- Our investor, Bloomberg L.P.
- What we believe about the future of work
- What we look for in a startup
- The deal terms
- Our “products,” or, models for how we work with founders
- How we support our companies
- Finding us
Our investor, Bloomberg L.P.
Bloomberg L.P. is our sole investor.
We appreciate many things about our investor: Bloomberg is a different kind of company. Bloomberg is a pioneer -- it created one of the original SaaS businesses, the first professional social network, and invented many practices that are now widely adopted by startups. We hope startups will be inspired by Bloomberg’s example, as we are.
Bloomberg knows and respects technology and technology companies, is set up to be independent-minded, and builds toward long-term value. Bloomberg was created 30 years ago on a then-controversial idea -- that information in financial markets should be more widely available. Bloomberg has reached global scale and influence, with more than 15,000 employees in almost 200 locations -- and yet it is still a private company, held by its founders.
Why did Bloomberg L.P. create Bloomberg Beta? Bloomberg wants a window into the world of startups to understand meaningful trends early, and know founders and companies long before it becomes obvious that they will be significant. To do this, Bloomberg wants a way to support founders and collaborate with them that doesn’t involve an ordinary commercial relationship. (Many startups are not ready to partner with Bloomberg -- or any established, larger company -- until they’ve grown, settled on a direction, and decided to make a partnership a priority. That can take as long as a few years after the company is founded.)
Bloomberg L.P. invested in Bloomberg Beta to open that window to startups, and set up a structure that is rare for a corporate-sponsored firm -- a true fund that invests for financial return, not an “operating division.” Bloomberg knows that great founders want investors whose interests are fully aligned with their own.
So Bloomberg Beta is set up to choose its own investments, and back companies solely on their merits and financial potential, regardless of whether they have (or intend to have) a business relationship with Bloomberg. We do focus exclusively on areas that are of relevance to Bloomberg -- we wouldn’t invest in a videogame, or a consumer e-commerce site for example. One way to think of our focus: we look at the future of work. If you’re focused on making leisure or family life better, we’re probably not your people.
Ultimately, Bloomberg L.P.’s founders have succeeded at doing what we hope to help other companies do -- create something extraordinary.
What We Believe About the Future of Work
To know how our fund works, it helps to know the views we bring into every meeting, every email we send, every thought about a startup. We've worked to articulate some of these beliefs -- both those writ large about the economy as a whole and the nature of how business will operate in the future.
Work as the Soil of New Technology
Our personal lives are now guided by technology -- voice-recognizing kitchen assistants, cloud-based email, self-parking cars, instant delivery of goods and services -- more advanced than what we use at work. In the last 20 years, unlike much of modern economic history, technology often arrived in peoples' personal lives before it reached industry.
We believe that work will catch up, and we'll return to the historical norm, where technology arrives at work before it arrives at home. Work -- especially knowledge work -- will be the soil in which many of the most exciting new technologies, especially many kinds of machine intelligence, will find their most interesting applications. Think about all the industries waiting for a modern approach.
Accelerating Pace of Technological Change
We believe technology's pace, while accelerating, will affect us in a more profound way: changes, when they happen, will be far more sudden and jarring. The transition from a human society of hunters and gatherers to an agrarian one took about 3,000 years; the transition from agriculture to industry took roughly 300; industry to services took about 30. Whatever comes next will happen during the span of the careers of people working today. Now, an entire industry or category-leading company can fall off a cliff. In 1958, if a company cracked the S&P 500, it could expect to stay for 61 years -- today, the expectation is only 18 years.
The Barbell Effect
We believe some startups (and some established companies, mostly the ones with respect for technology as a first-class citizen) will harness the chaos. They will replace entire ways of doing business -- mission-critical communication systems, cultures, business models, leadership, and many long-treasured assumptions. Some will supply technology to other companies, while some will enter the fray as direct competitors themselves, built differently from the ground up.
As the dust settles, industry winners will eat more of their industry's total pie, and the middle will wink out of existence. Big companies will get even bigger, and small companies will be able to make a good living for themselves, their owners, and their employees at ever-smaller sizes.
Working Like Developers
The human impact of these changes will be enormous. For people working, we believe more of their work will look like that of software developers (automating away tasks and harnessing the flexible power of computers to get work done), and of securities traders (acting on quantitative data all day long). We believe much individual work will be done in collaboration with software that makes its own choices. As a result, many people will suffer the maker vs. manager dilemma that today afflicts mostly software engineers. These talents will bring their own tools (more than just their devices) to work, insisting on the software and practices that make them most productive.
The New Company Wo/man
Careers will look less like a straight line, and more like a portfolio of activities, with people judged on their work and their capacities as opposed to their past institutional affiliations (whether educational or professional). In some cases, people will decouple income from work, and integrate their lives and their work in ways considered career limiting today. Their personal, economic, social, geographic, and demographic backgrounds will also be much more diverse than the most recognized talents of today.
The Importance of the Individual
Those changes in how people work mean the era of the superhero individual talent is only beginning. An individual person at work will become even more productive, and soon we will see a one-person billion-dollar company. Those individuals will be the ones to create new industries and topple old ones. They will need relatively little capital (financial or otherwise) to reach new heights. They are the ones we want to find early, support with trust as well as dollars, and cheer as they hit escape velocities.
