welcome and feeling to the next-generation of investors who will redefine the tech and VC industries. 

Homebrew won’t live on beyond me and Hunter, but Screendoor can! It’s our shared intent, along with Screendoor’s other Venture Advisors and a group of experienced institutional LPs, to grow and become an important “Limited Partner” in the VC industry. We recognize that when we started Homebrew we fit the “profile” — two men with a long history in Silicon Valley at well-known tech companies and with some investing track record. We’ve benefited greatly from being included in the virtuous cycle of tech and VC. With Screendoor, we hope that we’ll make it possible for those who historically have been excluded to finally reap the same benefits. 

If you’re an emerging manager interested in learning more, please contact us. If you’re an LP interested in a potential commitment to the investment vehicle, you can reach us here. And finally, we’re hiring for a Head of Operations. If you’re excited about Screendoor’s mission, consider applying here.

What We Learned from Hiring at Homebrew

About a month ago we announced the addition of Kate to our team. We regularly tell founders that hiring will and should consume the majority of your time, especially when hiring for key roles on the team, and it was no different for us once we published that we were looking for someone to join Homebrew. We recently conducted a retrospective to review what we learned from the process and we thought we’d share the results. And we’re hopeful that our experience will help inform others in our industry who are making additions to their teams.

When we started the process, we wanted to make sure to cast as wide a net as possible. So we did a few things to try and get a large and varied group of applicants. First, we were public about the opening, something that isn’t true of many (if not most) roles in venture capital. Second, we worked to have the role publicized within communities where our existing networks aren’t as deep as we’d like. All Raise and Code2040 are examples of organizations that were kind enough to share our opening. Third, we only loosely defined the requirements of the role, not even giving it a title, as a means of encouraging individuals to not prematurely disqualify themselves. Finally, we created an application process that had a goal of being less reliant upon the traditional resume and the biases they can introduce.

We received hundreds of applications for the opening. And here are some of the facts.

    • Nearly one-third female candidates
    • 55% minority* candidates (16% underrepresented minority candidates)
    • Almost 40% of candidates from outside the Bay Area (including 10 different countries on 5 continents)
    • Prior work experience varied dramatically but the most common employer was Google (perhaps influenced by our own networks). The most unique background was alpine skiing instructor.
    • Most admired entrepreneurs named by candidates were Elon Musk and Jack Ma, followed closely by applicants’ parents. The most unique answer was definitely Alan Alda!
    • Answers to questions that required video responses were incredibly useful for us. They were what we reviewed first and we spent countless hours doing so giving our application had two questions, each of which asked for up to a 3 minute video response. We saw people respond while holding their pets, walking around town, sitting in traffic and doing voiceovers for slide presentations. There were even applicants who didn’t submit videos and instead wrote “I’d rather not,” “I don’t have time right now,” and “:)”.
    • Surprisingly small number of applicants who mentioned supporting founders as their motivation for considering venture capital; too many who focused on what they wanted out of venture (it’s a service industry folks!)

For the people with whom we conducted interviews (post review of all applications), the metrics were:

    • Majority female candidates
    • 57% minority candidates (24% underrepresented minority candidates)
    • Nearly half of candidates from outside the Bay Area

So what worked well in the process to get to these metrics? We solicited guidance from outside experts on how to ask for and receive diverse candidates and how to remove implicit bias from our evaluation. Broad outreach about the role was key. While we required a resume, it was absolutely that last thing we looked at when reviewing applications (I’m 99% sure Hunter can’t tell you where Kate went to college). We didn’t require candidates to come to Homebrew HQ to interview. We involved our entire team, including Beth, our Head of Talent, and Charo, our Operations Manager, in the process. We didn’t make an offer until we completed reviewing every application and interviewing every last candidate. We gave every applicant a personal response.

What could we have done better? Even broader outreach to many more organizations and communities that aren’t part of our existing networks. More opportunity within the application, for those who came from untraditional backgrounds, to express what they can bring to the table. More feedback to candidates on what they could do to be even better equipped for the next VC role they seek.

We’re truly grateful for the interest that was expressed by so many in joining our team. We’ve added an incredible person to our team and we’ve learned a ton from the experience. If sharing both the things we did well, and our ideas for improvement, helps increase access to VC jobs for all candidates, we’ll be even more pleased with the process.


