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Key takeaways

Seed funds are highly selective. Seed funds do not scatter their investment and hope something takes off. On average, seed funds invest in 8-20 new companies each year, but meet with hundreds and get sent thousands of pitches. Seed funds tend to have one or more sector theses about the market driving their investment strategy.

Seed folks like to stick to seed. Why? They could move up the stack, raise a bigger fund and make more money. However, seed investors like seed because it provides an opportunity for them to see themselves making a return — provided their thesis and network is strong.

Seed funds raise like it’s 2009. Seed funds prefer to raise a new fund every 3 to 4 years, unlike more recent trends in venture with larger funds raising every other year. This time horizon for raising funds is fitting since the companies in a seed fund’s most recent portfolio will take time to prove product market fit and grow their valuation.

Fun fact: Hunter Walk on theYouTube acquisition by Google back in 2006. “It was called Google’s folly. They’re spending a billion and a half dollars for dogs on skateboards. Is this even legal? The hosting and streaming costs were high. At one of the internal TGIF versions, [Schmidt] announced the acquisition. Somebody asked Eric, ‘you paid a lot of money, how do you know that was the right amount?’ Eric paused for a second and said: ‘It’s definitely not the right amount. It’s either way too high or way too low. And we will know in 10 years.’ ”

Highlights from seed investors

7: Satya Patel and Hunter Walk, Homebrew Founders

Hunter on the market gap at venture

“I was surprised to find that the market gap at venture was returning emails, showing up for meetings [and] spending more than 51 percent of your calendar with the companies that you funded versus that next company, that next fund to raise, that next conference to speak at. We took a model that basically says we will pick up the phone, we will answer the email, we will be on the whiteboard with you.”

Satya on the three things companies have to do well

“All companies at this stage really have to do three things well: they have to build a product, distribute that product and build a team. So that’s where we spent a lot of time.”

Satya defines a Homebrew company

“A Homebrew company is one in which there is a mission-driven founder who has a firm belief about how the world should operate and a strong set of hypotheses for how to help get there. He or she has experienced the pain being addressed firsthand, has empathy for the customer and a deep appreciation for the target industry, disrupting it with love rather than contempt. The founders want to build a cap table that acts as extensions of the team, helping them increase the scale, velocity or probability of the company’s success. The company is building something that democratizes access to products, services, data or customers for constituencies and industries that haven’t had access previously. When we come across like-minded founders operating in industries in which we feel we have expertise, relationships or know-how, we think of those as Homebrew companies.”

8: Jana Messerschmidt and Katie Stanton, Founding Team #Angels

Jana on founder terms

“When you’re a founder, the terms that are set are ultimately driven by your ability to negotiate. Certain founders may only get one term sheet, so that’s the deal they have to accept because they don’t have as much negotiation leverage. But other founders might go to Sand Hill Road and get six term sheets in a week; they’re going to drive the negotiation, they’re going to have lower dilution and higher valuations, and they’re going to set the terms. That’s something we talked about a lot in our group. Do women have as many options when they go out raising? Are they able to command and demand that same sort of excitement about the companies that they’re building where they’re able to drive the negotiation process and set those terms?”

9: Katie Rae, The Engine CEO

On the second thing

“The second thing I learned is that the effort you put into this and the love you show for the entrepreneurs is so fundamental to great outcomes. You really learn to trust each other, because without that trust people just block each other off and stop telling the truth or stop revealing what’s actually happening. It was so shockingly apparent to me that you have to be genuine in these relationships. It’s not a transactional business, and certainly not in the seed stage. These are early companies where a hundred things could go wrong, but only one needs to go really right to win. If you’re focused on all the wrong, you will kill these companies. That’s what I learned.

“It’s a lesson that gets replayed in almost every piece of life, whether it’s your relationship with a spouse or your children. It’s always the same lesson.”

On the time frame for patient capital

“Whatever the biggest technical risk is, you want to take that out in the first four years. That’s what opens all kinds of capital to the company, whether it’s venture capital, non-dilutive capital or project finance capital. Most funds are 10 years, which means you must be in the market truly deeply within the first four years. Otherwise, you’re not going to get to exit within 10 years. We like to have a slightly longer time frame than that, ours is up to 18 years. And that allows us to take a different set of risks in technologies that we think are really important.”

10: Vas Natarajan, Partner at Accel

On the Rise of Cloud and APX

“The cloud is redefining how end users are working together and collaborating with one another. We spend a lot of time thinking about the future of work [and] the rise of new collaboration productivity systems, and how the cloud has been a major enabler for that.

“Part and parcel with the cloud is the rise of the API economy we call APX: the X means everything. What APIs do is actually integrate multiple different subsystems, so data is no longer siloed and workflows are no longer siloed. You can actually stitch together work across multiple different things. It has allowed entrepreneurs to create new cloud categories that are almost super-sets of individual pieces of workflow.

“The rise of cloud and, in particular, the rise of APIs, are big themes for us right now. We think the combination of those two is going to create a next set of cloud companies, both at the application tier, but also the APIs themselves will become interesting businesses.”