What we look for in a startup
We recognize that seeing early signs of an outlier is hard, and nobody’s cracked how to do it reliably. What we want is a reason to tell ourselves that a startup has a chance to be extraordinary. There are a few areas where we search for signs: certain qualities of a founding team, an early product, areas where we think we can be helpful, and the right moment in a company’s life. Here is a complete list of the questions we ask ourselves when evaluating startups.
We look for a reason to believe a founding team is extraordinary. Not that they have the perfect skills or experiences to match the business they want to build (which is where the “team” slide in the deck tends to focus), but that they have the capacity for greatness.
What gives us a sense the founders could be extraordinary? Often times, they just have an unusual psychology -- they think they are exceptional, see grand patterns others don’t, are indifferent to norms, and may have an exceptionally high pain threshold. We are inspired by Michael Dearing’s description of the cognitive distortions of founders (pdf, vid). We have passed on companies because we didn’t think the founders were crazy enough -- they seemed too textbook. (And we don't mean their appearance or background, we mean their level of extraordinary determination, willingness to try, or insight.)
We believe the founders destined for greatness will be magnetic to the best available talent and capital for their companies, and we find ourselves thinking we'd want to work for them (because, if we invest, we will be working for them). They see raising venture capital as a sometimes-necessary aspect of creating a certain kind of business, as opposed to a box to be checked or a badge to be won. They'd continue attacking the problem they've chosen, in some form, whether or not they raise venture capital. They hold as articles of faith that a great company will have a strong culture, and unusual practices that make it an outlier -- and begin to integrate that way of thinking sooner than strictly necessary to continue growing their business. Doing so often means concentrating their teams in one (or at most two) locations, recognizing that the known ceiling for distributed teams is still quite low and that face-to-face conversation is a surprisingly resilient mode.
Great teams have a plan to win when -- surprise, surprise -- they learn that a dozen other teams are pursuing their previously-thought-to-be-unique idea. They persevere when others (including us) tell them that ideas are cheap until they are brought to life. They both see themselves as unique and list many companies as their competitors.
So much of backing founders is about trust -- many of the companies we’ve backed are led by people who we’ve known for years, and grown to trust. If we don’t know you ourselves, we prefer if someone we trust knows you. Otherwise we find it hard to trust our impressions of you after a meeting or two; first impressions are so unreliable. That said, we’ve backed founders who we only just met -- sometimes you “just know.”
We also do background checks on founders where we search public records. Almost everyone has something turn up, and that's fine. People get sued, things happen. Some of history's best founders had complicated pasts. The issues arise when we're surprised by something important that we learn -- trust, again -- and we resolve those issues in conversation with founders.
We also are committed to diversity and especially encourage founders of underrepresented communities to speak with us about their companies. We believe that a community of companies is stronger the more different viewpoints come to the table, and we're happy to speak more about our record in this area with founders who are interested.
Product and market
We prefer to see products that are intensely successful in some initial market, over products that grow to large numbers but don’t play an important role in the lives of their users. Bloomberg itself started out as a bond price list for U.S. government bonds only. We like for a product to be the most important service to at least some of its users.
We like products we ourselves would use and understand. We’ve been technology buyers, software developers, founders, entry-level employees, and of course consumers of many media -- so the range of products we might use and understand is broad. These products often start with a specific application of a well-understood technology, not a multi-industry "black box" looking for a use case.
We believe startups destined for greatness, in their earliest days, choose...
- Only one model for how to sell, generally either directly to an individual or directly to a company (whereas many believe they can do both at first)
- One type of person (e.g., role within a client company) to target as a customer, and specifically avoid trying to serve business and technical users with the same tool
- Will choose to target customers whose businesses are thriving, and specifically avoid customers in low- or no-growth, or low-margin businesses (e.g., most online publishing)
If a product is launched, we care about how well it is doing -- the famous “traction” -- but we tend not to focus on absolute numbers. We focus on month-over-month (or, in earlier-stage cases, week-over-week) growth, ask questions about how different cohorts of users behave, and try to understand the per-user behavior (how much does any one user really value the product). At the earliest stages, we are most interested in evidence of customer love -- retention or intensity metrics, Net Promoter Score, or even anecdotal praise by customers for the product.
We strongly prefer to be the first money into a company, and to invest as early in the startup's life as possible. If a startup incorporates itself to take money from us, that's great.
This isn’t so much a rational investment calculation (arguably there is less competition to write bigger, later checks) -- but it’s a matter of our style. An early investment is less of a transaction and more of a relationship. We do make exceptions for certain reasons (e.g., a founder or company we just couldn’t resist).
“First money in” doesn’t necessarily mean lead investor -- sometimes we are the only investors, sometimes one of many. Sometimes the founder sets the terms, sometimes another investor does, sometimes we do. We are indifferent on this. When we're willing to invest, we're willing to set the terms; whether other investors follow depends.
We are more than happy to invest in companies that might take a very long time to prove they are on to something -- our investor, Bloomberg, has a decades-long view and is willing to build for the long-term. We do not have a fixed time horizon to expect our companies to return capital. In fact, we prefer companies who are building for permanence.
