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Interview with Confluence.vc (Gated community for VCs)

ConfluenceConfluence.vc is a vibrant online community exclusively for VCs. The two founders, Clay Norris and Tyler Dean, interviewed me for their podcast. We discussed:

  • How members of the community can work with Versatile VC
  • Versatile’s unusual approach
  • Diversity and VC
  • Opportunities within the VC tech stack
  • General solicitation pros and cons
  • How VCs can mitigate career risk for themselves and for people working for their companies
  • Thoughts on why seeking venture capital is the wrong move for most companies
  • and parkour.

You can listen here, or I’ve attached the transcript below (slightly cleaned-up):

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Tyler Dean: [00:00:00] Yo, everybody in the Confluence family. It is a blessing to have you all here today. Thank you for joining us. We have In the crib David Teten (Founder, Versatile VC) ,  who is one of the original people who set out to build something similar to Confluence. And we probably couldn’t exist without someone like him here. So, without sharing everyything about his story, which has a lot of really cool projects, just want to thank you for coming on.

David Teten: [00:00:23] Honored to be here, and I appreciate your time.

Tyler: For sure. How about in a few minutes you give us who is David  and how did David Teten become.

So I grew up in northern California, Marin County, learned to program when I was about 10, back when you did that after school  (i.e., not in school) . I worked as an investment banker, strategy consultant, and then fintech entrepreneur with two exits.  In 2011, I was fortunate to join ffVC as the firm’s first  outside Partner, when we were $10m AUM and we were just our founder, John Frankel, a CFO  (Alex Katz, later a Partner) , and an Associate. We grew the firm to 25 people and over $150m AUM.  Then I was recruited into HOF Capital, another emerging VC in New York. When I joined, I was the first outside Partner to join the firm besides the three co-founders. And we grew that firm as well to a total of 70 limited partners across 21 countries and more than 10x AUM during my tenure.  At both firms, we were fortunate  to invest in a lot of great  companies .

I have had a longstanding interest in fintech. So most of my investments have been in the fintech space, but have some other investments elsewhere as well, and particularly interested in salestech.  I also have particular interest in Israel, where I lived for three years, and Canada. My father is French, so by American standards, I’m synthetically Canadian, by virtue being French-American. So with that brief background, I’m now building a new VC firm. Versatile VC (https://versatilevc.com.) I am looking forward to the opportunity to share a little bit more about our thesis.

Tyler: [00:01:57] While we’re on that topic. Like you’re pretty involved in almost all relevant venture communities and you’re one of the first people there. I want to figure out how we can help people get involved with what you’re doing. You want to maybe give us a quick three to four ways we can be involved or support your work with versatile in your other projects.

David: [00:02:17] So thank you for asking.

  • 1) First of all, I welcome feedback. If people have ideas on our websites  (teten.com, versatilevc.ccom, pevctech.com) or social media or content, love to hear from you.
  • 2)  There are opportunities to join our team. We list on our website our currently open jobs.  We, and many other emerging managers will entertain opportunistically people joining .So if you think you would fit into the team in some way and have unique value-add, feel free to reach out. The worst that can happen is “No”. And maybe in a year from now, we’ll have budget to hire you. But we do have some openings for part-time roles like EIR and Venture Partner, listed on our site with details and what that entails.
  • 3) We also of course, welcome opportunity to co-invest with other VCs.
  • 4) And we also welcome ideas for joint marketing initiatives. So we have a number of areas where we are particularly focused, for example: alternative VC  (meaning new financial structures for investing in companies other than the traditional preferred equity/ convertible notes structures); the tech stack of the private capital markets; diversity; fintech; family offices. If you’re organizing an event in those domains, there might be an opportunity to partner and collaborate. Whatever sort of community you may be involved with, and that applies not just to your organization or confernce, but also to other organizations and other communities and other funds out there.

Tyler: [00:03:39] For those people who are building other funds, I think you have a pretty unique position to inform our audience. Tell us the advantages of starting with a new fund, new thesis and not being locked into preexisting obligations with your previous investors.

