20VC Zach Weinberg on Whether A Company is a Democracy, The Importance of Ownership, The Rise of PreEmptive Rounds, MultiStage Funds Entering Seed and How he Approaches Both Risk and Personal Capital Allocation

In the 20 VC episode, host Harry Stebbings interviews Zach Weinberg, cofounder of Operator Partners, a unique investment firm where operators fund operators using their own capital. Zach, a seasoned entrepreneur with successful exits including Flatiron Health (acquired by Roche for $2 billion) and Invite Media (acquired by Google for $81 million), also boasts a prolific angel investment portfolio with companies like RigUp, Ro, Color, Blue Apron, and Plaid. The conversation delves into Zach's journey from startup founder to investor, his approach to risk, personal capital allocation post-exits, and the importance of trust and honesty in founder relationships. They discuss the dynamics of the tech scene, including the influx of multi-stage funds in early rounds, the phenomenon of preemptive rounds, and the need for founders to focus on impactful work over social media ventures. The episode also touches on how Zach's straightforward, data-driven perspective shapes his investment decisions, with a recent example being his investment in David Energy, a software company innovating in energy management.

• Zach Weinberg is the co-founder of Operator Partners, a fund investing their own capital into startups.
• Zach previously founded and was CEO of Flatiron Health, which was acquired by Roche for $2 billion.
• Before Flatiron, Zach co-founded Invite Media, which was acquired by Google for $81 million.
• Zach has also been a successful angel investor with investments in companies like RigUp, Ro, Color, Blue Apron, and Plaid.

"And so with that, I'm delighted to welcome Zach Weinberg, cofounder of operator Partners operators funding operators with no outside lps, just their own capital."

The quote introduces Zach Weinberg and highlights his investment approach with Operator Partners, which is distinct in that they use their own capital and don't rely on outside limited partners (LPs).

• Operator Partners and 20 VC Fund have co-invested in three companies: ALt, Duly AI, and Boom Pay.
• The collaboration between Operator Partners and 20 VC Fund reflects a shared investment interest.

"And fun fact, 20 VC Fund has actually coinvested with operator partners in three companies from ALt, Duly, AI and Boom Pay."

The quote notes the joint investment ventures that have occurred between Operator Partners and 20 VC Fund, indicating a partnership in sourcing and supporting startup companies.

• Acknowledgement and thanks to Olivia Benjamin, Josh Coppelman, James McGinnis at David Energy, and Nat Turner for providing questions and suggestions for the episode.

"I'd also want to say huge thank you to Olivia Benjamin, Josh Coppelman, James McGinnis at David Energy, and Nat Turner for some fantastic questions suggestions today."

The quote expresses gratitude towards individuals who contributed to the preparation of the podcast episode, implying their input was valuable in shaping the conversation.

• Lattice is highlighted as a top people management platform used by companies like Reddit, Slack, and Postmates.
• Lattice's platform is said to improve retention, engagement, and productivity.
• Zoom is promoted as an essential business communication tool that offers video conferencing, phone calls, group chat, webinars, and more.
• Carter is mentioned as a platform that simplifies equity management for startups and investors.

"And companies who leverage the Latice platform see improvements across a broad spectrum from retention, engagement and productivity."

The quote emphasizes the benefits companies experience when using Lattice's people management platform, suggesting that it is a valuable tool for improving various aspects of team performance.

• Zach Weinberg's journey into startups began in college where he met his co-founder.
• They were introduced to the startup world through an internship facilitated by Josh Coppelman.
• Post-acquisition of Invite Media, Zach began angel investing with the money earned from the deal.
• After selling Flatiron, he and his co-founder began investing with more seriousness and structure.

"And then angel investing and investing broadly came fairly organically. It was basically after we sold the first business in 2010, we had some money that we had made from the deal, and people start pinging you and asking for advice and investment."

The quote describes how Zach transitioned into investing, indicating that it was a natural progression following the financial success from selling his first business.

• After the first business sale, Zach allocated about 20% of the capital for investing, a figure he was comfortable potentially losing.
• With increased confidence in the quality of companies and founders, he is now looking to allocate 30-40% for startup investing.
• The allocation is strategic and based on the quality of investment opportunities available.

"We had a target and kind of worked our way up to it wasn't more complicated than a little bit of finger in the wind and pick a number that felt comfortable to lose."