11: Shuly Galili, Co-founder of UpWest

On the challenges of building distributed teams

“It takes specific founders. Ultimately the sacrifice is on the CEO who has to be very communicative. He needs to create a cohesive environment, even though the team is distributed, ultimately live on an airplane, and not say ‘We’re a U.S. company, and you over there are some sort of an offshore.’ It’s actually the other way around; our goal is for our CEOs to share best practices with each other.”

12: Beezer Clarkson, Managing Director, Sapphire Partners

On returns for early-stage funds

“We look to�� underwrite Series A funds with 3x net, and a seed fund [with] 5x net. We have to believe that’s possible. We will look at when you’ve made investments, how many of them have become a 5x or 10x return and how many of those need to be true. And who’s in the team? How big is the team and what are the team dynamics?

“Nothing guarantees you returns. We have yet to find a fund that has had a significant return, call it 5x, that has not had either a decacorn type exit or multiple billion-dollar exits. If you’re a $50 [million] or a $75 million size fund, you still need to have multiple billion-dollar exits.”

On fast in Venture

“The feeling of fast in venture is actually the growth of the companies, and not the management of the funds.”

Main photo courtesy of Frank Vessia via Unsplash.

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To quickly recap, we talked with Accel, #Angels, BBG Ventures, Cowboy Ventures, The Engine, Floodgate, Homebrew, Lerer Hippeau, NFX, UnCork Capital and UpWest.��Here is the customized Crunchbase Pro list of organized by last equity funding amount from smallest to largest.��

Vas Natarajan: Partner, Accel

Natarajan pointed to , a site reliability engineering platform that addresses those instances when a company’s site goes down, potentially costing millions of dollars in lost revenue.

led the seed in 2018. Blameless raised a in March 2019 led by Accel and .

“What Blameless is building is a command and control for engineers, DevOps leaders, product leaders to be able to collaborate by Slack, pull in all the relevant metrics that they’re seeing from different infrastructure monitoring problems, and then push fixes as quickly as possible.”�� said Natarajan.

Secondly is , a data privacy technology company that raised a in April 2019 from Accel.

Every technology company needs to know where their users are logging in from around the globe, and the laws of that country. “That is a whole set of infrastructure solutions, and front end consumer facing tools that Transcend will build and sell for any company,” said Natarajan. “If you go to privacy.trulia.com or privacy.hoteltonight.com, I as an end user can see your privacy policy, I can log in and see what data you’ve collected on me and then I can hit delete. Transcend powers all that.”

Jana Messerschmidt and Katie Stanton: Founding Team #Angels

The #Angels founders have their eyes on , a marketplace that matches celebrities with consumers for personalized video shoutouts. Cameo raised a $50 million Series B in June 2019 led by .

“The consumer will script what they want the celebrity to say. So it could be a happy birthday message. It could be an engagement message. It could be congratulations on your job promotion. Whatever you want it to be. And then the celebrity decides whether they want to fulfill it. The celebrity also sets their price. You have everything from cameos for $25 all the way up to slots charging a few thousand dollars,” said Stanton.

Next is that helps women track their fertility at a fraction of the cost. Modern Fertility raised ain June 2019 led by of . “They’ve helped demystify fertility, and giving you more power towards understanding how fertile am I right now?” said Stanton.

Susan Lyne: Co-founder, BBG Ventures

“ is a marketplace for very large farms to sell the 30 percent of produce that gets ploughed under, because it doesn’t meet cosmetic standards for grocery,” said Lyne who invested in its seed round. Full Harvest connects large farms to food businesses. led its in August 2018.

Then there is .

“GoTenna allows you to send a text message and your location when there is no wireless coverage, no cell coverage, nothing. It was really developed initially for rock and roll concerts, and off-grid sports,” said Lyne. Since its early days it has been adapted for more critical use. “It’s just a great communications protocol that allows anyone to communicate in a disaster.”

Lyne invested in GoTenna’s seed round back in 2013. Most recently it has raised a in June 2019 led by .

Ted Wang: Partner, Cowboy Ventures

is an AI platform for accounting firms to automate routine tasks.

“What you’re really stopping humans from doing is reading and typing. This makes people more effective in their jobs. I can’t imagine anyone is going to be unhappy about not having to do that,” said Wang.

Vic.ai raised an in September 2019 led by .

“ is a company that currently has a product that looks at your job postings, and is able to analyze the text of the job postings and help you to write them in a way that they’ll be more effective,” said Wang. “You can send a posting through the Textio system, and it will send you an augmented version of the same text with suggested changes or highlights.”

Textio raised a in June 2017 led by .

Katie Rae: CEO, The Engine

“ is miniaturising a fusion plant with an invention that allows them to get to net positive energy,” said Rae of this fusion energy company built on top of decades of research. “We believe what they’ve invented will allow you to get there. If that’s true, you basically have endless clean energy. This is a team that has already proven out a bunch of the most significant milestones, and will continue to do that over the next two to three years.”

Commonwealth Fusion raised a in June 2019 led by , with , , and along with other investors.

Next up is , a company that develops technologies to engineer human primary cells and iPSC’s for both discovery and clinical manufacturing of advanced therapies. According to Rae, “They looked at the biotech industry and asked, ‘Why are there PhDs basically injecting things into cells?’ Would there be a way to speed this up in the biotech industry by ten thousand X?”

