20VC AngelList's Parker Thompson on How He Evaluates Startup Founders & Why The Move To Series A Is Harder Than Ever

In this episode of "20 minutes VC," host Harry Stebbings interviews Parker Thompson, a partner at AngelList and the creator of the Startup L. Jackson Twitter parody account. Thompson shares insights from his diverse background, which includes pivotal roles at Pivotal Labs, co-founding PlaceSite, and working at the Internet Archive and UC Berkeley. He discusses the importance of understanding a startup's customers, the learning velocity of teams, and the necessity of aligning fundraising with business milestones. Thompson also critiques the VC industry, emphasizing the need for founders to build great companies over optimizing for dilution and the evolving landscape where founders exert more control over their cap table. The episode touches on the future of VC, the value of building relationships with VCs outside of fundraising rounds, and the challenges of staying mission-focused at AngelList.

• Harry Stebbings hosts the final VC episode before Christmas on "20 minutes vc."
• There will be no episode on Boxing Day (Monday) but the schedule will resume on the 28th of December.

This is the 20 minutes vc with your host Harry Stebbings at H. Debbings on Snapchat. And this is the final vc episode before Christmas.

The quote indicates that this episode is the last venture capital-focused episode before the Christmas holiday, hosted by Harry Stebbings.

And over the Christmas break there will be a slight change to schedules as we will not be releasing a show as we usually do on Monday due to it being Boxing Day, but we will be back on the 28th and commence as usual from there, however, to the show.

This quote informs listeners of the temporary schedule change due to the Christmas break, specifically mentioning the absence of an episode on Boxing Day and the resumption of the regular schedule starting the 28th.

• Parker Thompson is a partner at AngelList and the creator of the parody Twitter account Startup L. Jackson.
• He has invested in companies like Algolia, RealtyShares, and Keen IO.
• Before AngelList, Parker was a partner at 500 Startups in San Francisco.
• His career includes roles at Pivotal Labs, co-founding Place Site, preserving digital content at the Internet Archive, and working on digital copyright at UC Berkeley's High School.

Stay and I'm delighted to welcome Parker Thompson to the show. Stay now. Parker is a partner at angel list and creator of popular Twitter parody account startup L. Jackson.

Harry Stebbings introduces Parker Thompson as a guest on the show, highlighting his role at AngelList and his creation of a well-known Twitter parody account.

At Angel List, Parker's made investments in the likes of former guests Algolia Realty shares and Keen IO. And prior to joining angel list, Parker was a partner at 500 startups in San Francisco, and his illustrious path prior to investing includes pivotal labs, cofounding place site, preserving the interwebs at the Internet Archive, and working on digital copyright at.

The quote provides a brief overview of Parker Thompson's investment history and career path before joining AngelList, including his time at 500 Startups and other notable contributions in the tech industry.

• Harry Stebbings thanks Eric Tornberg for introducing him to Parker Thompson, which made the episode possible.

I do also want to say a huge thank you to Eric Tornberg for the intro to Parker today, without which the episode would not have been possible.

Harry Stebbings expresses gratitude to Eric Tornberg for facilitating the introduction to Parker Thompson, acknowledging the role this played in realizing the podcast episode.

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• Parker Thompson shares his background, including his time at Pivotal Labs and his transition to VC through an offer from Dave McClure to join 500 Startups.
• At 500 Startups, Parker helped scale the company and managed the integration post-acquisition by EMC.
• He then moved to AngelList, where he is involved with the deal committee and marketplace, investing on behalf of the community.

Right before I came into VC, I was working in a company called Pivotal Lab where I spent about seven years all in from it being a couple people in a room, up through selling the company to EMC.

Parker Thompson narrates his pre-VC career progression at Pivotal Lab, from its early days to its sale to EMC, showcasing his experience in growing a company.

And then somewhat out of the blue, a guy named Dave McClure gave me a call and said, hey, I'm building this firm. He was about a year in at the time to his fund, 500 startups, and he offered me a job which ended up being a really pretty interesting transition for me.

This quote recounts the unexpected opportunity Parker Thompson received from Dave McClure to join 500 Startups, marking his entry into the venture capital world.

• Parker Thompson discusses the challenges of scaling 500 Startups from a team of ten to a much larger organization.
• He compares the operational struggles of VC firms like 500 Startups and AngelList to those of traditional operational companies, emphasizing hiring, management, and coordination challenges.
• At AngelList, Parker focuses on deals and works with syndicate leads and institutional partners rather than directly with startup teams.