The quote provides insight into Zach's method of deciding how much capital to allocate for investing, which was based on a balance of strategy and comfort with potential loss.

• Zach views startup involvement as an opportunity cost compared to other career paths.
• His and his co-founder's family backgrounds provided a safety net, enabling them to take early risks in entrepreneurship.
• As their financial situation improved, their risk tolerance increased.

"It's part risk taking and part circumstance."

The quote summarizes how risk-taking in entrepreneurship is influenced by both the willingness to take chances and the individual's personal circumstances.

• Zach admits that money has made him happier, not due to materialistic reasons, but because of the flexibility and choice it offers in spending time.
• He values the ability to support friends and family without financial stress.

"It's just the flexibility to choose where you want to spend your time. To me, that's what the value is."

The quote reveals Zach's perspective on wealth, emphasizing that the true value of money lies in the freedom and choices it provides in life.

• Zach believes it is naive to think a company can stand for nothing but its business, as societal expectations have changed.
• He rewrote Brian Armstrong's piece to reflect his view that companies should acknowledge and engage with broader societal issues.

"To me, I think it's a little naive to think that a company can just say we stand for absolutely nothing but our business."

The quote suggests that companies have a role to play in societal discourse and cannot be solely focused on business without considering the wider implications of their actions and the expectations of society.## Company Culture and Employee Beliefs

• Companies can maintain a culture of high performance while also holding core beliefs that extend beyond business.
• It's possible to set rules and guardrails for employee behavior without compromising on company values or performance.
• The debate centers around whether companies have to choose between focusing solely on execution or also considering broader social issues.

"I think you can do both. I think people are saying this is a or b. Either you have beliefs or you don't. And that's the only option. And I think you can have core beliefs... and still have a culture that's high throughput and execution oriented."

The quote suggests that companies do not need to choose between having a value system and being focused on execution. It's possible to have both.

• Companies can support certain causes publicly without bringing those issues into the day-to-day workplace environment.
• Employees can be encouraged to engage in public discourse on issues the company supports, but should not let it disrupt the workplace.
• Bullying or pressuring others based on beliefs is unacceptable and should have consequences.

"You can say, I believe these things are important and also say to an employee base, however, don't bring it into the day to day office."

The quote emphasizes the importance of separating public advocacy from the internal work environment to maintain professionalism and focus.

• Companies are not democracies; they are led by CEOs who set the culture and values.
• Employees can choose to work for a company that aligns with their values, as companies can vary widely in their cultural and ethical stances.
• Leaders have the right to decide the extent to which external issues affect the company's focus and operations.

"It is not a democracy. And it's really up to the CEO and then ultimately the board who controls who the CEO is."

This quote acknowledges that a company's direction and values are determined by its leadership, not by a democratic process among employees.

• The health of a democracy can eventually impact businesses, and companies may need to take a stance on issues that affect them.
• There is a balance between expressing opinions publicly and the potential impact on one's professional life.
• After achieving a certain level of success or independence, individuals may feel more comfortable expressing their views.

"As for the democracy thing, I mean, yeah, look, this is the part of the puzzle that I believe this is why companies do need, or should, I shouldn't say do, but should have a stance on, because pieces of the democracy crumble eventually that will make its way to your business."

The quote argues that companies should consider taking a stance on democratic issues because these issues can ultimately affect business operations.

• Second-time founders who had moderate success with their first venture are often seen as ideal investment candidates due to their experience and motivation.
• While second-time founders may have advantages, many successful companies are started by first-time founders.
• Investment decisions should consider the potential for growth and the ability to attract talent, regardless of the founder's experience level.

"I have found that second time founders who had a good but small first outcome are by far and away the best people to invest in."

The quote reflects the speaker's investment philosophy that second-time founders with a track record of success and a desire to improve are particularly attractive to investors.

• Valuation sensitivity varies between early-stage investments and later-stage ones due to the availability of data and growth projections.
• Investors aim to fund companies that can provide a significant return in the next funding round to compensate for other investments that may not succeed.
• Price sensitivity should be based on reasonable expectations of a company's growth and potential, not just market trends.

"We try our best to be, I don't want to say valuation sensitive, I just think of it as like valuation reasonable."