Kytopen raised a in May 2019 led by and .

Iris Choi: Partner, FloodGate

has built software for simulation testing of autonomous vehicles. Applied Intuition raised its Series B of $40 million led by in September 2019.

“Instead of physically having to run autonomous vehicles in Arizona in a quarantined off area, you can do billions of test runs, in various scenarios, using software. There is a benefit to having a mutual third party, instead of everyone building it in-house whether you are an OEM or a rideshare provider. This is only going to become increasingly necessary in the future,” said Choi.

Another company worth watching is , which offers business owners a simple procurement app for their daily supplies, reducing time spent on managing their inventory, and helping lower waste. Cheetah last raised its in October 2018 led by and .

Satya Patel and Hunter Walk: Homebrew Founders

“�� was started by two brothers, one who was a Navy Seal and the other who was an engineer at MIT. And the brother who was a Navy Seal came back for his tour of duty in Iraq and Afghanistan, and he came to the realization that none of his colleagues, fellow soldiers died in battle,” said Patel.

“They died when they were doing reconnaissance into areas where there was no information about the building or the terrain that they were going into. And it seemed crazy to him that that can’t be solved in some different way. And so he got together with his brother, and they decided to build a company called Shield AI, which is developing fully autonomous drones for the public sector. These drones can by themselves navigate into buildings and caves. Collect intelligence about what’s going on inside through thermal cameras, regular cameras and then communicate that back to people who can do analysis on it,” said Patel.

“Shield AI is a company that has such a powerful mission around ensuring the safety of civilian and military lives.”

Shield AI raised a $25 million Series B in August 2019 led by .

Also on his radar is , which�� creates software infrastructure for any software company to become a payments company. Finix raised a in July 2019 led by .

“We think of it as democratizing access to a financial services infrastructure, helping a whole generation of software companies create more value for themselves and their employees and their customers,” said Patel.

Eric Hippeau: Co-founder, Lerer Hippeau

is an AI powered app for personalized health information

“They can answer pretty precisely all your health questions. If you use the app then you have the choice of very quickly getting on in a telemedicine way talking to an experienced doctor,” said Hippeau.

“It’s also a B2B business where you’ll see it appear at the front end to a number of different kinds of service providers, who would rather have something like this, as the first point of contact. It might be a hospital or it might be a clinic so that they can better direct the patient to the right service,” said Hippeau.

K Health last raised ain December 2018 led by , and .

Also up is , which automates retirement plans for small to medium sized companies. “They basically offer a very easy, low cost for SMBs. It’s really low cost,” said Hippeau. “They do all this hard work for about $8 per employee per month. And so they now originate a huge percentage of all new 401K plans in the United States.”

Guideline raised their in December 2018 led by .

James Currier: Co-founder, NFX

New York-based centers on financial products in the real estate sector.

“They allow people to buy residential houses for cash,” said Currier. “Ribbon gives the cash for two to eight weeks for the transition to take place and then the home buyer gets a mortgage. It really helps when you want to buy a home before you sell your other one.”

Ribbon raised a led by �� in October 2019.

is the largest repository of in the world, for disease detection. “They’ve created a platform play, and then they’re working with pharma and agricultural companies to develop diagnostics and therapies to edit change in a responsible way,” said Currier.

Mammoth Biosciences raised its in June 2018 led by the .

Jeff Clavier: Founder, Uncork Capital

“ is a hardware company that makes air purification technology for allergy, asthma or respiratory disease,” said Clavier. “It has a huge potential market. When you think about pollution in India and China this is a big market.”

Molekule raised their in November 2018 led by .

Another on the watchlist is , a chat inbox for teams. “Companies can aggregate a bunch of email, text accounts and any communication into one single chat inbox where teams can collaborate and have way more efficient customer support,” said Clavier.�� Front raised a led by in 2018.

Shuly Galili: Co-Founder, UpWest

is a company automating accounts payable to decrease time spent chasing invoice approval. Stampli raised a in October 2019 led by .

“They’re dealing with customers who have thousands and thousands of invoices, are inundated with paperwork, with a paper trail, with not knowing where the invoice started, and when is it going to be paid,” said Galili. Customers include retailers through to companies that have many outsourced vendors.

Also up is , a cybersecurity startup that addresses the risks in a company’s IT systems. CyCognito recently raised an funding in Nov 2019 led by .

“The attack surface has changed because it’s no longer just the technology that is on your laptop. There are many ways that servers, mobile technologies, customer lists and credit cards are being exposed today,” said Galili. CyCognito monitors these shadow risks an IT team might not be aware of to minimize exposure to attack.

Pro Tip. Crunchbase Pro subscribers can save this to their account to track changes over time, and get alerts.��

To Note: Some of the investors mentioned in this article are ��

Illustration: .

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Backed by investors like , , and , is a technology startup building a software layer between the various parties in the world of health insurance, helping industry members pass information between each other more quickly and with fewer errors.

Founded in 2017 with offices in both San Francisco, California and Durham, North Carolina, has raised $4 million to date, including a Pre-Seed round in April 2018 and a Seed raise in November of that year.