David: [00:03:55] Well, look, I think if someone in the community is on a partner track at a respected fund, then you should stay there and rise up. Right? It’s much less risky and easier.  Launching a new fund is a 12 to 18 month process just to fundraise. And then what’s your new fund size? Usually pretty modest  (compared with your prior fund) . This is a get rich slow industry. So I find a lot of people interested in being an VC manager, but when you look at the economics, you have to budget for a long road to building a firm that is in any way comparable in terms of economic impact to what you could do by staying at a reputable fund in a good role.

So the big advantage of starting a new fund is you can design a firm with a thesis that addresses the market as you see it today. And if you have a differentiated approach that you think you’re not able to execute on at your particular firm, then maybe it makes sense for someone to launch a new fund.

In my case, i’ll answer the question about what our thesis is in two ways? So one way, which is the way most VCs answer it, is industry and check size. We are particularly interested in fintech and sales tech, although we are a generalist investor, and we’re typically writing checks of $200K to $1m, either leading or joining syndicates.  (We are focused on capital-efficient companies. Of the Inc. 5000 companies, only 6.5% raised money from VCs and 7.7% raised from angels. We are venture capital for the other 93%. We require minimum monthly revenues of $10K. Our formal criteria are here.)

But the other way to answer your question is how we’re designing the firm operationally (and strategically), which to me is the more interesting question because that I think is the greater differentiation.   Because there are a lot of firms out there that would give an answer like what I just gave in terms of check size and industry (although not operationally/strategically). But very few firms will give you the same answer as me in terms of operationally  (and our focus on capital-efficiency) , how we’re thinking about it.

So there are three main things we’re doing that that are unusual in our ecosystem.

1) The first is we’re creating a community for founders in transition. These are founders who maybe they exited their company and they’re now independently wealthy, or they shut down the company and they’re figuring out what to do next. Maybe their spouse is saying, “Honey, enough excitement.” Let’s go get a job and health insurance. So we want to help those founders in whatever their path in life is: start a new company, become an angel investor, become a VC, take board seats, consult.  We think this is a unique population, and we’ve built out a set of proprietary free resources to help founders in transition. And I know this community because I’ve been in this position, both having exited companies successfully and having shut down a company. So I know the pain and the joy .

2) We’re particularly focused on capital-efficient companies. We all know that the market is frothy right now, and some investors will be great with their vintage 2021 funds, but it’s an extremely safe bet that some investors will not do well with their vintage ’21 funds. So one of our filters is companies that have a clear roadmap towards profitability, and are not just relying on later investors putting more money into the company in the hopes of become profitable in some indefinite future.  We  have the flexibility to use alternative VC structures where appropriate. Indie.VC is the firm that’s best known for evangelizing this, but there are a few others. And we  think that there’s a lot of room to learn about what structures make sense.

One of my role models is the early high-yield market’s explosive growth, because what Drexel did is identify a financing gap in the market. They became a leader in financing companies that fit the junk bond (a.k.a. “high-yield”) model, and that was open source. Right? Other people could have done that, and did do it, and competed with them. But because Drexel was a leader, they got a big  chunk of the business of financing those types of companies. So that’s what we would like to build.

3) Thirdly, is our tech stack. I think that there’s a great opportunity for investors and private companies to get better returns by using technology and analytics and more sophisticated way. I published a detailed roadmap of how people like us can get better returns by doing that. And that’s absolutely fundamental to our longterm vision.

Tyler: [00:07:43] Love it, man. Yeah. I think you’re hitting on a lot of the points that a lot of our other guests have hit on in regards to just like why a lot of VC is stale, and you’ve tracked this and seen this  a few different iterations now. Can you maybe talk about the VC tech stack and like why it’s becoming more and more of a pressing issue for different venture funds?