This quote conveys the speaker's approach to investing, which focuses on reasonable valuations that reflect the company's potential for growth and success.

• Attempting to time the market is not a strategy due to the long cycle times of business growth and potential for multiple business cycles within the lifespan of an investment.
• Investment decisions are based more on the underlying business sense, technical and market trends, rather than the current economic climate.
• Investors should focus on whether the business addresses real customer needs and has a solid foundation.

"We don't. I think the cycle times on these companies are so long... So I think if you try and time it, you're just going to get it wrong."

The quote explains the speaker's rationale for not basing investment decisions on market timing, highlighting the long-term nature of business growth and the unpredictability of market cycles.

• Market size is a critical factor in assessing the potential of a business investment.
• It's challenging to predict market size accurately, but it's important to consider the potential for a business to grow into a larger market.
• Insertion points into larger markets can indicate a business's potential to scale and succeed.

"Yeah, I wish I had a magic wand on the market size stuff."

This quote reflects the speaker's acknowledgment of the difficulty in accurately assessing market size, which is an important factor in making investment decisions.## Market Dynamics and Investment Strategies

• Assessing existing market spending is crucial; it's easier to shift budgets than create new ones.
• Known budgets are preferred, but focusing solely on them might cause missed opportunities.
• Companies like Uber expanded beyond existing market sizes, indicating potential for creating new dollars.
• Market opportunities should be in the billions to account for capturing a significant percentage.
• Founders must be able to articulate market size and potential effectively.

"It's a lot easier to go after a market where people are already budgeting for that type of expense."

This quote emphasizes the strategy of targeting existing budget allocations, which simplifies the process of capturing market share.

"We prefer, where possible, known budgets. But if you only invest that way, you will miss a few very, very giant opportunities."

Zach Weinberg points out the balance between investing in known markets and the potential for massive growth in new or expanded markets.

"I don't want to have to teach the founder about their market size. I want him or her to teach me."

The investor expects founders to have a deep understanding of their market, which is critical for convincing investors of the opportunity's potential.

• Reserve allocation is a work in progress, with no definitive strategy yet.
• Participation in Series A rounds is likely, but involvement decreases at Series B and C due to increased risk.
• The initial investment is most critical for return on investment.
• The approach to reserve allocation depends on the fund size and investment goals.

"We're still figuring this one out. I wish I had a better sense of the right way to do it."

Zach Weinberg admits the complexity and ongoing learning process involved in determining the best approach to reserve allocation.

"It's the initial check that drives almost all the value."

This quote highlights the importance of the initial investment in a startup, which is often the most significant factor in determining overall returns.

• Founders should take enough money off the table to be comfortable but remain motivated for a larger outcome.
• A benchmark is selling less than 5% of their stake to maintain a sense of material upside.
• The investor community generally agrees on this approach.

"We want them to be comfortable and then focused, and we just have a conversation about what is that number?"

Zach Weinberg discusses the importance of founders having financial comfort to focus on scaling their business without excessive personal financial risk.

• Multi-stage funds entering early-stage markets can distort valuations and investment dynamics.
• Founders might benefit from additional capital and reduced risk.
• A subset of multi-stage funds may succeed with this strategy, but overall fund returns could decline.
• Market cycles will eventually adjust to these trends.

"It's not surprising to me that this is happening when, what's the ten year us treasury now? Like, zero, 1%?"

Zach Weinberg contextualizes the influx of multi-stage funds in early-stage markets as a response to low yields in traditional investments.

• Founders should assess whether they can achieve necessary milestones with the capital from preemptive rounds.
• The decision to take preemptive funding is personal and based on the founder's confidence in the business.

"Let's just do like a reasonable bottoms up. What is actually going to get done with this money?"

The quote suggests a pragmatic approach to evaluating the impact of preemptive funding on a company's growth and the ability to meet future milestones.

• The investor emphasizes alignment with founders and a focus on the final business outcome.
• Past entrepreneurial experience and transparency contribute to building trust.
• Providing honest advice without ulterior motives is key to a strong relationship with founders.

"I'm on your team. I see absolutely no benefit from marking up some investment or using it to raise a future."

Zach Weinberg assures founders of his commitment and alignment with their interests, which is foundational for building trust.