Noyo is a wager that application program interfaces, better known as APIs, can knit together an industry famous for printed paper, faxes, and errors. Notably, Noyo, a sort of for health insurance data, is already operating commercially. Plaid, another startup, has for its API service focused on the banking industry. Similar to what Noyo wants to do, Plaid helps pass information between members of a somewhat antiquated industry.

Noyo is intriguing because if its manages to situate itself in the middle of the American health insurance market (a market ) it could become a hugely wealthy, if largely invisible, technology company. Or, its efforts could fizzle and the company may wind up merely another failed attempt to hack at the waste and misery of modern medical insurance.

To understand how far along Noyo is, and how it came to be we have to rewind the clock and visit a different company. Let’s talk about back when Noyo co-founders and Dennis Lee worked for the Bay Area-based unicorn.

A Light In The Paperwork Abyss

In its heyday, Zenefits was hailed as one of . Capital flocked to the disruptive insurance player, including a in 2015 led by and valuing the company at $4.5 billion.

Zenefits later nearly crumbled under the weight of its own growth, and .

According to Goggin, Noyo’s CEO, Zenefits was “an insurance broker, as well as a benefits software platform,” making it a software company that had to work with antiquated systems.

Goggin, a product manager at the company, helped brokers and clients “shop for and explore their insurance options,” along with assisting customers secure price quotes from partnered insurance carriers, enrolling individuals, and managing those policies.

Zenefits didn’t grow quickly on accident. Instead, Goggin explained to Crunchbase News, the startup hit on something that the market really wanted. The company “grew incredibly quickly in large part because our product really struck a chord with the small businesses that we were selling into,” she said.

Its customers “had been struggling with paperwork for a long time,” according to Goggin, and with requirements to “fax something to an insurance company and not knowing where your data was, at any point.”

Because Zenefits offered a way around all that hassle, “it became very popular very, very quickly. And we grew very fast.”

While Zenefits grew like hell, making it a darling of the technology press and the venture scenes, it was itself dealing with a process that struggled to scale.

Tech Has Its Own Challenges

Zenefits is a technology company, but it couldn’t rebuild the industry it operated in from scratch. As Goggin put it during an interview, Zenefits was “able to build a lot of tooling and technology around our products,” but was “limited by the technical and process constraints of our partners.”

There wasn’t an absolute lack of connective technology for Zenefits to use, but what existed wasn’t sufficient. An information format called EDI, or electronic data interchange, helped some. Goggin describes EDIs a “precursor” to APIs, making them something between nothing and a possible solution.

EDIs didn’t fix what was most broken in the system that Zenefits operated inside of. The problems that Zenefits ran into from archaic tech, missing information, and the like could “be traced back to this sort of root cause,” according to Goggin, “which is that these [insurance-related business] systems don’t talk to each other.”

Zenefits managed to take some of the mess out of the insurance world for its customers, but it then had issues to deal with on its own side. And there wasn’t a technology layer to help all the market participants it spoke with in sync.

So Goggin and her co-founder Dennis Lee decided to build a company that could knit the insurance companies and brokers and even the new platforms together.

Frustration Breeds Innovation

Noyo was born out of Lee and Goggin’s frustrations with the technology solutions available to them at Zenefits (Lee worked on EDIs at Zenefits).

The two founded Noyo in Fall 2017, spending the first half-year of their business “going extremely deep on customer validation” according to Goggin.

They wanted to be sure that their “macro vision” of a digital infrastructure for health insurance connected by APIs was correct.

It was. The two founders showed mockups of what their product might look like to brokers and other players in their market, only to have them say, “Oh, yeah, we need this yesterday. Like, let me can I get the API keys? Can I try it out?” Goggin recounted.

The positive reaction was a push to move faster, Goggin told Crunchbase News: “We had to go back and say ‘okay, let’s go.’” She noted that the market’s reaction to their early conversations helped her and Lee know that it was time to “raise money, bring on a team and really go full force after this opportunity.”

Market Reception

Noyo launched its product with a few “early carrier partners” earlier this year. That means that its APIs are passing information between parties in its market and helping sign individuals up for insurance. “It’s working extremely well,” Goggin said.

There is a slow, but nearly-viral effect that the company’s launch is having on its go-to-market strategy so far. According to the company, when it links up with a new platform, it’s often asked to support new carriers. And when it adds a new carrier, that carrier will link the company to other parties it does business with, spreading Noyo’s reach, according to Goggin.

That’s a process slower than a meme going viral on TikTok, but for the insurance industry, it may qualify as wildfire-quick.

And as the startup adds new partners, it grows its revenue.

Noyo’s customers pay on a “volume basis” according to Goggin, who went on to tell Crunchbase News that her company charges “on the number of people policies that we’re managing.” So, as one partner or customer’s usage of Noyo goes up over time, the startup should see rising revenue from that account.

This matters for a key reason. We can presume that Noyo’s gross margins are pretty good; it’s a software company after all. And as the company charges based on a policy number that may grow over time on a per-customer basis, its revenue may resemble that of a traditional SaaS company. Recall that investors covet SaaS revenue, assigning it rich valuations due to its high margins and recurring nature. Noyo should be able to enjoy similar valuation metrics.