David: [00:08:08] So the first reason is because the market has just gotten more competitive. Firms need to differentiate. Second, is because it’s possible, right? If you go back 20 years, there was a lot less data available about companies in terms of their internal human stack, right? Who was working there, because LinkedIn was not as widely used  (for scraping) . In terms of their public facing tech stack,  not as many firms had websites with rich information available (and scrapable) . There are fewer analytic tools to, for example, scrape their job listings to determine what technology tools they were using in house. And so it’s hard to use analytics when you don’t have data.

Another factor is that these  these sort of practices are filtering down from the public markets investors. We’ve seen hedge funds, like D.E. Shaw or Two Sigma, completely change the way that public markets investing works. Two Sigma looks more like a software company than a traditional hedge fund in terms of how they organize themselves internally. And because they have lots of money, right? They’re able to invest a lot of resources and building that most private equity/ VC funds don’t have the internal resources to invest significant money in hiring engineering at scale.

But that sort of worldview and expertise is filtered down to smaller investors. And in the world of hedge funds, the vast majority of VCs, including the so-called megafunds are actually pretty tiny. There are individual hedge funds that have more AUM than the whole VC industry. So that’s why I say that we’re small relative to the big hedge funds.

And so I think that that’s another factor, and I think that the next generation of leading VCs and private equity funds will be aggressive about using these tools to become more effective.

Tyler: [00:09:55] To that point: most VC firms will never have the AUM required to take the management fees, to build the proprietary software they need. But, we live in a returns driven market, which means that everything is relative. Like, how do you see that evolving?

David: [00:10:12] So the bar is really low. In other words, because most firms, even though they might be a customer of a Carta or another one of the many vendors in the space, I think in many cases they’re not fully using the power of the tool.

Because any one of these tools, you have to be diligent about implementing it. For example, I know numerous funds where yes, they have a CRM installed. But, not everyone is using it. So one partner might have keep their sensitive data on their personal phone, as opposed to in the firm CRM.  That is not a best practice.

You’re not going to get the proper outcome unless you force people to put the data into the universally used CRM. So there is a lot you can do at a relatively low cost to become more effective in technology and analytics. And that’s what I’m doing. I only have so much budget. I definitely don’t have the Andreessen Horowitz budget.

So I had to make this decision myself. And I published a discussion of exactly how I’m triaging, where I’m investing money in my own firm, in order to have the biggest impact. Most obviously I’ve invested a lot in energy in choosing the right CRM system and super-customizing it for my particular use case. I view that as the backbone,  because  CRM data is so fundamental to the process of being a VC.

Tyler: [00:11:25] So Clay, do you want to talk about Visible.VC.

Clay Norris: [00:11:28] Yeah. Sure. And I feel like I have so many questions I could ask you just around adoption of software tools designed for VCs, but at Visible we help streamline investor communication. So whether that’s companies updating their cap table or investors updating their LP base, historically that process has sucked. It’s fallen under the role of an analyst such as myself and previous roles where a third of your time has just been collecting data, wrangling cats, and then packaging that up into LP reports. And by the time that data is is fresh and ready to go, it’s probably time to update it again. So we streamline all that. So investors can actually focus on the things that matter.

I had a question though, just kind of piggybacking off adoption of VC software , what are some of the challenges you’ve observed just from selling to these groups of people? These are people that pride themselves on saying, No. You see it in all these marketing docs: “we invest in 2% of the 500 deals we see a year”.  Do you think that this is a category that there are going to be billion dollar outcomes, just because they’re going to have to go through so many “No’s” in order to get it yet?

David: [00:12:34] So I’m an investor in a number of companies, like Earnest Research, which sell to the private equity/VC community, or more broadly, I should say to the investor community. So you can build really significant companies in this space. One thing I like to remind my friends is the wealthiest person in New York City is not an investor per se. It’s Mike Bloomberg, and he made his money selling a tool to Wall Street: the Bloomberg terminal and the data and analytics associated with it. (Also worth noting that he retained a huge stake in that business, by not taking in too much capital.) So, there’s a lot of economic opportunity there. The VC market is tiny, right? Relative to private equity, relative to the public market. So that’s the first thing I would want to think about is can your product evolve, so can be useful for a broader set of investors. I think that over time, some of these tools will become table stakes in the same way that Bloomberg Terminal is now table stakes if  you’re a public markets investor.

