Episode Summary
Executive Summary: In this podcast, Jason Calacanis and Josh Berkowitz discuss venture capital from an LP perspective, covering cap table issues, fund evaluation, and the importance of decision-making. They explore how family offices diversify into venture, the challenges of broken cap tables, and the traits of successful GPs. The conversation also touches on fundraising difficulties, the role of reserves, and the need for honest feedback in the industry.
Main Topics: Cap Table Problems and Founder Equity: Discussion on how low founder equity at seed stage, often due to predatory angel groups, leads to broken cap tables, forcing recaps or founder departures. LP Perspective on Venture Capital: Josh Berkowitz explains why family offices diversify into venture, citing high returns, entrepreneurial spirit, and the opportunity to back innovative companies. Evaluating Venture Funds and GPs: Criteria for selecting GPs, including unique strategies, execution ability, sourcing, picking, and the importance of getting reps in deal evaluation. Decision-Making and Doubling Down: The process of making investment decisions, the role of consensus vs. individual decision-making, and strategies for doubling down on winners. Fundraising Challenges and Market Conditions: Current difficulties in fundraising, the impact of market saturation, and the need for honest feedback from LPs to improve fund structures. Reserves and Fund Structure: Debate on whether early-stage funds should have reserves for follow-on investments, and the potential agency problem between GPs and LPs.
Key Arguments: Broken cap tables at early rounds, often due to predatory angel groups, lead to founder equity dilution and potential company failure. Family offices diversify into venture for high returns, entrepreneurial engagement, and the chance to shape the future. Successful GPs need unique strategies, execution ability, and extensive deal experience to identify top 0.01% startups. Decision-making in venture funds should be internally consistent, whether consensus-driven or individual-based. Doubling down on winners requires information advantage and should be structured carefully to avoid LP-GP agency problems. Fundraising is currently very challenging, with LPs often not providing candid feedback on why they pass. Late-stage venture capital (above $500M valuations) should be classified separately from early-stage VC to avoid distorting industry data.
Data Points: Founder equity given away at seed stage: 60% - Example of broken cap table where founders gave away 60% of the company early. Series A dilution: 20% - Expected dilution in Series A round. Series B dilution: 20% - Expected dilution in Series B round. Fund size for seed stage: $50 million - Jason Calacanis's first target for his fund. Carry percentage: 25% to 30% - Jason's fund charges 25% carry, with 30% if 2x return, which some LPs find too high. Number of startups in database: 21,000 - Jason's firm has 21,000 startups in their database. Number of meetings per day for analysts: 6 - Analysts at Jason's firm do six meetings per day. Number of meetings for reps: 500 - After 500 meetings, investors develop better pattern recognition.
Pivotal Quotes: "If you have cap table problems like low founder equity at the seed stage and they've given away 60% of the company, you're like, well, when they do their series A, that's going to be another 20% gone, and Series B, another 20% gone. These founders are going to have very little equity." — Jason Calacanis: Discussing the consequences of broken cap tables on founder equity. "The most important thing to me is that, like, the strategy is internally consistent. That every way they've structured their firm works together in concert to deliver returns." — Josh Berkowitz: Explaining how he evaluates venture funds for LP investment. "I don't think everybody should be doubling down or even have any reserves. I think if you are an early-stage firm that's running small checks into most of these companies, and then the only information you have afterwards is that you're reading the same quarterly update as every other investor. I don't actually know if you have any extra information to make you think you should double down at the A or B." — Josh Berkowitz: Arguing against automatic doubling down without information advantage.
Implications: This episode highlights the need for founders to be wary of predatory early-stage investors and for LPs to demand transparency and alignment in fund structures. The discussion on doubling down and reserves suggests that early-stage funds should focus on their core competency rather than chasing follow-on investments without clear advantages. The current fundraising environment requires GPs to be adaptable and seek honest feedback to improve their offerings.
From the Episode
So, if you have cap table problems like low founder equity at the seed stage and they've given away 60% of the company, you're like, well, when they do their series A, that's going to be another 20% gone, and Series B, another 20% gone. These founders are going to have very little equity. And then what happens when you have very little equity? Well, then you have to recap the company or give huge grants to new people or the founders leave to start a new company because they screwed up this cap table. So that was a lot of fun. You see a lot of that in Canada and Boston, actually. Just really broken cap tables at early rounds. And do you know why that is? I have some theories, but I'm curious if you figured it out. You have all these angel groups that are just kind of predatory and catch these founders before they really know any better. This week in Startups is brought to you by Squarespace. Turn your idea into a new website. Go to squarespace.com/slash twist for a free trial. When you're ready to launch, use offer code Twist to save 10% off your first purchase of a website.
At Sequoia, and you've got a massive platform, massive fund, tons of partners, tons of stages, also massive success. Every part of what they do is different. All of them can be successful. The most important thing to me is that, like, the strategy is internally consistent. That every way they've structured their firm works together in concert to deliver returns. And so, if I have a black and white rule, which is like I like consensus-only firms, or I like individual decision-maker-only firms, both can be successful. The most important thing is if If it's a consensus-driven firm, do you have the right people at the firm that can work well together and solve those decisions well? Is it a collaborative environment? Do they still flush things out? Can you still pursue the idiosyncratic deals? And then vice versa, if it's everyone's sort of a free agent-style founders' fund structure, do you have the right people there? Do you have the right incentive structure that fits that? Is the culture set up to make that successful? So, you really just need to make sure each of these is internally all aligned.
So, I think I probably have a different point of view on this than maybe is the most common. First, I don't think everybody should be doubling down or even have any reserves. I think if you are an early-stage firm that's running small checks into most of these companies, and then the only information you have afterwards is that you're reading the same quarterly update as every other investor. I don't actually know if you have any extra information to make you think you should double down at the A or B. You're not on the board, you might not. You're probably not getting direct information from the founder. You have no new information on market size necessarily or any of the other information the typical A or B investor would look at to make a series A or B investment decision. I don't know why you're wasting your time with a doubling down decision because, like, you're not a good, you're not a good late stage investor and you have no special information. The time where I would disagree with that is if you are very close to the founders you back, if you're spending a lot of time with them, if you're also spending a lot
About This Week in Startups
Jason Calacanis covers startups, tech, markets, media, and all the hottest topics in business and technology. He also interviews the world’s greatest founders, operators, investors, and innovators.