The Future

Like many companies that build APIs, linking together data from various third-parties, Noyo is bullish on what can be built on top of its budding infrastructure. Goggin told Crunchbase News that she “would like to see a lot more innovation and creative products built around the infrastructure that we’re creating.”

Noyo wants its service to become a platform upon which other companies can build, but it doesn’t want to write all the apps. It has a more pick-and-shovels approach in mind.

And that’s that. More when the company is willing to let a revenue number slip.

Illustration: .

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Gené: I want to welcome you both. This is new for us to have two partners. Why the name “Homebrew”?

Hunter: Homebrew was named after the Homebrew Computer Club. As a history major, there’s a certain respect for the shoulders we stand upon. It harkens back to the spirit of you do it for the love and passion, not just the disruption and economics. You’ve benefited from what came before you. So there’s a certain mentality as you continue to pay it forward.

With Homebrew we’ve taken a concentrated involved approach, as opposed to a more passive lottery ticket style, to be able to share some of those learnings across the founders in the portfolio.

Gené: How did you both meet?

Hunter: I ended up at , relatively quickly, but not necessarily intentionally. Google was still a private company, but was well known. One of the things that caused me to leave is that I wanted to touch millions, hundreds of millions of people. That very much matched Google’s ambitions. And that’s where Satya and I met. I joined late 2003 and he joined earlier in 2003. And we are on the same team. First literally on the same team, and then working under the same VP. We spent 2003 to the end of 2006 working on AdSense. The first project we worked on together is how do you bring AdSense from smaller self service websites into the larger publishers.

Satya then left to go to in 2007. And I moved over to just as it had been acquired. Google had moved from 1,000 to 12,000 people over the three years. It was just starting to change. Things were becoming institutionalized. YouTube was very much again the intersection of community and creativity.

Gené: YouTube was a bold acquisition by Google. It felt at the time as if the acquisition came out of nowhere.

Hunter: People were not congratulating YouTube. It was called Google’s folly. They’re spending a billion and a half dollars, for dogs on skateboards. Is this even legal? The hosting and streaming costs were high. At one of the internal TGIF versions, announced the acquisition. Somebody asked Eric, you paid a lot of money. How do you know that was the right amount? Eric paused for a second and said it’s definitely not the right amount. It’s either way too high or way too low. And we will know in 10 years.

Google was the perfect late stage venture capitalist to invest in YouTube.

Gené: At the time the big issues were how does YouTube make money and copyright?

Hunter: Copyright was the large one. YouTube did safe harbor and was DMCA compliant. They built copyright rights management into the licensing tool to help creators manage their content. When it came to terms of service and community standards, our big concerns back then had to do with spam, with people trying to crawl up the leaderboards. And making sure that ahead of some of the sophisticated systems that we were later able to build, that there was no pornography.

YouTube was starting to internationalize, and we realized what a dramatic world wide impact it would have. We were trying to understand and respect local laws, and sometimes local norms in countries where maybe we didn’t have a presence to operate, but we had users. During my first few years it was not taking Silicon Valley assumptions and layering them across the world. At the same time knowing you stood for access to information. This rolled right into the Arab Spring. A protestor who got shot was one of the first tests. This is violent. This is blood. This is somebody dying. This is historically important.

If you pull those strings hard enough, do you get to where we are today. It’s a challenge of a global company, global audience. We were dealing with year two through year six problems, not year fifteen problems.

Gené: Do you feel like YouTube spiraled out of control?

Hunter: I haven’t been there for seven years now. I feel like each phase has its set of challenges. The team is dealing with challenges that are often the byproduct of what worked, incredible growth, building algorithm around attention, and what the unintended consequences of that are. Google has always been a place where people have been willing to advocate for the right long term decision, no matter what the short term resources or business impact is. I hope the complexity of some of this decision making and the implementation of policy doesn’t get in the way of doing the right things. I have a lot of confidence in the people over there.

Gené: Hunter and Satya, you both have a product background. How did you come together to decide it’s the two of you that should start Homebrew in 2013?

Hunter: Satya left Google early 2007 to go back to venture. People we knew called him back into duty and he went to run product at Twitter for the better part of two years pre-IPO, building what is today. When he left late summer 2012, and unbeknownst to him, I was also thinking about leaving Google at the end of the year.

Gené: What is different about Homebrew?

Satya: Coming from product backgrounds, we thought about Homebrew as a product. So we tried to identify the white space in the market, and for us that was at the seed stage. While there are lots of sources of capital, there were very few investors who were willing to be the investor of record. As angel investors and advisors to lots of companies, we were often the first call when founders were having some operational issues like hiring somebody, a product question, even though there were larger checks on the cap table. We saw this gap where the early stages of company building are incredibly difficult. Most of the time founders don’t have all the skills needed to scale a company for year zero through three. And they were asking for help, and there was no one willing to give it to them. And so the thesis behind Homebrew was to be that investor of record, come to that conversation with empathy having been on the operator side. And to do that for a small number of companies each year, where our focus was not going to be looking for the next investment, but really spending time with the founders.