Clay: [00:13:30] It’s a really interesting point. I’d never really heard someone phrase it like that, where, the richest person in that city filled with rich people is somebody who’s just selling to the people that needed this data, which are the investors.

Tyler: [00:13:41] I mean, when I think about it, I think VC itself can maybe be a hard asset class to get into on, just by taking a piece of their management fees. So if you look at the TAM, what’s 2% of the aggregate VC management fees. And then you say, well, if that’s the case, maybe I can take  up to  4% of that and that’s your total TAM. But if you look at B2B2BC distribution channel, like David said, you can pivot into adjacent spaces such as private equity and do the same thing or hedge funds and do the same thing. Then it becomes pretty interesting. Or you maybe you can even sell to like the VC lawyers or wherever it might be. You’re in a pretty good position. I do really like VCs as a B2B2C channel because the amount of companies they fund in the scale that they can achieve can be pretty massive.

David: [00:14:25] I was going to say Carta as a perfect example of a company that is B2B2B, right. They’re selling to the companies, the portfolio companies, and they’re also selling to the funds, and that’s been a successful model.

Tyler: [00:14:37] Exactly. Let’s sprint to the next thing because David’s website has so much valuable information. I would argue that all of our open resource database on Confluence he’s probably contributed like a cool, like 6% to 9% of our content. And you have a really good piece on the 11 steps of the investment process.  Maybe you want to walk us through them, but more interestingly in terms of giving people the secrets of the trade, which of those steps do you believe are ignored by most funds?

David: [00:15:14] So when I talk about data and analytics in private markets, I find most people interpret that to mean, “Oh, you’re talking about scraping LinkedIn to see which startups have hired a lot of C.S. grads from top schools or PMs from top FANG companies.” And that’s valid. You can definitely create value there, but you can also create value at all 11 steps of the investment process, not just in the sourcing side. I will contrast this with a hedge fund world, where 90% of the calories at a firm like Two Sigma are around origination. They don’t use the word origination; they’ll call it trade selection. They spend huge efforts around picking, what trades do we put on? And the reason, is because most other steps of the process are super automated, so you can’t create much value there. Right?

In our world, in VC, I think that the step that gets to the lowest level of attention relative to value creation opportunity is portfolio acceleration. What happens to the companies after you invest in the 5 to 10 year window, typically where you’re a shareholder. And I think that there’s a lot you can do over time to help this company systematically. First Round Capital is a good example of a company, a fund, that’s done this and created a vibrant  community and resources, to help their companies over time.

I think that there’s a lot more that can be done to help out companies. So at that stage, that’s one of the reasons why I like private markets vs. public markets. When you invest, you put on your trade, you go long IBM, great. So what can you do next? You can pray, you can hedge, or you can sell.  That’s about it. But in private markets, you can actually nudge the roulette wheel and improve your odds by sitting on their board, by bringing in clients, doing lots of other things to help out.

Tyler: [00:17:02] How do you think about that value creation with different stages? I mean, I think especially the pre-seed seed stage, it could be forming a community around these investors, providing a bunch of resources like you’ve done. But then as you get more established, farther along, it becomes more about customer investor intros. How do you kind of triage that at least within  your strategy?

David: [00:17:23] So that’s a longer conversation.  Briefly for my particular firm, we’re investing in early stage. So we are helping in recruiting. We’re doing a lot of other things that are appropriate for firms where inherently the management team is incomplete.

At the point we invest, they definitely don’t have an experienced executive in all of the different functions you need to grow the company. For some of the growth stage companies that I’m an investor in, especially given I’ve been doing this for awhile. A lot of my older companies are more baked; one of them just filed for a SPAC.

So in that case, there are different levers that you can use to support them, but there are still ways to add value. And the proof point of course, is look at the world of late-stage private equity. Look at the activist investors, the Bill Ackmans of the world who deal with public companies, right? At every level, there are things an investor can do to add value or destroy value in a company.

