In the first 20VC episode of 2020, host Harry Stebbings reflects on the previous year's coverage of precede investing and introduces guest Gurav Jarin, co-founder and managing partner at Afford Capital. Jarin shares his journey from a childhood in India, inspired by the American dream, to co-founding Afford Capital, which focuses on precede funding. He discusses the challenges founders face in raising initial funds, the shifting seed market, and the importance of specialization in venture capital. The conversation also touches on the rise of angel funds, the role of multistage funds in early-stage investing, and the delicate balance of portfolio construction at the precede level. Jarin emphasizes the need for authentic founders with unique insights and the potential for market pull, rather than relying solely on founder resumes or market size projections.
"We are back for the very 1st 20 VC of 2020, and I'm so excited to say in the coming months we have the likes of Vinod Kosler, Patrick Collison and Howard Marx coming on the show."
This quote sets the stage for the podcast, highlighting the high-profile guests expected and the focus on precede investment for the year ahead.
"As someone that grew up in India, I thought the concept of venture was kind of weird. The fact that somebody will trade a lot of cash, real cash, for a piece of paper that holds no collateral, purely for some promise of the future."
This quote reflects Gaurav's initial skepticism about venture capital and his realization of its importance in achieving the American Dream.
"Everybody says they're founder friendly because it's easy, it's what founders want to hear. But in cases where what's best for the founder is not the same as what's best for the VC, that is what really tests your value system."
This quote encapsulates the ethos of prioritizing founders' interests, a core value Gaurav observed and adopted from Founder Collective.
"The reality on the ground is very different than that perception. It may seem at the surface level, based on how much money is going into venture, that it should be super easy to raise a precede round."
This quote highlights the disconnect between the perception of ease in raising precede funding and the actual challenges founders face in securing their first institutional investment rounds.## Precede Funding Challenges
"historically seed funds used to invest at this inception stage, but they have moved later and they're demanding traction."
This quote explains the shift in seed fund investment behavior, emphasizing the requirement of traction before investment.
"it's actually getting harder and harder to raise a micro vc fund."
This quote highlights the increasing difficulty in raising micro VC funds due to market saturation and LP investment behaviors.
"A4 accounts for about 40% of capital that has gone into funds exclusively focused on precede."
This quote provides a statistic on the market share of A4 in the precede funding space, indicating its significant role.
"The round will always be there. Exactly what it's called may change."
This quote suggests that the precede round is a constant in the startup ecosystem, though its naming may evolve.
"the biggest cost driver for the company at this stage is people."
This quote explains why the amount raised during precede rounds has remained stable despite technological cost savings, emphasizing labor as the primary cost.
"Their 500k precede suddenly turns into two and a half just because of the sheer capital supply."
This quote illustrates how the presence of capital can inflate the funding rounds of founders with strong backgrounds.
"the moment there's some modicum of traction, and if they are in an interesting space, that, especially if it falls in a prepared mind for a series A fund, we certainly see those rounds getting preempted."
This quote explains how Series A funds preempt rounds based on traction and market interest, leading to earlier and potentially overvalued investments.
"Their entry into precede seed is just a function of the economic cycle we're living in."
The quote connects the behavior of multistage funds to the current economic climate, explaining their strategic shift to earlier-stage investing.
"venture will always remain to be a small industry."
This quote emphasizes the inherent limitations of the venture capital industry regarding scalability and capital deployment.
"it puts a real risk on the company."
This quote acknowledges the potential negative consequences of multistage funds investing early, particularly related to signaling.
"if that very large mega fund... chooses to not invest in your company, it adds the question mark for everybody else."
This quote explains how a multistage fund's decision not to continue investing can create doubt among other potential investors.
"we think there's more variance on the problems that companies face across stages and phases of the business than there are across sectors."
This quote argues that the challenges companies face are more dependent on their stage of development than their industry sector.
"If you look at some of the best vcs in the business over the last few decades, they've been generalists from a sector perspective, but they've always been focused on a stage."
This quote suggests that the most successful venture capitalists have historically been stage specialists rather than sector generalists.## Generalist Investment Approach
"So being generalist from a sector perspective allows you to then invest in companies that are different but then still have the similar set of problems?"