Hunter: So much capital is coming into the seed stage. There’s no capital gap structurally at the seed stage. Maybe there was 15 years ago. That doesn’t mean that fundraising is equitable or easy. That’s a whole other discussion. But there’s lots of capital.

That capital has come to market in forms that sometimes have more to do with the needs of the investors, than the needs of the entrepreneurs. Increasingly large funds that are multi-stage, and or the size of the fund predetermine what success looks like. It’s just math. We co-invest with those people all the time They’re wonderful. Especially as companies get bigger and know what to do with $20 million, what to do with $27 million. You can’t grow a company without that.

Similarly, there are more and more people who like writing here either institutionally or individually 20, 30, 40, 50 smaller checks, a year. I sometimes joke, they have a general partner name Darwin, because what they do is see who survives. It’s often not in investors’ short term interest to take the model we do. Which is to keep your fund size constrained, concentrate on early investments, and spend more time servicing the deal, than trying to win it. We get involved at the seed and then stay operationally supportive into the Series B. We commit to a three to five year runway with these companies. There’s not many people willing or able to take on that model.

Satya: And this stems from why we created Homebrew in the first place. It was not to become venture capitalists. We would not naturally enjoying being venture capitalists. We really enjoyed building Homebrew, because it’s focused on what we thought for us was the most interesting thing to do was work side by side with founders to help them build businesses.

Gené: What is a Homebrew company?

Satya: A Homebrew company is one in which there is a mission-driven founder who has a firm belief about how the world should operate and a strong set of hypotheses for how to help get there. He or she has experienced the pain being addressed firsthand, has empathy for the customer and a deep appreciation for the target industry, disrupting it with love rather than contempt. The founders want to build a cap table that acts as extensions of the team, helping them increase the scale, velocity or probability of the company’s success. The company is building something that democratizes access to products, services, data or customers for constituencies and industries that haven’t had access previously. When we come across like-minded founders operating in industries in which we feel we have expertise, relationships or know-how, we think of those as Homebrew companies.

Gené: Are you wanting to be the Andreessen Horowitz services model at seed?

Satya: We’re trying to practice venture capital, the way it was originally practiced, when it wasn’t just capital. It was this notion that your investors are part of your team. They’re not your managers. While they’re on your cap table and you’re responsible to them to some degree, you’re not reporting to them.

Hunter: I was surprised to find that the market gap at venture was returning emails, showing up for meetings, spending more than 51 percent of your calendar with the companies that you funded versus that next company, that next fund to raise, that next conference to speak at. We took a model that basically says we would pick up the phone, we will answer the email, we will be on the whiteboard with you.

Satya: All companies at this stage really have to do three things well. They have to build a product, distribute that product, and build a team. So that’s where we spent a lot of time.

Gené: What do you mean by investing in the bottom-up economy?

Satya: The notion of bottom-up economy is based on this overarching arc that we see within the technology industry. As technology is getting cheaper and more flexible, more accessible, it’s finally being leveraged by constituencies, and industries that haven’t yet leveraged it. That means everything from enabling the business of one, to empowering teams within larger organizations. It’s about democratizing access to products, services, data, marketplaces, and revenue streams. That’s what the bottom-up economy encompasses. We tend to say we like to invest in sexy software for unsexy industries. So it’s a lot of financial services, healthcare, manufacturing, logistics, retail, everything from kids clothing to autonomous cars.

Hunter: You don’t see a lot of stuff in the portfolio that’s meant to sell into the top 50 CMOs or the top one percent of consumers. was an early fund one investment, also an early fund one exit. But we came to that with the prepared mind, given some of our experiences at Google and beyond, with AI and computer vision. All of a sudden you’re given some credibility and through [Vogt] the CEO there, you’re given a set of founder relationships and you start pulling the strings and it leads to a few companies in the second portfolio.

Some things are evergreen. We just have incredible domain expertise in fintech, . I don’t think there is anybody who has a better seed portfolio in financial services over the last six years. But then there’s other things where your own personal interest, or meeting the right founder at the right time, you start to build a market presence, build the capability and then you just have to decide how far you want to follow that down or not. So now the stuff we’re doing in automation, and computer vision is less to do with autonomous cars, and more to do with manufacturing.

Gené: How did the investment in Cruise happen?

Hunter: There’s been two investments in our first six, seven years that started with a password protected video. Both of those turned out to be very good investments. Kyle sent us a password protected video of him driving down the 101 Highway to demo day with periods of the drive, having no hands or feet on the wheel. Ok, we are in. At the time people thought if this was going to happen, it was going to be Google, there’s going to be an Apple car. People were not talking about componentry, what do you do with LIDAR? This is why GM bought them. That acquisition was 18 months after the seed round. And people say, how did they come up with this number for that acquisition. The GM board decided what percentage of the market cap they wanted to spend to de-risk the rest of it.

Gené: Your most recent fund in 2018 was $90 million. How are you planning to invest that fund?

Hunter: So we’ve stayed very much the same since the first fund. Each fund is a byproduct of how many companies we think we’re going to invest in doing six to eight a year. And what’s the check size needed to get to 10 to 15 percent ownership in a seed round.