Greatness can start anywhere. We're a small team with a modest-sized fund, though, and believe we can really only help if we’re nearby. Startups depend on trust, and it's hard to build trust without spending time together in person. That means San Francisco and New York since our team is in both of those cities. We have deep roots in both places so our ability to bring in local folks who can help is greater there, and we only want to invest where we believe we can be disproportionately helpful. We would consider an investment elsewhere (for example if an area has a deep specialty, as some regions do with security startups), it's just harder for us.
The same is true for startups that are headquartered in one of our hometowns and have an initial market elsewhere (e.g., a company in San Francisco focused on doing something in India). We believe companies should be as close to their customers as possible, and we want to deeply understand a startup's potential customers -- that's difficult when it's targeting customers in markets that are far from where we have expertise and relationships.
We have invested outside of San Francisco and New York a couple of times (Seattle once… Boston a couple of times…), though we need an exceptional reason (and often it's when we already know and trust the team).
We find investments in many ways, but our favorite is for founders we have already backed to refer other founders.
Founders are our customers, and we believe in doing more than waiting to be introduced to them -- we want to get to know them early. So we have developed a model in partnership with the Lester Center for Entrepreneurship at UC Berkeley’s Haas School of Business (based on data from AngelList and others) to predict who are the people in Silicon Valley and New York statistically most likely to become founders, who haven't yet -- our "Future Founders" group. We reach out to these individuals to form relationships with them, and encourage them to form relationships with each other.
After that, we are most likely to invest in companies that come to us through someone we trust. Several of those have come our way through referrals from the staff at Bloomberg -- this creates an instant “customer reference,” often from someone whose judgment we respect.
We don’t really find companies, we mostly find founders. We tend to ask people we trust who are the 1-2 most exceptional people you’ve met, whether in school or at work, or in some other way -- and then we get to know those people. We hope that some of those people evolve to be great founders, and we’d like to know them whether or not they do.
We also try a lot of products. Our phones have many, many apps installed. And we read. We reach out to people and companies whose products we like, or who we read about.
We keep track of companies we’ve been in touch with -- just like we’d hope that our companies do, we have an organized system for our outreach. In general, we try to run our fund with the same tools our companies use.
We also created the Open Scouts program to deepen relationships with a handful of angels we trust. With the program, administered through AngelList syndicates, we back every deal our Open Scouts do at a fixed ratio with their personal investment. We are not direct investors in their portfolio companies and each Scout manages their relationship with companies. Our intent is to support people we trust, and extend our fund to support many more companies, not to create direct deal flow for us. (In fact, sometimes our Open Scouts might invest in companies competitive to ones in our portfolio -- since we have no visibility into details about those companies, and we're obligated to back them if our Open Scouts do, we can continue to serve our portfolio companies effectively. We treat this situation the same way as if we'd invested in a venture fund that backed a startup competitive to one of ours.)
Our focus is investing in startups that improve work -- and knowledge work in particular.
We have doubts about the effectiveness of theme-based investing. The best founders can surprise an investor with an unexpected take on a category. That said, there are areas our team has grown to care about and learn about. We only want to invest in companies where we believe we have enough understanding to be enormously valuable to our founders, and to have good enough judgment to support founders through thick and thin.
Machine intelligence crosses all the areas we care about, and we have treated it as our main interest area for several years now. We believe machine intelligence will transform every industry and every function -- and we focus on its effects on business. We believe machine intelligence will be like electricity: cheap, convenient and on-demand. We want to back the founders ushering this future into the now.
Areas where we’ve invested include: content discovery, cybersecurity, data sets and services, developer tools, full-stack startups who use technology to compete in a new way, hardware, human-computer interaction, learning, media distribution, new organizational models, open source software, productivity tools, professional networks, technology platforms, workflow tools, workplace communication.
We avoid investments in financial services companies that intend to compete with Bloomberg clients.
Sometimes founders mistakenly assume that we avoid “consumer” companies entirely. There are many individual-facing businesses that we’d fund -- they just need to help a person at work. (Typically “enterprise” businesses sell to a company, and these individual-facing services sell to the end user directly.) Ask us if you are unsure if you fit in our scope!
We do avoid, for example, e-commerce and entertainment because they tend to serve people outside their work capacity. There are also other areas that intersect with the future of work where we know too little to be confident, e.g., retail, travel, local, heavy industry, and medical services.
A demo is 50 times more useful than slides. One is a description of a thing, the other is the thing itself. We look at your demo the way a new user would.
We cringe at the idea of founders spending lots of time making fundraising presentations. When we see “v36” in the filename of a presentation, it bothers us. That said, we do value the work founders do writing down their plans for their company, because it gives us a sense of:
- How the team thinks
- How well the team communicates
- Whether, if we don’t know the team, we should spend the time to meet in person
If you use a presentation to sell your product to customers, we're as interested in that pitch as in your fundraising pitch.
There is no standard format we like, but we probably spend 2-5 minutes reading a deck when we are deciding whether to meet a company. How many slides? Depends, but if you need 20 detailed pages to tell your story, that's likely more than we can absorb.
In roughly one-fifth of our portfolio companies, we never saw a deck before investing -- usually because the product spoke so loudly for itself, or we knew the team and business so well we didn’t need a deck.
In some cases, where we know the team well, we’ve helped founders (even before we decide whether to invest) write their deck for other investors.