• There are target check sizes based on valuations, but flexibility is maintained.
• Ownership requirements are not stringent; the focus is on transparency with founders.
• The investor's role is not primarily to provide capital but to add value in other ways.

"We have target check sizes based on the valuation."

This quote reflects a structured approach to investment amounts, tailored to different stages of company valuations.

"It's a target, not a rule."

Zach Weinberg clarifies that while there are preferred investment sizes, they are not strict requirements, allowing for adaptability in investment decisions.## Early Stage Board Membership

• Being an early stage board member is distinct from late-stage public company board roles due to less stringent requirements.
• The focus should be on aiding the founder without causing distractions.
• Simple actions like reading the board deck beforehand and not using your phone during meetings can show attentiveness and understanding.

"Being an early stage board member is a very different job than being a late stage public company board member."

This quote emphasizes the differences in roles and responsibilities between early stage and late stage board members.

"Really what you're trying to do is find ways to help the founder in any way without distracting them."

The quote highlights the primary goal of an early stage board member, which is to support the founder effectively without causing unnecessary diversions.

• Zach believes most venture capitalists (VCs) are very good, with 90% of investments being co-investments with venture leads.
• There are, however, some "bad apples" in the venture community.
• It's important for early stage VCs to recognize when to step down for the benefit of the company as it grows.

"My belief in general is that most vcs are actually very good."

This quote indicates Zach's positive view of the overall performance and contribution of venture capitalists.

"There's a time and a place for an early stage vc to step off and to say, look, I've got you to your b or your a, and now I need to go back and focus on what I do."

Zach advises that VCs should know when to step away from a board as the company matures, to allow for more suitable expertise to guide the company at different stages.

• Zach prefers long-form articles over books, particularly in the scientific realm.
• He mentions a book called "Calling Bullshit" that deals with understanding misleading data and statistics.

"I don't really read a ton of books. I'm much more like a long form article type of person."

Zach expresses his preference for consuming content through long-form articles rather than books.

"There's a new book called Calling Bullshit, which I think is kind of phenomenal."

Zach highlights a specific book that resonates with his interest in critical thinking and understanding data.

• Zach is a proponent of the tech industry but is critical of the overinvestment of talent in social media.
• He hopes that tech professionals will shift their focus to more impactful work.

"I think the tech scene is actually in pretty good shape. I'm somewhat of a big fan."

This quote reflects Zach's overall positive view of the tech industry.

"Spending their time working on social media, in particular to me is just such a disastrous waste of very smart people's time and attention."

Zach criticizes the allocation of intellectual resources to social media, suggesting that these talents could be better utilized elsewhere.

• Zach shares his experience with Casden Capital, a hedge fund that was notably helpful and proactive with one of his companies.
• The fund's active involvement and follow-through made a significant positive impact.

"Casden Capital and Eli Casden, the guy that runs it in his group, who was one of the most useful and helpful investors we have ever had."

This quote offers a specific example of an investor who provided exceptional support and engagement with one of Zach's companies.

• Zach discusses his long-standing partnership with Nat, emphasizing their trust and understanding despite differences.
• The key to their successful partnership is the mutual belief that each is trying to do the right thing.

"I think each of us understands that the other person is just trying to do the right thing."

Zach attributes the success of his partnership with Nat to a foundational trust and shared intentions, even when they disagree on tactics or decisions.

• Zach criticizes Keith Rabois for overconfidence in healthcare, a field in which he lacks expertise.
• He values investors who can admit their limitations and quantify their confidence levels.

"He has absolutely no idea what he's talking about in healthcare."

Zach calls out Keith Rabois for speaking authoritatively on topics outside his expertise, potentially causing harm.

"Some of the best investors...will tell you I don't know what I don't know."

This quote underscores the importance of humility and self-awareness in venture capital, as highlighted by Zach's respect for investors who acknowledge their knowledge gaps.

• Zach is excited about David Energy, a software company in the energy space that uses technology to manage energy utilization in buildings.
• The company's approach includes vertical integration, becoming an energy retailer to optimize energy management.

"The most recent one we did, I think, is a company called David Energy, which is here in New York."

Zach discusses his latest investment, explaining why David Energy's innovative approach to energy management in buildings is promising.

"What got me excited, it's a software company in the energy space."

The quote reveals the rationale behind the investment in David Energy, focusing on the potential of software to innovate in the energy sector.