I mean, I think it was an interesting firm in that 500 is not a traditional vc and angelist is not a traditional VC. Right. So my whole experience as an investor has been in these weird organizations.

The quote reflects on Parker Thompson's experience working in non-traditional VC firms like 500 Startups and AngelList, highlighting the uniqueness of these organizations compared to standard venture capital firms.

• Parker Thompson emphasizes the importance of the founding team in early-stage investments, acknowledging that while ideas and markets may change, the team often remains constant.
• He looks for teams with resilience, a fast learning curve, and deep customer knowledge.
• Parker asks indirect questions to gauge the team's understanding of their product, customer preferences, and strategies for improvement.

It's a cliche for a reason and it's correct, right? Like the people, the ideas change, the models change, the markets change, but generally speaking, you can't change the people.

This quote underscores the venture capital adage that the team is the most critical element in early-stage investing, as they are the constant factor amidst changing circumstances.

So I try to ask people questions that give me insight into their learning process and their velocity of learning, because I think at the early stage, that seems to be a strong predictor of success.

Parker Thompson explains his focus on assessing a team's ability to learn quickly, which he considers a strong indicator of potential success in the volatile environment of early-stage startups.

• Good teams have a natural orientation around the customer and the problem.
• They work towards making existing customers happier and increasing the product's value.
• This approach also aims to expand the product's audience over time.
• Bad teams lack the necessary data to discuss customer orientation and product improvement.

"So good teams, they don't necessarily articulate it that way, but I think good teams just very naturally have that orientation around the customer and the problem. And bad teams don't have that data, and I don't even mean quantitative data. Right. They just can't even talk about these issues."

The quote highlights the distinction between good and bad teams in terms of their focus on customer satisfaction and problem-solving. Good teams innately prioritize these aspects, while bad teams lack the ability to even discuss them.

• Early stage traction is often criticized by VCs as insufficient, which can be frustrating for founders.
• Traction should be viewed in relation to the perceived risks in the business.
• Founders should clarify what specific traction VCs are looking for and how it aligns with business assumptions.
• Traction depends on the market and the level of risk investors are willing to take.
• Investors look for good teams working in large markets, with some indication that people want their product.
• Early stage traction is considered qualitative, focusing on value delivered rather than revenue.
• Founders should understand market expectations and adjust their fundraising approach accordingly.

"When you say you don't have enough traction, right. You're either not able to articulate something actionable or you're just trying to be nice and you really don't like the people and you want them to go away."

This quote emphasizes the vague feedback often given by VCs regarding traction, suggesting that it either reflects a lack of clear articulation by the founder or a polite dismissal by the investor.

• Founders are advised to focus on building a great business rather than trying to game the VC system.
• Understanding general milestones to reduce risk is more beneficial than detailed research on VC partnership dynamics.
• Founders should identify interested partners and seek warm introductions, but not overemphasize internal VC dynamics.
• A good fundraising process involves talking to multiple firms in parallel to ensure options.

"I generally tend to think that entrepreneurs are better served building a great business and understanding, generally speaking, what milestones are going to take risk out of the business and where to focus their energy and the fundraising."

This quote suggests that founders should prioritize building a solid business and understanding key milestones over trying to navigate the internal dynamics of VC firms.

• Building relationships with VCs is important, but it should not be solely about raising funds.
• Founders can benefit from the broad industry perspective and operational experience of VCs.
• Conversations with VCs can provide valuable business feedback and advice, and also build relationships for future fundraising.
• Authentic interactions with VCs are more valuable than transactional approaches aimed at securing investment.

"I do think it's helpful to build relationships to VCs, but I don't think it's necessarily about raising."

This quote challenges the "Always Be Raising" mentality, advocating instead for genuine relationship-building with VCs that can provide strategic value beyond just fundraising.

• Founders should seek data points and work backwards from future fundraising rounds to determine current needs.
• Understanding the market and the milestones required for subsequent rounds is crucial.
• Founders should avoid letting the amount they can raise dictate their strategy.
• Conversations with a few knowledgeable individuals about the current and next round can greatly benefit founders.

"My advice to founders is to go get some data points, right? So I spend a lot of time with people raising seed rounds, right? And so I say to them, look, let's work backwards from the a."

This quote advises founders to strategically plan their seed rounds with a clear understanding of the requirements for future rounds, ensuring they are adequately prepared for the fundraising process.