In day-zero companies, we don't pay much attention to your milestones -- if you are in the discovery phase, trying to figure out what works, you'll generally be unable to predict where you will be beyond two months from now.
We do care about what metrics you intend to track -- what experiments are you running, what hypotheses is your first product testing -- and if there is one metric you care about more than any other.
We also ignore, in most cases, long-term financial projections -- except to the extent that they show what the “unit economics” (revenue and cost from a single user or customer) need to be for the business to work. If you fail to invent assumptions that make the overall business wildly profitable in a few years, then you probably should be doing something else for a living.
That said, we do care about the short-term financial plan, especially on the choices founders directly control. How many people do you intend to hire, where will you spend the money? This helps us figure out how much time you will have before you need more capital, and how far we believe you can get in that amount of time. We prefer to see early-stage companies spending their capital on building product.
Put another way, a five-year financial plan is mostly useless for early stage companies -- a monthly plan for the next twelve months and a quarterly plan for the next two years could be very useful.
Once we’re meeting in person, you can often leave the laptop closed. We’re trying to get a sense of you as a founder, ask you hard questions and see how you respond.
If your product is public, you should assume when you walk into the room that we’ve spent the time to play with it.
Some things we tend to say, ask, or think in meetings:
- We act more like an individual investor in many ways than a fund. More like a “CEO who invests” -- because we both create and invest in companies, because we’ve all been “on the other side,” and because we always enjoyed the CEO-investors who backed companies and found them to be incredibly valuable per minute spent.
- We don’t put great faith in the value of advice (including, often, our own) -- the world of users and customers has more to teach a company than any smart, well-intentioned person.
- What makes you an outlier? (Do you know what makes your company a potential outlier?)
- What do you want out of your investors other than money? (We’re trying to figure out if we can be uniquely helpful.)
- If a dozen other companies are creating a company right now with this exact idea, how could you still succeed?
- Who will you pick as your first customers? (This tends to be, in our view, one of the most important early choices founders make.)
- How close do you feel you are to product-market fit? (Here, it's less that we want you to have product-market fit, and more that we want to understand how you think about your own progress wherever you are.)
- Are there any plans you really would like to pursue, but have stopped talking about with investors because you've been told by VCs they bad ideas? (We often like those plans.)
- Why are you raising money at all? (We find there are plenty of startups who don’t actually need to raise money and, in general, that’s better for them -- even if it means we don’t get to participate.)
We try to avoid some of the, shall we say, less useful questions others ask:
- What will you do if [big scary company X] competes with you?
- Have you patented any of this?
- How does this become a $1B business?
- How’s it going?
Founders are sometimes surprised at how quickly our meetings move; we often will take you off your story to zero in on something we believe is a key driver. This is how we’d work with you after our investment, so you can think about whether you enjoy working with us.
At any point, we’d be happy to narrate for you our level of interest -- though you might not always like what you hear. (And remember, an 80% chance of wanting to work together still means there is a 20% chance we will not want to work together.)
Immediately after we meet, a frequent thing we need to do is just think on it -- if we find ourselves getting less excited a day or two later, that’s probably a bad sign. If we find ourselves returning to the conversation in our heads, wondering what you meant when you said such-and-such, and imagining how great the product will be, that’s a great sign.
A lot of founders wonder why investors are slow to get back to them. This is an unacceptable pattern, and yet one we’ve been guilty of from time to time. Sometimes, the reason is we’re doing work on your company (e.g., calling references, who might take a few days to get back themselves). Sometimes it’s that we’re unsure and we’re giving ourselves a few days to see if we get more excited or less as we think on it. Sometimes we just mess up and forget to reply. It’s a fail when that happens. We try to at least narrate as we go with “I know you haven’t heard from us in a few days, this is what’s happening…”
We aspire to be at the extreme end of the “we communicate openly with you” scale.
“Doing the work” and calling references
If we decide we are going to invest, we often (but not always) go through a short cycle of working on our own view -- probing for holes in our own thinking, asking the advice of our one friend who has been thinking about this industry for 10 years, understanding other approaches that have been tried (or are current competitors), and spending as much time as we can using the product. Many of the same kinds of things we find that founders do in the early days of contemplating creating a new company.
During this period, we try to be open with the founder about whether we will call around to ask about them. We put great faith in the value of these reference calls, and we owe a debt to the friends, colleagues, and partners who are willing to share open, unvarnished views. We try to skip nonsense questions (“what are their strengths and weaknesses”) and instead focus on things that will help us decide whether to back a founder:
- How does this person compare to other founders you’ve known? Top 10%? 5%? 1%?
- What makes you believe this person is extraordinary?
- If you were us, and decided to invest in the company, in what areas would you guess this person would need the most help?
We call as many references as we can find.
How we decide
We have an “anyone can say yes” policy. Yes, any of our team members can say yes. And no, you don’t have to meet my other partners. We believe the best founders and companies are polarizing. Our best investments might have been, originally, opposed by one or more of our partners. Teams are great at gathering information and surfacing wisdom, but terrible at making decisions. We believe in individual accountability -- if anyone can say yes, then everyone feels the weight of making a decision. (That said, we do require that before anyone says yes they mention the investment to the rest of us -- that way they get the benefit of the team’s input, and it’s a good way to slow down and think for a second.)