Tyler: [00:18:12] Are there are there any areas within  the 11 steps that you think could add the most value or the least value?

David: [00:18:20] It depends on your individual fund and your fund strategy.  I think that for most early mid stage companies, recruiting is an absolutely critical point. One of the great challenges in our industry is in the old world, 40 years ago, you joined a GE and you rose up by rotating through different functions and businesses within a conglomerate. In the new world. you might start your job at Google, but then you go to a startup, and then they shut down, and then you go get a job at another startup and they shut down. In an ideal world, you would then go to another company that would recognize the experiences you had at those two prior startups, but that’s not necessarily what happens.

So the investor community has a lot of value creation (opportunity) here by helping mitigate the risk of joining an early stage company, by providing some credentialing function that says, sure, you were previously CMO to a failed company, but you did a great job. It wasn’t your fault. And your next job should be at a comparable, a higher level of seniority and comp, to recognize your experience. So both on a societal level and on individual investor’s IRR level, I’m very interested in how you more efficiently move human capital around the ecosystem.

Tyler: [00:19:35] So everyone talks about how you learn more from failure than success. But society rewards the opposite of that.

David: [00:19:43] Yeah. And it’s a privilege. People say things like that, because the reality is if you don’t come from family money and you’ve got a decent job at a decent firm, you go join some startup and they fail, you can be really screwed, right? You lost that. It can be hard to go back to Google or some other big FAANG company, and then you go work for a bunch of other small startups that don’t offer the cash comp. So I generally recommend people have a very high bar for joining a startup company. I’m a VC, right? So I have a diversified portfolio, but for your career, you don’t have that, you can only work for one company at a time. And if it fails, potentially your equity is worth zero. You probably took a below-market salary for a while . It’s a real issue. And so I think that it’s really important that we try and mitigate this.

One of my models here is Welsh, Carson, (Anderson & Stowe), which is a prominent private equity fund. They advertise on their website that 40% of their management team previously worked at another Wells Carson company. So what they’re doing is they’re synthetically creating the equivalent of the old school corporate career track, where you go from one division of GE to another, because if you’re a rising Controller at one Welsh Carson company and the CFO who’s above you, your boss, is 35 years old, not going anywhere. They’ll help you get a job at some other Welsh Carson company where you can be CFO. And you’re still in the overall family and you still get credit for having done a good job in your prior job.

Tyler: [00:21:10] I love that, man. We have a lot more that we want to cover, but something that I want to talk about with you, Of the things that have changed since you started with ffVC  what’s been the most shocking development or change over the past.

David: [00:21:27] I think it’s commendable that in the last two years or so, there’s been a much more significant focus on diversity including from people who I wouldn’t have predicted that, if you’d asked me 10 years ago. But the pathetic thing is if you actually look at the data on diversity, it’s still really, really poor, right?

There’s a whole wave of new emerging manager funds led by diverse managers, but the total AUM of them combined is pretty modest. And probably because the mega funds are getting much bigger, right? The total AUM that is managed by diverse people, it still remains tiny. I do have optimism that this will change over time.

But  it takes a while. I do give our industry a little bit of credit, at least people talk about it more. Definitely I’ve talked with a number of VC firms who said, Hey, we’re looking to hire a new partner. And we have a really, really, really strong bias to hire someone that doesn’t look like all the other current partners. And that’s great.

Also valuations:  I remember 10 years ago, complaining about valuations, seem a little frothy and look at us now. Right? So at some point this will be proven true, and people say, wait a second, this is kind of crazy. I lived through 1999, so I definitely lived through that awakening moments. But  we’re not there yet. And so I would not have predicted 10 years ago that people would be comfortable writing the type of valuation checks that they’re writing now for often quite young and unimproved.

Tyler: [00:22:50] Got it. That makes a lot of sense. Also  in regards to time in the space, you were ahead of a trend, which is general solicitation as you’re raising a fund, that was pretty forward thinking at the time.  What were the conversations like behind closed doors and what was some of the lines of thought in actually going through with it.