• Bridge financing is often misunderstood by new investors.
• It's challenging to determine if a company has genuinely achieved product-market fit.
• Companies may appear to have good traction, but still might not meet the criteria for certain investors.
• The bar for investment readiness is rising, leaving many companies in a constant state of fundraising.
• Insiders typically lead bridge rounds, making it hard to differentiate between wise investments and throwing good money after bad.
• Preemptive bridges are becoming more common, with seed firms taking their prorata early to strengthen future fundraising rounds.

"I think. Often not, although it's very hard to tell if you're a new investor."

This quote explains the difficulty new investors face in assessing whether a company has truly hit product-market fit.

"I emailed Paul. And I'm like, hey, here's this interesting company. They're looking to raise this seed, plus they've raised maybe a million and a half to date, and I think their numbers are pretty good."

Parker Thompson describes an instance of recommending a company to an investor known for smart bridge rounds, highlighting the company's good traction and fundraising history.

"So the bar is getting further out. And I think a lot of companies just don't see it. They don't know what the goal is that they need to hit."

Parker Thompson points out that investment criteria are becoming more stringent, and companies often lack awareness of the targets they need to achieve to secure funding.

"So where we tend to bias is more towards a different pattern of investment, which is the preemptive bridge."

Parker Thompson explains a shift in investment strategy towards preemptive bridge rounds, where investors secure their stake early on in strong companies.

• Founders with strong networks can raise significant funds, but there's a debate on whether they should go for heavy valuations or be conservative.
• Pre-product companies are advised to raise as much money as possible due to the unpredictability of their future needs.
• Companies with a product and some market fit should focus on raising what they need, with a buffer for unexpected challenges.
• Founders should focus on opportunity rather than optimizing for dilution, as the outcome of venture funding is binary.
• The mindset of minimizing dilution can be a negative signal to potential investors.

"If you're a company that has a product in the market and you have some customers, and you understand where you're resource constrained, particularly if you have some level of product market fit, I think it's easier to make a specific budget."

Parker Thompson advises that companies with a product and customers should raise funds based on a clear budget that addresses their constraints and includes a contingency factor.

"My general rule is figure out what you think you need and multiply by 1.5 because something's going to go wrong."

Parker Thompson suggests a rule of thumb for fundraising to account for unforeseen issues, emphasizing the importance of planning for extra funds beyond the estimated need.

"I've sat down and done this spreadsheet with a couple of people, and you're like, look, let's imagine we're building a billion dollar business. Here's what happens."

Parker Thompson discusses the exercise of financial modeling with founders to put into perspective the impact of different fundraising scenarios on the company's future.

• The venture capital industry is evolving, with founders gaining more control over the investment process.
• The influx of capital into the market is shifting dynamics, with a bottleneck being the limited number of innovative companies.
• AngelList is leveraging these changes through its syndicate model, which adds value to a company's cap table.
• Traditional VC firms, especially those that add significant value, are likely to remain stable despite market changes.
• Later-stage investors may face more competition and reduced margins, while early-stage investing is seen as more accessible and potentially more lucrative.

"I think that we are on this trajectory, generally speaking, of founders being able to exert more control over the process, over who invests, over how they invest and whatnot."

Parker Thompson speaks about the trend towards greater founder control in the investment process, driven by the increasing capital flow into the sector.

"I think vcs offer a lot of value. I tend to think, for what it's worth, that the seed market is easier to be a seed investor today than it is to be a later stage investor."

Parker Thompson expresses skepticism about the complete disruption of VC and sees value in traditional VC roles, particularly at the seed stage.

"They're doing something quite different, which is a thoughtful reaction to the market."

Parker Thompson acknowledges the innovative approach of certain VC firms, like Andreessen Horowitz, in adapting to market changes.

• Andreessen Horowitz's returns, considering the size of their funds, have been impressive.
• Their strategy aligns with investor expectations, aiming for significant impact.
• The firm's use of management fees is seen as disruptive and beneficial to founders.

"They were pretty good considering fund size."

Parker Thompson comments on the performance of Andreessen Horowitz's returns relative to the size of their funds.

"Like we're going to go big or we're going to leave a big crater."

This quote reflects the high-risk, high-reward strategy communicated by Andreessen Horowitz to their investors, indicating alignment with their expectations.

"They do a pretty good job. Right. Like what they're doing with their management fees, in my mind, is fairly disruptive."