We value each others’ opinions and seek them out. Our team is unusual in that we don’t (yet!) have any of the “partner issues” we hear about at other funds. In other funds, it's the worst of both worlds -- founders lack clarity about how investments get approved, and in some firms the partners become resentful of one another's power to approve each others' investments and then do little to support another partners' companies.
We believe in each others’ talents, trust each other enough not to mind when someone is wildly wrong, and enjoy each others’ views. We talk as a full group twice a week, to think out loud about companies we’ve invested in or might invest in, and we meet for a full few days once every couple of months.
Because any one of us is empowered to “yes” a deal, we all share and share alike on helping each others’ deals succeed. “Before the investment, it’s your deal; after the investment, it’s our deal.”
When we talk about companies, we find ourselves asking questions like:
- Why do we believe this company has a shot at doing something unique and potentially revolutionary?
- How do we like the product or, if the product isn’t yet built, the planned approach? Do we think users will love the product? Will they like it enough to convince their closest friends / colleagues to use it?
- Do we really believe we understand this product or team better than others?
- How useful can we really be to this company -- are we “just a check” -- and if the company succeeds, how likely is it that we’ll be able to continue to support them?
- If the company goes sideways, do we have enough confidence in our conviction to feel supportive and know how to help?
- When will the company need more capital, and what will it need to accomplish before it can earn that capital?
We’ve had investments where the founder only ever met one person on our team before we invested (though, afterward we all want to meet our companies so we can help them). In practice, each of us often asks the founders if they’d like to meet one of our other colleagues because the founders will get a better feel for us, and because we like and respect our colleagues.
We've noticed something about our "anyone says yes" approach: over time, we've each gravitated toward different styles of companies. Some of us prefer companies before they've even incorporated, others once they've committed some code (sometimes the code happens before incorporation, that's OK, too). If you get to any one of us, we'll each have a feel for who on our team is most likely to say yes to you -- and that's the person we'll try to steer you toward.
In practice, here are your odds: we have invested in 2% of the companies we have spent time reviewing.
Our deal memo
Before we invest, we write a “note to self” outlining our views. We do this so we can be as disciplined about our commitments as founders are about their commitments. We also share this note with a small advisory group at Bloomberg L.P.
In order of importance, we write about:
- The founders’ vision
- Our thoughts on the founding team, and what our diligence calls revealed (including how we met the team)
- Why we are excited about the company
- If the product is built, what we think of it and how well it is doing
- Ways we plan to help
- Whether Bloomberg L.P. can help the company and whether the company, in success, could create benefits for Bloomberg L.P. (this is not a criterion for investing, but something we want to know -- to best realize that potential opportunity later)
- What we believe the company needs to do to succeed (or make the next major milestone, like a further round of funding)
- The terms of the deal
- Other stuff: competition, market size (to the extent we can tell), use of the funding, business model (in our experience it is usually either unknowable or obvious, and not worth much mental energy either way)
How long it takes
We’ve made investment decisions in the first meeting (though usually when we already knew the founder and something about what they are working on), and we’ve had cases where we get to know the founder over a period of weeks or months and watch their business evolve (often paying a higher price as we watch the founder make progress).
Our “Service-Level Agreement”
Some firms commit to giving you an answer in a certain amount of time. We commit that at any point in time, if you ask us to narrate the likelihood of investment and timeframe, we’ll give you our best guess.
The reason we don’t have a guideline like “3 meetings in two weeks” is because that smells like a transaction, and we’d rather be in a long-term relationship with you. We take seriously the process of getting to know a founder and a company, and having the founder truly know and like us.
Many of our investments have evolved out of months or years of conversation with a founder, much of which started before Bloomberg Beta even existed. Yes, some are love at first sight -- but it’s exceedingly rare. We’re not sure which will turn out better. But would you tell someone on the first date how many times you had to date them before you decided whether to get married? It’s fundamentally unpredictable at first, but it does become clear quickly.
If you’re in a conversation with us, our policy is “do ask, do tell” -- we are happy to share with you our current sense of excitement and timing. You might have to make a decision, and we want you to know where we stand. If the elevator doors close while we are thinking on it, so be it.
We intend to always give a clear “no” with straightforward reasoning. That reasoning, while straightforward, might still be subjective (“we just didn’t get excited about this and we’re not sure why”).
The deal terms
Our goal, particularly with first-time founders, is to explain what we want and why in plain language. We want to act in a way where, if our asks were widely publicized, we’d be proud of them.
How much risk do we take
Since we bet early, and expect the vast majority of our portfolio companies to fail to return much money, our winners need to be big. We fully expect that, if we succeed, one investment we make will return our entire fund. So we need to believe that every company could be that investment.
We prefer enormous growth in modest markets to modest growth in enormous markets. We believe that tends to be a more reliable signal of a company's greatness -- it is harder to serve 100 customers exceptionally than to serve 10,000 customers poorly. And we learned, in part from the example of Bloomberg's growth from one category of the financial industry to another, that deeply understanding each type of customer gives you an exceptional ability to lead an industry.