*Defined to include U.S. Census Bureau categories of Hispanic or Latino, Black or African American, Asian, American Indian or Alaska Native, Native Hawaiian and Pacific Islander.

Fun conversation on Angel podcast

I recorded an episode of the Angel podcast with Jason Calcanis that was published a couple of weeks ago. It was a wide-ranging conversation, covering everything from cryptocurrencies to company culture to our portfolio companies. Because the podcast and Youtube video run nearly an hour and twenty minutes, I thought a transcript might be helpful for people who’d prefer to read and save some time. As with most transcripts, apologies for any errors and inaccuracies. You can find all 33 pages(!) here. I hope you get something out of it.


How to Fire an Employee the Right Way

The beginning of the year is the traditional time for annual performance reviews at most startups (if you don’t do them, check out Homebrew’s guide to Performance Management at Startups). And sometimes, the outcome of that review process is the decision to fire someone who hasn’t been performing or doesn’t work well with others on your team. While there’s no shortage of advice on hiring at startups, including my own, there doesn’t seem to be as much attention paid to how to fire someone correctly. Doing this well is critical because you’re dealing with a human being, someone who is likely to experience pain and disappointment when fired. And handling firing people well is also important for the remaining team’s morale and sentiments about the company. Here are some tips for making an already difficult conversation a bit more tolerable.

Own it: Sure the person you’re firing isn’t doing her job well or is a terrible teammate. But you hired her. And you saw skills and qualities in her that made her a seemingly good fit for your company. So it’s likely that part of the reason that she failed is because the systems, structures and processes you put in place didn’t work well for her. The failure is as much yours as hers. Recognizing that will help you approach the conversation with compassion and a focus on the facts.

No surprises: The person you’re firing should never be surprised. Of course, this assumes that the reason for being fired is performance and not an ethical or legal policy violation or the result of a cost reduction, in which case it might be difficult to avoid surprise.  If you haven’t been giving him feedback on his performance and suggesting ways to improve it, you haven’t been doing your job as a manager or teammate. And you haven’t been giving him an opportunity to improve and demonstrate that he is the employee you thought you were hiring. That’s a disservice to him and the company.

Don’t wing it: Talk to your lawyers. Document the prior feedback and outcomes. Plan what you’re going to say and also where (someplace private) and when you’re going to say it (avoid Fridays so you can address any concerns of your team and not let them fester over the weekend). Prepare compensation and benefits information to present in writing at the end of the conversation.   

Empathy, not apology: Firing someone is emotional for both sides, but there’s no question it’s tougher for the person being fired. Engaging in a debate about why someone is being fired or apologizing for firing him only generates more emotion. Your approach needs to be empathetic, but focused on the clear and concise delivery of the message and its finality. If you’ve done your job communicating and documenting feedback, you won’t need to explain why he’s being fired. If the person is being fired because of a cost reduction, proactively offer to provide a reference to potential employers.

Do it in person: The person you’re firing was your teammate for some period of time. She deserves to be treated with dignity and respect. Firing someone over the phone or email doesn’t properly acknowledge the risk she took in joining your startup and the effort she put into being a good employee. It can also leave her feeling disrespected and angry, which can have its own repercussions, including legal action. Firing someone in person will help you maintain a better relationship with her over the long run.

Don’t do it alone: While you want to have the conversation in person, you don’t want to be the only person in the room. Fired employees are less likely to react angrily or violently when someone else is present. That person can also verify what was and wasn’t said in the conversation if there is ever a dispute. Ideally, someone from your HR team can join you. Your HR representative may be able to present the compensation and benefits information at the end of the conversation or answer any related questions. Many startups don’t have HR staff early in their development, so opt for a founder or another executive who has prepared in the same way that you have.  

Handling firing the right way can make a tough situation a bit easier for everyone. In fact, you might be even be surprised how people may react in the moment. An employee may express relief because she knows she’s been underperforming but has been afraid to make a change herself. Or she may share her gratitude for her time at the company and the relationships she’s built. But expect that no matter the outcome, the conversation is not an easy one. Taking these simple steps will help you have a less difficult conversation and maintain a good relationship with someone who you once considered a fantastic hire.   


