Digesting my time on the job // the state of seed investing in 2019
Me: “It’s a strange time to enter venture.”
Acquaintance: “People say that every summer…it’s always a strange time to enter venture.”
“In recent years the investors have started to seem a little less essential. There are so many of them and they have so much money and they are so transparently thirsty about giving it to entrepreneurs.” — Matt Levine, We Looks Out for Our Selves
This summer, I graduated from college, moved to San Francisco, and joined the investment team at Haystack alongside my colleagues Semil and Ian. I’m lucky to have a job that provides a unique lens into talented people building the future, as well as one that gives me the ability to consistently soak in the “local knowledge” of Silicon Valley. Looking at it from a few months out, my path into venture was the right mix of deliberate and fortuitous. Considering the job at the moment, I’ve consistently pondered three sets of questions:
Why should people invest in startups in the first place? How can one make investment decisions with little data?
Are there existential risks threatening the venture landscape? Do they apply more directly to seed investing?
When is the right time to generalize your investment strategy? When is the right time to specialize?
For most people outside the venture ecosystem, it’s hard to understand why and how one would invest in startups. They’re extremely risky bets to make, and only a few funds capture the majority of the returns. I’ve always wanted a better explanation of “why venture?” than the surface-level idea of being closer to the future than the rest of society. As an aside, the ability to explain myself and the art of persuasion are components in the professional development process. In your early career, you can have a gut feeling, but you lack the vocabulary or vernacular to make that intuition intelligible.
Circling back — it is often hardest to justify startup (and especially seed) investing to those from traditional Wall Street or finance backgrounds.
“How would you evaluate this business? There’s no data to evaluate this business.”
I’ve recently come to a conclusion for a fitting rebuttal, and of course, Marc Andreessen articulated it very well in this recent podcast (~32:00). Looking at venture investing through the lens of *one* business is the wrong approach. According to Andreessen, you need to see this game as bundle creation — a holistic, portfolio model. You’re investing in a basket of experiments, and probabilistically, a small fraction of the experiments are going to work. But in order for the whole model to work, and the 1-2 bets to pay for the rest of the losses, the payoffs have to be massive. Then, maybe the only calculus should be: how big can this really get?
Take a shot every time someone says “capital is a commodity.” It’s trite at this point, but it’s true. More dollars are pouring into the venture industry, and seed investors may be feeling the brunt of this the hardest. Semil summed it up quite well in “The Summer Solstice And Seed Stage Squeeze.” Seed funds are feeling competition from all angles:
Angels who are able to quickly allocate small checks into companies and founders they’re familiar with.
Other seed funds getting off the ground who have certain ownership targets.
Platform funds dipping down into seed to buy in early.
Traditional hedge funds looking to get exposure across the public / private spectrum.
As a freshly-minted seed investor, this is frightening. But, it’s also a little thrilling. The market dynamics pose unique challenges to us at work every day, and we need conviction in ourselves that we can work within our networks to access unique businesses and gain the trust of founders building legacy-defining companies. Despite the noise and high prices, one has to believe hard-to-find properties will always exist.
Something along these lines I’ve been thinking about — what’s capital’s complementary good? Perhaps there’s opportunities for fund direction there.
Specialization & Generalization
One way investors try to combat capital commodification is by focusing on specific verticals or domains. You can take a directional bet in something like SaaS or fintech, and more companies will come to you, enabling you to build a flywheel of deal flow and investments in that category.
It’s hard to specialize at seed, and for Haystack’s style of investing, it doesn’t really make sense. Yet, I have thought about specialization and what it means for differentiation / personal brand building. When I do think about this, the “specialization scaries” settle in — the lurking feeling that you’ll cut yourself off to interesting opportunities if you only spend time in a few arenas. I’m not quite sure what the solution to that mental state is, and I’m positive I’m not the only one in this industry that experiences it.
One’s career is a continual process of refinement and craft, and I’m certainly curious to see how mine evolves over time.