We are not big fans of boards in day-zero companies. While we like founders having a close circle of trusted colleagues to ask for advice and we aspire to be in that trusted circle, when we imagine early-stage founders working on slide decks instead of products, it makes us feel a little ill. We'd rather be in your Slack or getting your Github notifications than having you prepare for meetings.
We also feel that the cadence of board review (every couple of months, let’s say) is mismatched to the cadence of a day-zero company (which evolves every week or two). Later on, boards can be great. If people don’t talk just to hear themselves talk, which each of us has been guilty of now and then.
More generally, we are ambivalent about whether investor control is useful at all. We’ve seen it cut both ways.
So, we generally prefer not to have a seat on a company’s board. But, that said, if the company wants us on the board, we’re open to talking about it -- and we have agreed to join boards from time to time when the founder truly wants this and has good reasons after hearing our views.
Rights we want
We care about getting pro rata rights. This means that if a founder offers another investor the opportunity to invest at a certain price, we want to invest at that price too -- at least up to the amount needed to preserve our ownership of the company.
We also want to approve of any investments you take that might get their capital repaid before ours.
We care about getting some information rights -- basically the ability for us to understand how well the company is doing, and its financials.
Our standard first check is $500,000, though more and more often we are investing up to $1M. We want to invest enough to give a startup the money it needs to make real progress in the early days, and to attract other investors alongside us if needed. We are happy to lead, and happy to participate in rounds led by others, depending on the situation -- in earliest-stage venture, sometimes the idea of a lead means different things to different people.
In the early days of our fund, we wrote smaller checks because (like the early days of companies) we believe in burning capital slowly until you find product-market fit. (In our first year, our biggest check was $250,000.)
We have no minimum check size, and have written checks as small as $25,000, especially in what we call a "flag" investment.
We care about price. We do not have a target ownership level, but we want to get return on our time in addition to our capital, so we generally want to be able to own a meaningful amount of a company over time. Our view is that we are comfortable taking the highest possible levels of risk and that founders, and their investors, should be rewarded for that. We believe companies are successful when their teams also get generous equity grants that motivate the early team members to create something valuable.
We also believe “the price is the price” -- we won’t ask for unusual discounts for ourselves with strange terms like participating preferred equity. We are flexible as to whether our investment is structured as convertible debt or as equity.
No, not every VC wants to own 30% of your company. In fact, we think at seed stages too much ownership by the early investors can ruin the cap table -- making it difficult for the founders to make money, or later investors to own enough of the company when the company needs bigger dollars to scale.
We believe in transparency. If a startup that takes our money wants to publicize the terms of our investment, we’d generally support that. (Of course we’d never disclose anything confidential without consent, and we expect the same of our founders.)
The average pre-money valuation of our recent investments was $5M. (We intend to update this number from time to time, but not too frequently -- to avoid inadvertently disclosing the terms of any one deal. This average includes only our investments where we were part of the first money into a company -- we could not figure out a way to make our small number of later-stage investments comparable on an apples-to-apples basis.)
While we’d like to claim that the amount of work we do on behalf of a company will vary dramatically based on our ownership interest, we’re not sure that is true yet -- the reality is that the amount of work we do for a company depends most of all on how much the company needs and wants our help. If they ask us to work for them, we do what we can to help.
We don’t care whether we are the lead investor or not. While we prefer to co-invest with others (who can help support a company in difficult times, and bring more expertise to bear), we have invested in situations where we are the only investor. We have also invested in situations where we own such a miniscule percentage of a company that it rounds to zero.
When we do co-invest, we care who a company’s other investors are, because the investors form an extended team around a company -- and we want our companies to have the best teams possible. We get concerned when we see situations with many investors, none of whom have a significant stake, because we worry that none will actually work to help the company.
We can commit to terms on just a handshake as opposed to a formal term sheet (which we're happy to write when founders want them).
We only want founders to hire us as their investor after careful consideration of the alternatives, with as full information as possible. So we're allergic to "exploding offers" (where proposed investment terms expire on a set date) -- in fact we have never made one. Investors and founders enter a marriage from which there is no divorce, so while it's important to choose quickly, it's also a one-way door and it's essential to choose well.
Because we have a relatively big fund ($75M) for writing modest initial checks, we do plan to devote an unusually large proportion of our fund’s resources to following on. We will deploy our capital over the usual length of time for a fund: five years or so for all our initial investments, and then follow-on capital after that. We do not have a specific timetable for expected returns, one of the benefits of having a single LP with a long-term focus.
We won’t follow on in every investment, but if we are excited about putting in more money we might want to follow on for 5x our initial investment -- or more. That said, there will also be situations where a company evolves in a way where -- even though it is still a great company -- it would benefit more from another investor’s capital than from ours, so we might not always follow on in great companies.
We're happy to invest outside of what is typically considered "a round" -- there are some companies where we've invested multiple times in between more formal rounds.
If asked, we’re happy to be explicit about the conditions under which we’d ask to put more capital into a company. Generally, when a team's initial bets prove to be right...
We believe investors should get a “1x liquidation preference” -- in other words, if the company ends up being worth less than the value that we invested at, we should be able to at least get our money back.
We want to protect your confidentiality and ours, and usually include a standard term to accomplish that -- though the best protection is trust.
Our “products,” or, how we work with founders
We think of our “products” as offerings of support and capital to a company, and the price we charge is ownership in a company.