How we work at Homebrew

Homebrew was founded on the simple idea that there are many sources of capital at the seed stage, but there are very few seed stage investors who are willing to sign up to be the investors of record. To us, being the investor of record means being accountable to the founders, and for the company, in a way that goes beyond just providing capital. It means working alongside the founders to help ensure they build a company they’re proud of, one that matches the fidelity of vision they have in their heads. This doesn’t mean we sit on org charts or seek to make decisions on behalf of the founders – quite the opposite, we look for founders who will be successful without us, who treat their company as their first product and are intentional about the decisions they make. But we work closely with them so that the company can hopefully increase its probability, speed and scale of success.  

In many of our first meetings with startups during the fundraising process, founders ask us exactly how we work with companies. So I thought it would be helpful to answer that question in public, both because it’s asked frequently and because it’s critical to the relationships that we build with founders who choose to partner with us. We have a few formal ways in which we work with founders (the informal being text, Slack, email and calls all day, every day!) during the seed stage.


When we worked on the operating side, one-on-one meetings were incredibly beneficial to us as both employees and managers. They helped gain alignment, provide support and overcome roadblocks. When we started Homebrew, we thought that 1:1s would be valuable in doing the same for us and the founders who choose to partner with us. So, after we invest, the first order of business is to schedule a weekly or bi-weekly 30-60 minute meeting, which we often describe as the equivalent of an agile “stand-up”. In that phone or video meeting (we don’t really stand!), the founders lead us through the activities of the past week and the upcoming week and then highlight the areas where they’re stuck or want help. From that last portion of the conversation, we ask the founders to assign us “homework” (no more than three assignments at a time), which we then aim to complete before the next stand-up.  Our perspective is that it’s the founders’ company and they know best what the priorities and challenges are.  So we take our cues from them.  

For us, the beauty of this approach is that it gives us deep visibility into what the founders and company are focused on day-to-day and what’s keeping them up at night. And on the flip side, it also reveals to us what they’re not focused on. So not only are we able to be responsive to the needs of the company, we’re also able to help the founders course correct or avoid potential pitfalls that we see coming down the road based on our experiences with other teams and companies. The cadence of these stand-ups also assists all of us in establishing a foundation of trust so that there are never any surprises for either side. Along the way, we solicit ongoing feedback to make sure both parties feel like the time is well used.   

Working with Homebrew was our very first foray into the venture world. We had nothing from which to compare their model of working so closely with their founders versus another company.  But as we got more educated on the landscape, we have realized just how unique and special this is. The best parts for their unique structure have been two fold: there is a specific weekly forum to discuss anything that comes up on either side on a regular basis. And it really does feel like you are building your company with a partner. 

Carly Zakin, theSkimm Co-founder  

Board Meetings

As I’ve shared previously, we’re big believers in creating a board of directors at the seed stage. These meetings typically take place every 6-8 weeks and are treated as working sessions focused on the key strategic issues facing the company. The meetings tend to be fairly informal to start and become more formal as the company gets closer to a Series A fundraise. This keeps the required effort to a minimum in the early days and provides ample opportunity to practice for more typical board meetings later. The board meeting gives us and the founders the opportunity to step away from the tactical, day-to-day issues to focus on 1-2 critical questions the company needs to answer in order to reach its next milestone (typically raising a Series A). The meeting also helps all of us make sure that we’re in alignment about the company’s goals and what needs to be achieved so that we collectively want to take the additional risk associated with raising more capital.  

On-Demand Closing

For seed stage companies, possibly the most important decisions they make are about building the team. And in a hyper-competitive talent market, even little things can make a big difference between candidates choosing a job at one company versus another. That’s why we try to abide by a 24 hour SLA for conversations with candidates, at any level, who have job offers from our companies. Our goal in these conversations is not just to close the candidate, but to make sure that there is a strong mutual fit.  We believe that as much as companies choose people, people also choose companies. And so both sides needs to feel that joining the company is the right decision. Being able to talk to the investors who chose to put capital and time into a company is often both helpful and meaningful for candidates who are trying to understand the opportunity in front of them and their career alternatives. And it gives us the opportunity to meet incredibly talented individuals who may works at our portfolio companies or go on to do great things outside of the Homebrew portfolio.  