David: [00:23:09] So I can’t share all the conversations, but I will say that we knew that there’s always a benefit to being the first to do something. It also means you get the arrows in your back. And so (at ffVC) we were excited to do that (in 2013) and be able to go on TV and talk about our returns because it is a huge annoyance that in our industry, you can’t, unless  you’re general soliciting, you can’t actually talk hard numbers in a public context. What I will highlight though, is you’d asked earlier what’s been surprising or shocking to me. So we’re now years past 2013. And the number of funds that raised via general solicitation is still tiny. I think barely gotten out of single digits. And so that goes to how general solicitation (for funds) to date has not been as successful as people thought it would be. I hope that changes and I’m an investor in Republic.co, which is very much a leader in this area, Republic.co. But that said it’s not  (yet) mainstream.

Tyler: [00:24:07] Got it. Well, can you talk a little bit about some of the pros and cons of the 506c regulation? .

David: [00:24:13] Well, the pros are, you can talk publicly about your returns. You can build a financially motivated community around you who will help you source deals and maybe work for your companies and so on. That’s exciting.

But the downsides are,  (first) signaling.  When you’re raising capital for a fund, you’re fundamentally selling a luxury good. It’s seen as more valuable because it’s scarce. That’s part of the secret of the hedge fund industry’s success in gathering assets. The hedge fund industry collectively does a great job of making heads for managers rich and not so much the limited partners. And yet they still have a lot of assets.  So why is that? Because it is seen as prestigious to invest in a hedge fund and seen as a sign of naivete to invest in mutual funds. And so I think that the fact that you’re selling a luxury good that is hard to access makes it seem more attractive to a lot of people.

Another factor is friction. You have to verify the investors are in fact accredited, reviewing their tax forms and financial statements  and so on. You can typically outsource this for as little as 60 bucks to companies like Verifyinvestor.com or EarlyIQ. But it’s still a hassle, right?

It’s one more point of friction getting people to fill, to get their money over. And then you’re going to get more tire kickers. People who are not serious buyers who want to talk with you. It is generally a lot easier to raise a small number of large checks than to deal with the people who can write the 6-, 7-, 8-digit checks.

And even though you’ll get lots of tire kickers there,  at least, you know that in the best case scenario, you will get a large check from them. I’ll share with you one of my favorite stories about fundraising. At one of my prior VC firms, we had a three hour meeting with an extremely well-regarded institutional investor, one of the top investors in VC funds globally. And at the end of the meeting, we said, “Great meeting, what are next steps?” And this investor said, “Well, our average time from first meeting to wiring a check to a new VC fund is four years.” We said, “Well, we’re glad we had the meeting today. So we could start the four year clock ticking.”  That’s how long some institutional investors take before they actually give you money.

Tyler: [00:26:22] Wow. I feel that I had a lot of insight into the potential signaling risk, but I hadn’t thought about the timeline, also had haven’t given much thought to like what that might feel like.  Okay, next piece. So let’s talk alternative forms of VCs. What fascinates you most within that ambit?

David: [00:26:52] Well, let me share with you one of the most shocking statistics that most people are not aware of in our industry. If you look at the Inc 5,000 companies, the fastest growing  companies in the US, only 6.5% raise money from VCs and 7.7% raised from angels. So we have this whole industry  (venture capital) devoted to identifying fast-growth companies. And we’re desperate to put checks to work. And we, as an industry, collectively managed to invest in less than 10% of all the companies we should invest in.

That’s crazy. So why is that? T here are a couple of layers of reasons. One of them is that for all that VCs love to bang on consumer packaged goods and restaurants: “It’s not scalable. Blah, blah, blah, blah.”  (But) look at Sriracha Sauce (Huy Fong Foods). Look at MyPillow. There are lots of companies most VCs would not touch, but actually make a lot of money for the investors who came in early. So I think that  indicates that we need to rethink some of the models in traditional VC.