Our first fund was about 20 companies over two and a half years. Our second fund was 27 companies over three and a half years. And when we went to set up fund three, we decided to do it even a little bit longer. So it’s targeting to be about 32 companies over four and a half years. If you are going to live up to the expectation that you set for founders, that cascades through fund size and fund strategy.

Gené: How much do you need to invest in this market to get your 10 to 15 percent? And are you co-investing?

Satya: We always co-invest. We’re big believers that syndicates add real value at the seed stage to get various skills, experiences, and relationships. Our average investment is probably a million dollars now, but anywhere between half a million to two million as a range. The average investment has had to tick up a little bit from when we started as round size and valuations have gone up.

Gené: How large is a typical seed round?

Satya: $3 million on an average but anywhere between $2 and $4 million is pretty established as a Bay Area seed round.

Hunter: We had a geographic collar on ourselves for the first few years. We didn’t want to stray too far out of California or New York because we really want to make sure we could deploy our model without spreading ourselves too thin. As we gain confidence, we’ve been willing to make investments in Portland, Boston, Salt Lake, San Diego, and Toronto.

In the 1990s software was a vertical. Now, every business has a software component, and sometimes the best companies being built in some of these verticals have an academic background or domain expertise that’s not necessarily native to Silicon Valley. And so we look at each geo as — is it neutral to positive for this company to be located here. Are we going to invest in a Spotify competitor in Kansas City? Probably not. Is there a lot of really compelling vertical AI work being done out of Toronto because of the university footprint there? Absolutely.

In a competitive market, how do you make sure that for the handful of verticals that we have the deepest expertise, how do we make sure we’re top choice, for founders in that area? Because there’s lots of wonderfully smart investors, lots of capital. It’s not just enough to be thought of as ‘they’re good people.’ You need to be preferenced. And so we’ve done a lot of work around some of the co-investor relationships, some of the founder relationships. In year seven, we’re finally starting to see our own proprietary deal flow from employees at the first companies. Either those companies got acquired and handcuffs are off, or people invested in doing things. We’re starting to see referrals from the companies that we back in fund one.

Satya: We really think of ourselves as seed phase investors. So while our average check is a million dollars. We’re happy to be the $200,000 check in the pre-seed, or the last $2 million that goes into the company right before the Series A. Our focus is in that early period where companies are largely pre-product market fit. Pre-product or post-product with some early customers.

Gené: You have around 20 exits with Cruise being the biggest. That is a high count of exits six years in.

Hunter: Because we’re investing in companies that are often innovating within traditional verticals, they’re quick to the customer, and quick to revenue. They are proving their worth. Why do companies choose to be acquired? Somebody is willing to pay into the future, to bring them in-house. Which means that they’ve done very well in their first few years, and developed something. Another reason is founders feel there’s a compelling offer on the table, and they’ve constructed a cap table that allows them to take that offer. We want teams to be able to play both offense, and maintain optionality until they decide that they know who they are, and raising several hundred millions of dollars of venture capital is what they need to get there.

I’ll give you an example of a company in our first fund that has provided a meaningful return. in the construction SaaS that Autodesk bought earlier this year for $265 million in cash. That company had some growth term sheets on the table, could have played forward, but decided based upon where they were in their own development that Autodesk would be a natural partner for them, the roles they would be given there, that it was something that founders wanted to do. Not controversial because they hadn’t made promises to the cap table, and raised at valuations that made only a $300 million exit a loss. Right? I would be really happy if each fund, produced one or two public companies, and a bunch of outcomes that were really great for the founders, really great for their teams, and really great for their investors, because they didn’t get so far out over their skis, that they closed too many doors prematurely.

Satya: Because we’re investing early, we’re investing in people, and our commitment is to those people. There are also situations in which things don’t work out as everybody had hoped. Maybe the offers that they’re getting aren’t of the nature that Buildingconnected got. Because our commitment is to those people, it’s our job to make sure that we help them find a home for them and their employees that ends up helping them move forward with their careers. Part of what you see reflected on the website are also acquisitions, where we’re just doing our job as good investors and good partners to these teams, and helping them land in places that are going to be positive.

Hunter: Do the early investors have not just conviction, but alignment? Some of these first time funds need to keep a company alive, so their LPs don’t ask, how come these companies are failing? Or in the face of a good offer, that wouldn’t move the needle for the fund, so they make it hard on the company and tell the companies to play on. Because it’s not a $5 billion company, it doesn’t matter to us.

Gené: Why do you do this? A lot of firms would step away.

Hunter: The best rationale is when there’s both self-interest, intersecting with it’s the right thing to do. So the self interest is those founders become incredible evangelists for us. More and more smart founders when they do diligence want to talk to founders in a portfolio where things didn’t work out, not just the ones that did. If you can get one, two, three times your money back on your dollars you get to recycle that back into the companies that are going to do that. For a sub $100 million dollar fund, we can turn that into something that actually does contribute back and we put that into a , into a , into a .

Satya: And it comes back to we didn’t start Homebrew to start a fund. We started Homebrew because we saw that there was a lack of service being provided to founders.