Because of his incredible willingness to jump in to speak with candidates whenever needed (even when he doesn’t know about it until an hour before…), Satya has basically become the final step in our interview process for key roles. He has been able to bring an invaluable combination of perspective on candidates’ overall horsepower, whether or not their superpower is a fit with what the business really needs and whether they will fit with our culture. And then in cases where we are in love with a candidate, we look to him to quickly validate that feeling but then close it right up! He’s batting 1000 right now and so obviously we don’t call him Satya anymore. we just call him “The Closer”!  

Galyn Bernard, Primary Co-founder

There are many founders for whom this kind of investor involvement may be unexpected. But it’s important to note that the Stand-Ups are voluntary, the Board Meetings happen on a frequency that is usually determined by the founders and in both cases the agendas are always owned by the founders. And most importantly, the data would suggest that our approach matters.

In our first fund, 16 companies have gone to market to raise Series A capital and 15 of them have been successful in raising a Series A led by a new investor. Now we could just be exceptional company pickers with founders who are gifted fundraisers, but that seems unlikely given the typical percentages in the venture business. Our hypothesis is that having an “investor of record” who has been responsible for the company is a strong, qualifying signal to new investors. Further, because we agree on what needs to be achieved to raise the A (through the Stand-Ups and Board Meetings), the companies tend to go to market when we collectively believe that they’re able to raise from a position of strength, with both strong stories and solid results.

Time will tell if our companies will continue to have this kind of fundraising success. But there is no question in our minds that our approach to working with companies is incredibly rewarding for us. Hopefully our founders feel it’s as impactful for them!

When I first met Satya and Hunter I was 25. I had never really managed anyone, or even been a part of a business at scale. The bet that Satya and Hunter made on me and my team was, in retrospect, insane. However, they’ve consistently followed through and been a big part of the Q story. Their model of working with me in regular calls and board meetings has been fantastic.

In the past 3 years we’ve raised over $70M from top investors, and the company is now over 1000 employees nationally. We have a long way to go, but we’re on the path to realizing our vision. On a personal level I credit them with helping me to scale from an early stage founder to a late stage CEO. They are a constant support, whether it is pushing through a fundraise, whiteboarding org design, pitching in to recruit top talent, or telling me to take a vacation. It is easy for investors to only be around when you’re “killing it,” but what I value most about Satya and Hunter is that they are never shy to impart the tough love that makes me and my team better…even when we think we’re killing it. 

Dan Teran, Managed by Q CEO

Homebrew’s 2017 Annual Meeting: Our POV from year four

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.

Homebrew Year 3: The Path to Investment

We had an incredible day last Thursday as we got together with our LPs, founders and advisors for our 3rd Annual Meeting to review Homebrew’s progress over the past year.  Hunter already wrote about what we said we know and don’t know after three years of Homebrew.  One of the things we talked about was being eager partners to other investors and also hungry competitors.  But the opportunity to partner or compete is predicated on the lifeblood of any fund: deal flow.

Picking great startups and winning the opportunity to invest in those companies is clearly critical to the success of any VC fund.  But it all starts with seeing the best opportunities in the first place.  Potential investment opportunities can come from known connections like operators, investors, or service providers.  But they also come in cold based on reputation and are generated actively via outbound outreach.  And we do our best to provide an answer (almost always a “no”) to every single company.  After year one, I wrote about our deal funnel.  It’s time to revisit the data after a couple of years of refinement.

Here’s how our overall investment opportunity funnel broke down in 2015:

  • ~1600 opportunities evaluated (100%)
  • 476 companies with first meetings or calls with either me or Hunter (30%)
  • 64 companies that then had a meeting with both or the other one of us (4%)
  • 14 investment offers made (0.9%)
  • 10 investments made (0.6%)

Of the ~1600 opportunities we saw, here is how those opportunities were sourced:

  • 35% from entrepreneurs and executives in our network
  • 27% from other investors (includes angels, VCs, accelerators, etc.)
  • 3% from service providers (legal, finance, etc.)
  • 35% from other sources (inbound, proactive outreach or ideation)

Coopetition and our seat at the table

It might be surprising to some to see that over a quarter of our opportunities come from other investors (up from 16% in our first year) but the VC ecosystem at the seed stage is very cooperative.  Seed rounds seem to range from $1.5m-$2.5m nowadays and most seed firms don’t write checks that large (larger funds are a different story).  As a result, nearly every financing round has a syndicate structure with several VCs and angels participating.  Our approach is to be the investor of record in the round.  To us that means being the lead or co-lead investor (writing one of the larger checks, from $500k to ~$1m) for only 8-10 companies each year, typically taking a board seat and then working closely with the founders to help them build the company that they envision.  