One prominent reason for that is that the standard structure that VCs use– preferred equity, convertible notes, NVCA standard term sheet, or YC template for the SAFE. That  (set of structures) works for certain narrowly defined type of companies. It doesn’t work for a lot of others. If you look at most wealthy people in the world, they didn’t get wealthy by selling off most of their company to strangers and then exiting. They got wealthy by tightly controlling the equity, self-funding their growth.

And then at some point they got liquidity or maybe not, and then they still own a big chunk of  the equity. So for example, if you look at the big public companies in the U.S., oftentimes the founding family still owns a big chunk of the stock.  So I want to get in, figure out ways that we can finance those companies, support those companies.

And this will open the entrepreneurial doors to a lot more people in particular. I think there’s a built-in bias in traditional VC, right? Traditional VC encourages people to take great risks, right? And we applaud the people like Bill Gates and Michael Dell, Mark Zuckerberg, who dropped out of college and built companies.

And I certainly commend them for doing that, but let’s be honest. Those are privileges. The opportunity to drop out of college and start a company, that is a privilege of coming from an affluent background. All those folks came from backgrounds of some education and privilege. And so if they failed, they’ve just gone back, finished their degree at a reputable school, and gotten a job at Goldman Sachs or whatever.

So I think that if you can figure out ways to lower the risk in starting a company and encourage people to become profitable, or at least  make sure there is a path to profitability, you will open it up to more types of founders. I published research on this, showing that the VCs who are investing using alternative structures are attracting disproportionate numbers of women and other founders from underrepresented backgrounds. And they’re actually wiring money to founders from underrepresented backgrounds.

What’s striking to me is they’re not doing it from a “quota” lens of, oh, we’re investing in you because of your gender or your race or whatever. They’re doing it because organically, from the nature of the financial instrument  (and/or the focus on capital-efficient founders) , you’re getting a broader set of founders and you’re going to invest in some small percentage of them.

And that’s really exciting to me. I’ve certainly spoken with some founders who happen to be women or minorities who say, look, I’ll take money from whoever will give me money.  Realistically it’s hard to raise money, but all things equal, I would rather use money from Sequoia or some traditional VC, not from the VC that says we’re only investing you because of gender, race, in addition to all the other credentials. Because I want to compete in the big pool with all the other founders. I think I’m just as good as those other founders who might come from a different background as me, and I should get money from the traditional VCs, just like they do. And so these sort of alternative VC structures allow me to accomplish a diversity goal without headlining that you’re investing because of the particular set of chromosomes you were born with.

Tyler: [00:30:58] To that point, what I would say is traditional VC rewards people for having certain milestones already met. And those who do invest on just ideas or invest incredibly early, tend to rely on networks, which minorities and women are typically not part of, because of systemic reasons, and that these alternative forms of investing  leave, give people space in time and just enough capital to get to those milestones.

David: [00:31:27] Let’s put it this way. I certainly have talked with underrepresented founders who view it as a negative signal for themselves.  They’d rather have money from Sequoia than from a fund that has that  (exclusive focus on minorities) as a thesis. But that said, they’ll take money from where they can get it. And I support the firms whose thesis is to specifically target underrepresented founders. And that’s part of the Versatile VC thesis, is to make a point of building relationships with communities of underrepresented founders, because we know that just by waving a sign saying “we welcome your inquiry” , we will invest in you, you don’t need a warm intro… that will create better opportunity sets for us, and it’s good for the ecosystem.

So my point though, is that  there is this negative signal, which players should acknowledge. And I’m very interested in ways to get around it.

I met a while ago with two African-American gentlemen who were starting a new VC fund. And we were talking about to what extent they wanted to headline with that, and we all agreed it didn’t make sense for this particular firm to headline that “We have a particular interest in the African-American  community”, because you look at the website and the difference is kind of obvious. You don’t see that many (team pages on) websites of VC firms that look like theirs. That will make the point enough. And they can just talk about their areas of technology they’re interested in. Inevitably they’re going to get more deal flow from the African-American community than a lot of other VCs because the founders come from that.  (They say, “We invest in great founders”, just like the other top VC firms.)