Parker Thompson compliments Andreessen Horowitz on their management of fees and their positive impact on the companies they invest in.

• Andreessen Horowitz provides meaningful services to their investments, such as facilitating meetings with major corporations like Procter & Gamble.
• The firm is recognized for creating opportunities and addressing market gaps in collaboration with their portfolio companies.
• There is a call for more innovation in venture capital models, inspired by Andreessen Horowitz's approach.

"Now we're sitting in a meeting with Procter and Gamble talking about the gap in the market and how they might build products with us to really address our customer base."

This quote highlights the strategic partnerships and high-level introductions that Andreessen Horowitz can facilitate for its portfolio companies, demonstrating the firm's value beyond just capital investment.

• Parker Thompson's favorite book is the Modernist Cuisine book series.
• He appreciates the series for its combination of science, food, and photography, making it a unique recommendation.

"I'm going to give an answer that hopefully no one else has given on the podcast and say the modernist cuisine book, which I think are great because it is great science, porn, great food porn, and just phenomenal photography."

Parker Thompson expresses his admiration for the Modernist Cuisine books, highlighting their interdisciplinary appeal and high-quality content.

• Parker Thompson is not a proponent of Soylent due to concerns about its impact on the microbiome.
• He emphasizes the importance of being cautious with food science and suggests that traditional diets may be preferable.

"I believe that there's still so much that we don't know, that we want to be really humble about trying to engineer things that we think are the perfect food, when in fact, it probably is the case that what we've been eating for a long time is perfect food."

This quote reflects Parker Thompson's skepticism towards engineered foods like Soylent and his belief in the potential superiority of long-standing dietary habits.

• AngelList's mission is centered around helping startups, which is both a source of satisfaction and a challenge.
• The difficulty lies in maintaining focus on this mission amidst the demands of other stakeholders, such as syndicate leads and investors.
• Staying true to the mission requires conscious effort and clarity.

"It's really hard to stay focused on the mission when there's all these other folks that are trying to pull you onto their mission."

Parker Thompson discusses the challenge of staying mission-focused at AngelList, given the many external demands and distractions from various stakeholders.

• Strategy by Ben Thompson is Parker Thompson's top choice for reading material.
• He also engages with a variety of tech and non-tech podcasts, newsletters, and blogs, including the 20 Minute VC.

"So my number one, I would say if I had to pick one, I'd go with strategy."

Parker Thompson identifies Strategy by Ben Thompson as his favorite source of strategic analysis and insights, indicating its value to him as a reader.

• Parker Thompson finds the most satisfaction in the daily interactions with founders, syndicate leads, and LPs.
• He values the personal connections and the ability to assist others in their entrepreneurial endeavors.
• The focus on customer engagement is a key aspect of his role at AngelList.

"It's great to just meet with folks and get value out of the day to day versus the bigger picture stuff, which is a little bit less attached to the customer."

This quote captures the essence of Parker Thompson's enjoyment of his work at AngelList, emphasizing the importance of daily interactions and customer focus.

• Parker Thompson's most recent publicly announced investment is in Commonwealth Network, a wireless ISP.
• The investment was influenced by the strong team, technological advancements, and the market opportunity to compete with disliked incumbents.
• Commonwealth Network's approach to solving the last mile problem with wireless technology presents a cost advantage.

"You've got a great team working in a space with a potentially asymmetric price advantage. And you've got an answer to the question, well, why does it make sense to do this now versus ten years ago?"

Parker Thompson explains the rationale behind his investment in Commonwealth Network, highlighting the team's strength, the market timing, and the potential for cost advantages over traditional ISPs.

• Parker Thompson expresses his appreciation for being on the show and for the opportunity to share his insights.

"Hey, thanks for having me. This is great."

The quote is a simple expression of gratitude from Parker Thompson for the platform provided by the podcast to discuss his work and opinions.

• Harry Stebbings is pleased to have had Parker Thompson on the show, fulfilling a long-standing desire.
• He expresses gratitude to Eric Tornborough for facilitating the interview.
• Harry Stebbings invites listeners to engage with him on various platforms and to read his more thoughtful pieces on his website.

"I've wanted to have him on for a long time now, so it's absolutely fantastic to have that box ticked."

Harry Stebbings shares his satisfaction with having Parker Thompson on the podcast, indicating the significance of the guest's presence to him and the podcast's audience.

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