We’re very transparent about this approach with both companies and other investors.  And we work hard to make sure that they see a clear seat at the table for us based on our approach, experience and potential contributions to the company.  Often times we’re able to work with other VCs in supporting a company.  Sometimes it means that we beat out other VCs for the opportunity to invest and sometimes it means that we get beat (4 times in 2015, of which two were originally seed rounds that became Straight to A’s).  But it’s super important to us that irrespective of the outcome with any particular investment opportunity, we treat other VCs with respect and honor their potential contributions to a company.  It’s one reason that we’ve had the good fortune of seeing so many wonderful opportunities from our fellow VCs.

Hustling to find the best opportunities in areas we care about

The percentage of deals that come from other sources has also increased (up 10% from year one), driven largely by our outbound efforts.  While not exclusively thesis-driven, we do spend a lot of time thinking about markets or trends we liked to invest in.  We then take those interest areas and try to identify and contact companies or entrepreneurs doing innovative work in line with our theses.  Not coincidentally, 3 of the investments we made in 2015 were the result of outbound efforts.

Open to inbound

We get a lot of cold inbound emails from founders asking us to invest.  The form emails that are clearly being sent to a large number of investors get rejected quickly.  But on occasion, a truly thoughtful, personalized email appears in our inboxes and grabs our attention.  The sender has clearly done his or her homework on our investment approach and areas of interest.  And the email contains data or a demo that tells a compelling story.

We respond to all cold inquiries because of emails like those and because we want to be at least somewhat helpful to founders who take the time to express interest in working with us.  We believe that there is an opportunity to grow the pie and impact founders beyond just our portfolio given the platform we have as VCs.  And every so often, this “extra” work yields a match.

Just as in Fund I, we have one investment in Fund II that is the direct result of an inbound email without a warm introduction.  You’re much more likely to have success getting any VCs attention if you’re referred to him or her, but if you’re going to send a cold email, make it clear why your company is a potential fit for the investor and back up that story with data or a demo.

Tightening our filter

Since we started Homebrew we’ve continued to refine our investment criteria and judgment to make quicker decisions so that we don’t waste founders’ time and so we can allocate as much time as possible to our existing portfolio companies.  Our goal is to take a deliberate path to conviction rather than circle an opportunity to see how things play.  Our diligence focuses on the questions that we think are appropriate for a seed stage company that hasn’t yet obtained product-market fit, not endless data requests and busy work for founders.

We only take a first meeting or call when we see something about a team, product or market opportunity that signals it could be special.  While we reduced the percentage of companies with which we take a first meeting from 45% to 30% in the past two years, we’d like to continue to drive that number down, probably in the 20-25% range.  Every meeting can be educational or lead to an important relationship, but we err on the side of getting to “no” (and once in awhile “yes”) as quickly as possible.  And usually that means even before a first meeting.

Sticking with unanimous decisions

Every single investment we make is one that both Hunter and I are excited to put sweat and reputation behind.  There’s no such thing as Satya’s investments or Hunter’s investments.  There are only Homebrew investments.  It’s been this way since we started and only if we someday have 3+ partners do we expect that to change.  In the meantime, every company we invest in spends time with both us of during the diligence process.  If after a first meeting (and usually some preliminary diligence) one of us believes that the team, product and market collectively represent a strong candidate for investment, the other partner is brought in to dig on the 2-3 key outstanding questions.

At the end, we believe we need to be early or contrarian (and eventually right!) when making investments.  There has to be something unique about the combination of the team, the product and the problem being addressed that compels us to write a check.  We tend to be less interested when there is a market where a dozen companies are doing effectively the same thing.  Unless we see a very clearly differentiated approach that has long lasting differentiation, we’re likely to pass.  