Tyler: [00:32:58] Yeah, I totally agree. I mean, I guess there is some advantage to SEO.  Other than that, like I think the bigger point that you’re hitting on is like, “Be it, don’t say it.” Okay. How about we take a moment for you David, to ask me and Clay, anything in the world, whether it be about venture capital, life, emotions, video games,  anything in the world and we will answer in full transparency and then we have. Clay, take us out with the rapid fire round.

David: [00:33:23] My real question for you is what do you want to do with Confluence? Where do you want to take it? But I suspect that’s not a question you can answer in two minutes so we can talk offline about that.

Tyler: [00:33:32] We want Confluence to be an enablement layer for every person who comes into venture capital from analyst to partners. And we want it to be a community that shortcuts that space and on the back end of that, like you look at it as anything from a job board, which we recently launched, what we started with, which was an open resource database to a closed network of people on Slack or whatever channel that we use to automate it introductions to, now a fund and a future GP style program, where we quite literally give our community members who are part of the top 1% of the community or show promise or hustle their own funds to prove themselves. And, that’s the next like two to five years maybe. And from there. I don’t know, maybe we will become a SAAS company. I’m kidding. Maybe.

Clay: [00:34:25] I would just echo all that. And now we can probably like continue a conversation offline . I feel like we could talk about that for another hour, but I want to be mindful of your time too, David. So if it’s cool with you, I can just close out with this quickfire round where we’ve got five questions for you meant to be answered in two sentences or less. First one we’ve got is what is a recommendation you hear regularly that you think is bad advice?

David: [00:34:52] Found a company. VCs have diversified portfolios and most of their investments fail. And so I don’t think you should found a company until you’ve assessed at least 10 different ideas, and it meets the same bar as a VC.  (Preferably 100 ideas. Details on this at teten.com/mr)

Clay: [00:35:06] Love that next one. In the last year, what new belief behavior habit has most improved?

David: [00:35:12] I do bodyweight exercises and parkour, and I certainly focused more  (in the past) on strength moves. I would say I focused more on doing certain difficult moves and not enough on form. And so I am now focusing more on form, which in the long run will improve my ability to do some of the more challenging moves in the world of bodyweight exercises and calisthenics.

Think you’re the first parkour athlete we’ve had on here.

David: I would say athlete is a little too strong, but I do  a few things that are challenging.

Clay: [00:35:44] I don’t think I could do that. I think I’m too long for it . All right, next one. Aside from having to say no all the time, what’s the worst part about being a VC?

David: [00:35:53] Oh, it’s iIliquid. And if your fund performs very well, which most funds don’t, you’re still going to get rich slow, because it is illiquid and that’s the nature of the space. But the good news is it means you have a built-in pension fund.

Clay: [00:36:06] Next one, best piece of advice for junior VCs .

David: [00:36:09] Pick a competency, like analytics or marketing or software engineering or an industry, and go deep into it. It’s like college admissions. I think there’s a lot of value in being spiky. And the best case scenario, you pick something like crypto in 2015. And if you did that by now, you’re probably a partner at a large fund, right? Because you picked a sector that became hot. (And read my book.).

Clay: [00:36:34] Couldn’t agree more. There’s a lot of good things about starting a career in venture. I think one of the bad things is just being way too much for generalist and not being able to go deep in any subject. But I think that’s really good advice. We’ve heard that from a couple of other people. I couldn’t agree more. Last one: who’s a mentor of yours that you’d want to give credit.

David: [00:36:55] John Frankel, the founder of ff Venture Capital, is the first person who gave me a job in VC. So I definitely want to express my appreciation to him.

Clay: [00:37:05] Love it, love it. Well, cool. That wraps up quickfire. I think that wraps up core questions as well. I know we’re going a little bit over, but this has been awesome. I feel like that was just packed with so much tactical advice, both for us and for everybody else. So yeah, just want to say thank you again for coming on, agreeing to do this.

David: [00:37:26] Thank you very much for having me, glad you enjoyed it, hopefully it’s helpful the community. And , look forward to continue cooperation with you.

 

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