This quote highlights the advantage of being a generalist investor, which is the capability to invest in a diverse set of companies that face analogous challenges, enabling a more flexible and wide-ranging investment strategy.
"Yeah, the reason we're seeing this huge influx is really a byproduct of the intense and growing competition at Series A."
This quote explains that the surge of angel funds and scout programs is a direct result of the competitive environment at the Series A funding stage, where funds are seeking more opportunities to invest and gain deal flow.
"It's prevailing wisdom that the earlier you go, the more diversified your portfolio needs to be, just because of the lack of data, lack of certainty."
This quote addresses the common belief that diversification is crucial in early-stage investing due to uncertainties and the absence of substantial data to inform investment decisions.
"We keep probing until we hear I don't know. And just because these pre-seeds don't have traction and data, they have plenty of traction and thought."
This quote emphasizes the importance of thorough questioning during the investment diligence process to understand the depth of the founders' insights and the level of thought put into their business plans, despite the lack of traditional traction and data.
"We consider each check we write, even in existing portfolio companies, as a new investment."
This quote underscores the disciplined approach to reserve allocation, where each follow-on investment is critically assessed as if it were a new opportunity, ensuring that additional capital is allocated effectively.
"You need momentum before you can lift off. And I think it's similar with startups and you should start and stop."
This quote draws an analogy between the momentum needed for an airplane to take off and the capital required for a startup to build enough momentum to reach an inflection point in its growth trajectory.
"It's important to move fast and mostly to be efficient with the founders time, but I don't think it's an arbitrary race to the finish line."
This quote conveys the importance of being efficient and quick in the investment decision-making process, while also ensuring that the process is thorough and not rushed simply to close a deal.
"In my opinion, best companies will either e"
The quote is incomplete, but suggests that the speaker believes the most successful companies have the potential to expand or create markets, indicating the importance of market size and potential in the investment evaluation process.## Market Dynamics in Precede Stage Investing
Uber, of course, you've seen the first deck, right? Talks about the tamp being $4.2 billion, and they now do almost $60 billion in bookings.
This quote exemplifies how initial market size estimates can be drastically outperformed as a company grows, highlighting the importance of recognizing potential beyond early projections.
So over time, the market is going to become more efficient, which means that it'll be smaller than what it would have been if it wasn't for performance marketing.
The quote suggests that innovations like performance marketing can streamline a market, potentially reducing its size but increasing efficiency, which impacts investment considerations at the precede stage.
The number one thing they look for at precede when investing is validation around unity economics and unit economics at the center of their thinking.
This quote reflects the perspective of some investors who prioritize unit economics early on, despite the challenges of accurately assessing these metrics at the precede stage.
I think you cannot take it literally on what the unit economics are, but I think you start to see some leading indicators on the idea of market pull that I talked about.
Here, the speaker emphasizes the importance of interpreting early signs of market pull and distribution strategy over concrete unit economics at the precede stage.
One of the big myths in the industry is that precede is betting on founders resume and idea and not much more.
This quote challenges the common misconception that precede stage investment is only about the founder's past achievements and the initial idea, suggesting a more nuanced approach.
What we look for are a few things. First of all, authentic founders, folks that are building this, not because it's a hot space, but because if you look at their arc of their career, you can see how they ended up starting this company.
The speaker outlines specific qualities sought in founders, emphasizing authenticity and a career trajectory that naturally leads to their current startup venture.
It's called the trillion Dollar coach, and it was actually written by Jonathan Rosenberg, who I used to work for. He had a product at Google and Eric Schmidt. And it was about Bill Campbell, who was a coach for Larry and Sergey, Steve Jobs, many of the iconic founders in Silicon Valley.
The speaker references a book that influenced their perspective on venture capital, highlighting the value of coaching and supporting founders rather than directing them.
That it's an artisanal business, that it's about honing your craft. This is not a world domination kind of business.
This quote reflects the speaker's realization over time that venture capital is about refining one's skills and approach, rather than pursuing a strategy of aggressive expansion or control.
It's a company that builds a platform for employers to offer mental and emotional wellbeing support to their employees. I just love the mission.
The investor explains their recent investment decision based on the company's mission and the societal need it addresses, demonstrating the importance of alignment between investor values and startup objectives.