That’s not to say those companies won’t be successful or won’t be able to raise seed money (in most cases they do).  They’re just not the right opportunities for Homebrew.  Many times we feel very confident that those companies will likely be successful in raising capital beyond the seed round.  But we’re very comfortable foregoing short term write-ups to avoid what we perceive to be long-term pain.  The net is that we’d like to get more efficient in this process as well, decreasing the percentage of companies that meet with both us from 13% of companies that have a first meeting with us to 10%.

For the curious, our average core investment in 2015 was $799k.  We invested in four Bay Area companies, 4 NYC companies and 2 LA companies.  Three of the companies had female members on the co-founding team (including two female CEOs) but none had founders from underrepresented populations.  We’re working diligently to try and address the last issue because we know that to be a top-performing fund we need to back a diverse set of founders.  We also emphasize with our companies that diversity within the first 20 hires will make for better startups.  Finally, we’re doing our best to stay on top of our own unconscious biases.  It’s early, but we hope to make real progress here in the coming year.

So what?

Based on the opportunities that we see, we have great confidence that a very successful fund can be built by investing in the right subset of those companies.  Ultimately, we won’t know for many more years whether our picking will yield an incredible fund.  But we do already know that we’ve invested in incredible people.  People who we are so proud and excited to be working with.  It’s these people and the ones we’ll back in the future that lead us to work every morning.  We’re so lucky they’ve chosen to partner with us.  We try to remember that every day, but it’s never more apparent than on the day of our Annual Meeting.  As Hunter and I said after the meeting “How. F’in. Lucky. Are. We? Very lucky.”  Hoping we’ll continue to be as lucky until our next Annual Meeting!


What’s your startup’s superpower?

The sky is falling in the venture financing market!  Warnings, exhortations and admonitions are being written and spoken everywhere.  A market in which capital was abundant is now increasingly constrained.  So what’s a startup to do?  The reality is that you probably shouldn’t change anything about your business if you’ve been running it rationally.  Capital is really only a tool at the early stages.  Capital enables you to exist, it doesn’t enable you to win.  More important than ever is being able to answer one question.  What are you going to be the best in the world at doing?  Answering that question will help your company focus on unlocking its superpower, the skill or asset that truly sets it apart in the market.  And that will allow you to survive, and even thrive, in any fundraising environment.  

As a VC, I see a large number of startups, often times multiple startups pursuing the same opportunity at the same time.  In all of these situations, Hunter and I care a ton about the “Why”.  But just as important is the “What”.  And the “What” has to be a vision that contemplates what will truly differentiate the startup in the long term.  Too many companies we see think that being first to market, raising the most capital and spending it quickly will lead to winning.  That’s never been accurate, and it’s both wrong and dangerous in today’s market.

Google is best in the world at search.  Facebook is best in the world at building a social network.  Apple is best in the world at building integrated software and hardware for consumers.  All of those markets are or were incredibly crowded.  But knowing what they wanted to be best in the world at helped them figure out what superpower they needed to develop.  Google knew that to be best in search in needed the best data infrastructure.  Facebook knew that if it wanted the largest social network it needed a competency around growth of that network.  And Apple knew that if it wanted to build devices for the average consumer, it needed simple and beautiful design.  Arguably, these superpowers didn’t just help those companies win.  These superpowers helped them maintain their market leadership as well.

Whether you’re bootstrapping or flush with VC money, it’s worth asking what your startup’s superpower is going to be.  Once you answer that question, you can focus on the development of that superpower rather than on things that make you temporarily different or different in a way that is easy to replicate.  Success at building your superpower will lead capital to seek you out, even in a market where it’s trying to hide.

Busy, but not productive

The founders we meet each month are always passionate, ambitious and determined.  And they’re always working like mad.  But too often, especially as of late, I find that they’re making little to no progress despite their endless work.  This isn’t because their ideas are bad, their teams are weak or they’re capital constrained.  It’s because they’ve fallen into the trap of being busy, but not productive.         

It’s so easy as a startup to spend your hours building, selling, recruiting, etc.  You always want to be doing something.  What startup founder doesn’t say that he or she is “really busy” when asked how they’re doing?  Because if you’re doing something, you’re surely making progress, right?  Unfortunately, not really.  Progress at a startup is ultimately measured not by hours but by risk.  In the early days of a company, everything is uncertain and the risk is extraordinary.  Progress is made by reducing risk.  And the only way to reduce risk, is to learn.  Being productive at a startup means focusing all of your activity on learning so that you can reduce risk in the business.  