Our preference is to be the first money into a company, and to contribute a meaningful amount of capital. This is the core of what we do, and it reflects roughly 90% of the dollars we invest. We want to be able to add capital, sometimes even increasing our ownership stake, as the company evolves. While we lack a specific ownership percentage target, we try to get meaningful ownership given the stage of the company -- in practice, this can be 5-15% depending on how far the company’s progressed. (It’s difficult to generalize because, in startups, exceptions are the rule. We also find that hard ownership targets can make it more difficult to form a syndicate with other investors who can be helpful.)
In some cases, we only seek to put a small amount of money to work (for example, in rounds where the founder is fortunate to have many investors who want to support the company, or it is a later-stage company), and it is unlikely we will invest more. In these cases, our support is as much symbolic as it is financial -- we want to be part of something, even though we know it is unlikely to be an investment that is meaningful to our fund financially. A typical check for these investments might be $50K. While these investments have access to all the services we offer our portfolio, given our lower ownership stake we’re less able to pay proactive attention to these companies and we want to set clear expectations up front about what kinds of startups the founder will likely consider competitive.
How we support our companies
We aspire to be the most useful investors per minute spent with us. We want our founders to feel they would want to work with us even if we weren't investors offering them money. (Though, for us to be willing to advise, we'd need the same level of conviction that we have when we're willing to invest.)
We want to work with startups the way they work, not the way that big companies or traditional investors work. We prefer to take the formality out of the investor-founder relationship. Instead of requesting board seats and scheduling formulaic calls, we share with founders and encourage them to reach out to us when we can help. Consider us “on speed dial.” We try to cut waste out of the process; starting a company is hard enough.
Our team works closely together -- we speak often and love helping each other, and we each know the full portfolio -- so every portfolio company has access to every member of our team. We think this is different to some other venture firms we’ve met -- a “no dysfunction” partner.
Areas where we tend to be most useful
While we’re happy to help companies across the full range of early-stage company questions -- recruiting, fundraising (should I take more money or call it a day?), services (who do I use for HR?) -- we concentrate on the range of skills loosely called “going to market.”
To us, that includes finding product-market fit, pricing, segmenting your market, sequencing your approaches to potential users or customers, understanding when to review and when to ignore the competition, using the various organic marketing tools, paid marketing, press, partnerships, planning to raise more capital, and just the overall understanding of the importance of communicating who you are and why you are. We find we have many views here that are surprising to startups.
We have presence in both San Francisco and New York. We've found that SF-based founders appreciate introductions to customers in New York -- we can open that door. We make a concerted effort to help the transition from “west to east” and “east to west.”
We don’t care about face time -- you won’t get a “hey let’s have coffee just to catch up” every two weeks. We do spring into action when we see the Bat Signal. We adjust the intensity of how often we’re in touch with a company based on what we believe would be useful to them -- and we take feedback from companies on what they want. Some of our companies have asked us to do monthly, or even weekly, meetings with them, others “go into hiding” while working on their product -- we’re good either way.
Because we may be creating our own products, we are current on tactical trends and know them firsthand. We don’t believe that investors and founders are fundamentally different -- we may face different risks and questions, but we’re all just trying to spark something great in this big wide world.
One thing many founders don’t realize is how little direct control their investors ultimately have -- we can’t demand certain information from you unless it’s specifically written into our agreements (where we often ask only for general financial information), we won’t make you hire or fire anyone -- we work with you based on mutual trust.
How we like to work with you
It varies. There are some cases where most of our communication with a company is by IM, others where we do a regularly-scheduled call, others where we meet in person from time to time -- it just depends on what the founder wants. At minimum, we generally like to know the number one thing we can help a company with at a given time and focus on that.
We appreciate getting regular investment updates (e.g., a monthly email) from our companies, since it creates a background of good understanding that helps us help you. In practice, about two-thirds of our portfolio companies are in this habit.
What makes a good written update for investors?
- The one key operational metric you believe tells the story of where you are, and how that metric changed since last time you communicated it (and relative to your expectations)
- What you’re most excited about that you just achieved
- What we can expect you to achieve in the near future
- How you’re doing financially (cash left, burn)
- Team additions or changes
- Where you want help from us
Here is a sample anonymized update from one of our companies.
We do try to get the right to receive your financials, it’s a good way to give us a snapshot of your likely future capital needs.
What’s even better than an update intended for investors, is some passive way for you to keep us updated (i.e., something that requires no incremental work). If you send a weekly internal update, copying us is great; if you use a team collaboration tool (Slack, GroupMe, Yammer, Trello, Basecamp, a Skype chat, etc.) we’d love to be included and take it as a great sign of trust; we have even subscribed to the private Github repo of one of our portfolio companies.
How to make the most of us
What gets us going is helping companies realize their potential. We are happiest when we are “in it” with you, whiteboarding a set of features, pushing back on your plan to announce your fancy new product release, or getting that late night call that you think things aren’t working out with the person you just spent six months to recruit. We feed off your enthusiasm, and hope to help you build even more of it.
We also know that startups are not all roses and sunshine, even for the best of companies. We aspire to be most helpful to you when times are tough, not when you are on top of the world.
Investing, to us, is really nothing more than the mechanism we use to find a way to work with you. We are more comfortable talking about new product launches than about how to optimize our allocation of capital across our portfolio.