Hunter: I hope when we turn off the lights, years and years from now, one of the things we can say is we were the best version of who we wanted to be. We don’t want to be a junior version of Andreessen Horowitz, we don’t want to be First Round 2.0. We don’t want to be an incubator, accelerator, crypto, or whatever flavor of the month is.

We always say the way to get better fund over fund is just to make one better decision.

Gené: How many companies do you meet?

Satya: 3,000 intros, and we meet about 800.

Gené: Are a lot of the deals coming through other seed investors?

Satya: It’s about two thirds through founders, entrepreneurs, and executives in our network. It’s about one quarter from other investors, and the rest is some combination of inbound/outbound.

Hunter: So there’s this interesting trend. There’s a bunch of wonderful funds that write these $100K to $250K checks. There’s certain pockets of entrepreneurs that they’re pretty well connected to, because it’s the ex-Airbnb guy. The challenge that some of those funds face is that there is a surplus of their dollars, and they can’t make a round come together by themselves. And they’re very interested in placing the lead, not just because they care about the company, but because if they place the lead, they’re less likely to get squeezed down. Oh, I know you want $250k but sorry you’re only getting $100k.

And so one of the interesting trends over the last seven years is the increase in volume and quality of introductions from that segment of the smaller supporting seed funds, who really need to protect their allocation. Why we play nicely with them is because we’re not trying to do 80 percent of a round. They’re hoping a founder protects their allocation, but you also really need the funds to protect their allocation. That’s definitely been one of the interesting structural changes in seed that has impacted where we see deals from. It’s definitely different than 2013.

Gené: Satya, you were at Twitter as the VP of Product when Twitter was making some crucial decisions about enabling an ecosystem through a platform or becoming a destination. And they went with destination. In retrospect, do you think Twitter made the right call?

Satya: I would argue in many ways we didn’t make a decision. We tried to play the middle. And I think it’s pretty clear, in retrospect, that was the wrong answer. And frankly, I think it was probably clear to a lot of people internally, it was the wrong answer then. There was a whole host of reasons why that played out the way that it did. They did both because they closed down the platform to a smaller set, but they still wanted to be a platform. And of course they’re driving towards being a destination. I think there was a little bit of wanting to be both, but doing neither well.

Gené: Was that the biggest question Twitter was trying to answer at the time?

Satya: It was everything from making sure the service stayed up, to monetization. It was pre-IPO. Platform was certainly a big component of it. You might recall a time when there were no photos or images on Twitter. That was a big decision to do even that. So there were lots and lots of decisions that played into what Twitter became. I do think that it would be a very different service if it had moved to the platform direction. I think potentially a much more broadly used service.

Gené: What are two companies in your portfolio that you’re excited by and why?

Satya: We’re investors in a company called . Shield AI was started by two brothers, one who was a Navy Seal and the other who was an engineer at MIT. And the brother who was a Navy Seal came back for his tour of duty in Iraq and Afghanistan, and he came to the realization that none of his colleagues, fellow soldiers died in battle. They died when they were doing reconnaissance into areas where there was no information about the building or the terrain that they were going into. And it seemedd crazy to him that that can’t be solved in some different way. And so he got together with his brother, and they decided to build a company called Shield AI, which is developing fully autonomous drones for the public sector. These drones can by themselves navigate into buildings and caves. Collect intelligence about what’s going on inside through thermal cameras, regular cameras and then communicate that back to people who can do analysis on it.

Gené: Is this product targeted at the military?

Satya: The public sector broadly, but DoD obviously is a big target of theirs. And so we seeded that company a few years back. Andreessen Horowitz did the Series A. The company is in the process of closing its Series B. And already the impact that companies are having in terms of keeping people out of harm’s way (both military personnel and citizens) is phenomenal. A company that nobody will probably ever hear about. It is based down in San Diego. But a company that has such a powerful mission around ensuring the safety of civilian and military lives. And started by founders for all the right reasons. One we’re super excited to be part of. And an example of a company that stems from the work that we did at Cruise. Because these fully autonomous drones are using computer vision and all the same types of technologies, that allowed us to have a point-of-view around that market.

The other company is called . They started based on the idea that every software company has become a payments company. They all want to be able to accept payments and disperse payment. And the norm for doing that is by signing up with a processor and paying that processor three percent or whatever that might be.

What Finix is doing is creating the software infrastructure for any software company to become a payments company itself. Instead of paying three percent you then turn that into a revenue center. It’s also software driven, it can be adopted and used by companies of any size. And so we think of it as democratizing access to a financial services infrastructure, helping a whole generation of software companies create more value for themselves and their employees and their customers.

Gené: Who do they sell to?

Satya: They are targeting marketplaces, software companies, and financial services companies.They work with companies like Lightspeed POS, they work with companies like Visa. Literally any company that wants to be able to accept payment of some kind, credit card or otherwise.

Gené: How do they charge?

Satya: It’s software based subscription plus transaction. We seeded that company. And , , and led the A recently. Incredible founding story where the founder is a self taught engineer, first generation college graduate, with a Latino American background and just the hardest working guy you could ever meet.

Gené: Thank you I think we have it.

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