Unfortunately, for lots of startups, learning takes the form of doing something and then seeing what happens.  That’s not learning.  That’s just being busy.  True learning requires asking a question and forming a hypothesis before taking action.  That action (a test or an experiment) then helps you prove or disprove your hypothesis.  In addition, most founders think about learning only in the context of their products.  But being productive and focused on learning applies to every aspect of the business.  Marketing, hiring, pricing, etc. all need to be hypothesis-driven so that you’re always learning about whether you’re targeting the right customer, hiring someone with the right experience or capturing the right value for your product.  

It’s only learning that helps you reduce the risk in your business.  And ultimately, that’s what enables you to attract capital when the time comes.  During your next fundraise, any new potential investor is going to want to know what you’ve done since the last investment.  That’s really his or her way of asking what risks have been reduced or eliminated in the business.  They don’t want to pay a higher price for the same risk that earlier investors took.  They only want to pay up for reduced risk.  That comes from being productive instead of just busy.

The two goals of startup fundraising

Money’s been flowing. VCs have been investing money at levels not seen since the bubble year of 2000. Entrepreneurs have been raising enormous amounts of money at valuations that assume years of future growth and eventual profitability. So what’s the downside of all this? That entrepreneurs mistake what they’re reading on Techcrunch as the reality for their own companies both now and for the foreseeable future. Raising money seems like a cakewalk, but that’s only because you don’t read about the failed financings, down rounds and recaps nearly as much as the unicorns and decacorns. And warning signs are emerging that the cascade of cash is about to end. The reality may be very different soon, and that’s something that we’ve emphasized to our Homebrew partner companies as they’ve hit the fundraising trail this year. Fundraising is confusing, frustrating and all-consuming at its worst and informative, exciting and rewarding at its best. But regardless of the process, we like to say that for all startups there are only two goals in the fundraising process: put money in the bank and maintain optionality.

Put money in the bank: The number one goal of fundraising is to get money in the bank so that you have the opportunity to solve the problem you set out to solve. If you’re fortunate enough to have a story or metrics that attract multiple term sheets, feel free to aggressively negotiate pricing, structure, syndicate partners, etc. But more likely is that you won’t have so many options and you’ll need to accept the terms you’re offered (more or less) so that you can live to fight another day. The number one cause of company failure is running out of money. And many times the key to winning is just surviving so that market timing finally lines up with your product or service. If you want to build a high-growth, venture-backed startup, do whatever it takes to push cash on the balance sheet. That way, you’ll be able to fund operations to hit the next set of milestones that will allow you to raise additional capital or achieve profitability.

Maintain optionality: It’s incredibly tempting to raise as much money as you can at as high a valuation as you can. All startups believe that with more money they will accomplish more in the same amount of time. But in our experience, constraint is what yields innovation and results. More money typically yields more spending. Companies often end up trying to solve problems by hiring more people and burning more cash. In the meantime, the bar for the next financing has been set much higher because investors expect to see greater results given the larger amount of money and the higher price at which it was raised. Everytime you raise money, consider that you’re cutting off possible paths in your financing/exit decision tree with every increase in dollars raised and valuation. While every founder envisions building a unicorn, the odds are that if your company is successful, that success will be at an exit value much lower than $1 billion. So why not approach your financing in a way that maximizes your options for raising more money when you have additional data that gives you the confidence to take more risk and double down on the business? Or why not maintain the option of accepting an acquisition offer or going public at a fair valuation and still generating incredible wealth for you, your employees and your investors? With a currently mixed exit environment (even for unicorns) and historical exit data skewing much lower than $200 million, maintaining optionality through your financing can be the difference between surviving or winning and the failed financings, down rounds and recaps that no one wants to talk about.

Raising large amounts of money has been glorified. Being able to do it quickly and painlessly has become the expectation. But the reality is very different and likely to become more so as the market adjusts to a reality with few exits and difficult to justify valuations. So just remember that at the end of the day, only two things matter when it comes to fundraising. Put money in the bank and maintain optionality. Give yourself the ability to control your startup’s destiny and take on more risk only when you feel ready.