How our fund works with Bloomberg L.P.
We look for opportunities to connect startups (including our portfolio companies and others) with Bloomberg L.P. -- we invest significant time in understanding what Bloomberg may be interested in seeing. In practice, we refer more companies to Bloomberg that are not our portfolio companies, than are our portfolio companies. And at the moment only one-fourth of our portfolio companies have business contact with Bloomberg. Bloomberg Beta would never be a party to a business relationship between a startup and Bloomberg L.P.; those relationships are all at arms’ length.
There are areas where access to Bloomberg may be enormously helpful to a startup. For example, some areas where Bloomberg has some of the best expertise in the world: the creation of a data-driven subscription business, selected technical specialties, high-touch customer service.
That said, we are set up as a separate legal entity to protect the confidentiality of startups with whom we work.
While Bloomberg will only work with your startup if it makes sense for Bloomberg (no, you can’t have a discount on a Bloomberg terminal), we have a great understanding of how to facilitate the right conversation quickly.
We have an Advisory Committee at Bloomberg L.P. that hears from us about common themes we see, gives us input and feedback, and approves unusually big checks -- just like the LP Advisory Committee in any venture fund.
We recognize that founders don’t have the time to plan for their own professional growth and learning, so we offer them some of that. We might do a training on how to create useful communication with technical teams, or invite founders to a panel on a subject we think they might care about.
Events we host
Sometimes, one way we can help companies is just by getting them out of the building. We get our founders together every so often with an extended group of our friends. These events are completely optional, and have no direct usefulness at all.
We do host some selective events (for example, with a senior government official or business leader) to which we invite our portfolio company founders.
Now that we are beginning to have a critical mass of companies in our portfolio, the companies can be helpful to each other should they want to be -- vendor referrals, emotional support, product tips, etc.
We were one of the first (if not the first) fund to set up a portfolio community channel on Slack, even before Slack supported this functionality natively. Our founders congratulate each other, promote one another's successes, support each other through tough spots, offer tactical recommendations ("who should I use as an accountant?") in ways much more immediate, varied, and specific than what our fund could do for any of them directly.
We noticed the conversations in that channel were surprisingly specific -- less about the big picture and more about what kind of paintbrush to use. We were inspired by the Picasso quote that only art critics talk about the Big Ideas, real artists help each other find cheap turpentine. So we created an event series, "Turpentine Talks," where one of our founders who has expertise in a certain area (e.g., growth, building open source communities, hacking personal use of time) leads a roundtable discussion with other founders learning and offering their own experiences.
We admire and want to continue to support these kinds of communities, that openly share a craft to hone the trade of companybuilding, with a particular set of companies that share a similar way of working and similar values.
After the exit...
We are disciplined about learning from every company. We will write up a retrospective report where we evaluate our value added to the team -- vs. what we wish we could have added. We assess whether we were right on the risks the company faced, and what lessons we learned. Most important, we ask whether the founder would have asked for our money again.
Company feedback on us
Once a year we ask all our founders to do a short (under 3 minutes) anonymous survey to give us feedback on what we can do better. We do a Net Promoter Score as part of this. We use that NPS as the most important metric to drive our fund's choices.
We would share our Net Promoter Score here, but we don’t want our founders to feel we are using their feedback to market ourselves. (Though we’d be happy to tell you in person.)
Always be learning from your customers -- ours are founders.
If you don’t know how to find us, figure it out. Great founders overcome much more than that. If you can't, you don’t know how to use the Internet and you should probably rethink whether being a founder is the right career for you.
How to reach out
Should you send us a cold email? Probably not. If we were a customer of yours, would you email us cold? Wouldn’t you rather try to find someone in common? If you have to resort to a cold email, which great people sometimes do, at least show us that you took the time to exhaust the available sources of information first. Write an interesting headline. Tell us you read this…sentence…right…here.
Caveats founders should know
Things not to try on us, that others have tried:
- A first email that says “My round is closing next week. Do you have interest?” We understand that founders are eager to close their funding rounds. Sometimes timing doesn’t work -- we have no fear of the elevator doors closing on us. That said, we always try to imagine how we'd behave with any company if there were enormous time pressure to decide (founder time is precious) -- and behave that way regardless.
- “You can only try our product if you invest.” If the product isn’t ready, we understand that. But if it is ready and we can’t play with it, we can't figure out whether to work with you.
We will turn down investing in a startup that is a known competitor today to one of our portfolio companies. If you pitch us, and we think one of our founders might find it competitive, or you might find one of our investments (especially an un-announced one) competitive, we'll tell you that we think there is a risk and (in as much as we can share) why. Then, if you want to continue talking, we'll agree with you on what we can share with the other founder (and then, vice versa) to assess the risk of a competitive issue as openly as possible.
We recognize that competition issues can be complicated. Our intent is to respect the interests of our portfolio companies, and the confidentiality of every startup with which we communicate.
Why you should take our money
We wrote this manual so you could understand how we work, and see if you want our money. We hope this manual achieved that, and that we can avoid repeating it all right here.
We all move fast, and prefer to spend our time on things that matter. So if you read this, and if you spend time with us, we hope that -- whether or not we work together -- you find it worth it.