Hi HN! Happy to answer questions here, which is funny because this is where it all really started for me back in 2007 when I was first thinking of starting my first company. I started as an HN reader working at a friend's startup, applied to YC and got in, became a YC partner, and then an early stage investor.
We're engineers and designers and product folks, and most investors aren't still (which is crazy, right?) so we figure if we can do what we're doing while being the investors we wanted when we were founders, that's about as good as it gets.
Two quick questions: Of the investments Initialized has made, what percentage of them are non-YC alums? Of those, how did they connect with Initialized? Cold email, warm intro, etc?
About 1 out of 3 startups from our last fund were not YC. Many came from warm intros, but a few I scouted and found myself. I went out and recruited Bannerman to YC personally (they're focused on security, which fulfills a key role on Maslow's hierarchy of needs), for instance, and then later invested afterwards.
Cold inbound emails haven't worked well for me, but that's where software down the road should help.
so a quick follow up: how many startups of the last round were not located in SF? Sometimes as a non US citizen it seems like the whole startup world is all centered in SF...
SF/SV is still the most concentrated place for startups, so when you want to grow fast it's still probably the most concentrated place for talent and capital. You can certainly start a company anywhere (and people are, and that's great!), but when you want to grow fast many people still move here, now increasingly at the Series A.
I love the bay area. Worked at startups there off and on for over twenty years. But it's precisely because its the center of the universe that when I start my next company, I'm going to do it somewhere else. I do love it there though.
Big congrats, Garry. I've been a lurking fan of yours for many years now and this day honestly feels like an inevitability, even though I know it's required a ton of effort largely invisible to me.
Clearly one unique value proposition of your fund is that sweet combination of check amount, time to close, and stage of investment. That's certainly appealing.
But I've learned over time that I care most for my fellow founders in the trenches. I love my people. And with your fund, the people involved – especially those in your portfolio – appears to be a huge draw.
I've had the privilege of interacting with at least a few founders of your portfolio companies and to a person they are all stellar. Fred of Rainforest and Brad and Matt of SendWithUs were all kind enough to come on our fledgling little podcast (thanks again!). And I first spoke to Jarrett of EasyPost as he dove into responding to my support emails; still wear my EasyPost t-shirt all the time!
Some questions that popped into my head while reading:
- One of YC's great strengths is your community of peers. How do you plan to create such a community within your portfolio?
- How strong a hand do you expect to have in guiding your investments? (Trying to get the mental model right of where you'd sit between an AngelList syndicate, a YC, or a full-service firm like a16z.)
- Do you expect to be amenable to alternative exits, for example distributions at some multiple, a la Indie.vc?
- Why are your checks typically in the $500K - $1M range? (Personally not sure my company would need that much capital, so I would like to be careful of being cash rich as much as cash poor.)
Hi Josh, thanks so much! I feel the same way - fellow founders are our peeps. Great questions.
Community is of course amazing to have, and very necessary. We've all been to those horrible mixers where everyone runs around talking about how they're KILLIN' IT. Those are huge wastes of time. It's always done through the little things - events, mixers, dinners where smart people hang out and know that they can trust each other and share what's really happening. YC has worked incredibly well because everyone knows that you can trust each other since if you violate that trust, you'll get kicked out of the community. It's something more people should do. Of course since we're later stage, the founders will be spending a lot more time with their teams than with each other.
We're probably in between YC and a16z. We're a smaller fund, so we can't afford as many operating partners and staff, but we'll be able to do a lot. My goal is to spend almost all of my time with the 20 or so companies we work with in a year, so it'll be more concentrated. That's what will be necessary to get companies from seed to Series A, across that dreaded funding gap.
We've always supported founders to make the right choice whether they want to sell, or not. In terms of alternative exits we haven't gotten there yet, because that model is pretty unproven but I really like what Bryce is doing and I really want it to work, because its clear there is a lot of stuff out there that should exist but can struggle to get capital.
Most seed rounds we see come together are between $1M and $3M these days, so that amount of capital lets us get our percentage ownership (which is necessary for portfolio construction) while also letting a good round happen with other good seed investors. Most folks want at least 18 months to 24 months of runway to get to a solid Series A or profitability, so a lot of these numbers work backwards from that.
Thanks again for your questions Josh! Hope we can be helpful to you down the road.
Thanks for the great answers here. This definitely provides a lot of context to how you're positioning the fund. Some of this was signaled by the round size, but certainly didn't want to assume any of that.
Really hopeful to see Bryce's model work, as well. Am keeping an eye out to see if your fund experiments with similar models.
My question: will you follow other investors pattern for whom only warm introductions matter?
I read in the press other SV investors stating that exactly zero investments were made as a consequence of a pitch through the contact email. Will this be true to you as well?
We're trying to figure out ways to get around this for later stage seed investments. We don't have a solution yet, but we're working on it.
In a thread below I talk about file cabinet industries — industries that basically have no software, and are horribly inefficient. Investing is absolutely one of those, but only using email and calendaring. The main bottleneck for investors is number of hours in the day, because there are very few people making all the decisions. Warm intros are the only way a non-software system can work.
Whether stated or not, this is basically true of all professional VCs. That doesn't mean it's right or wrong, only that if you want to get funded, figure out a way to get an introfiction. It's far from impossible, even starting from nothing, and it's much easier than 10 years ago when far fewer VCs wrote/tweeted/commented in public.
By late stage for us, I was thinking that you still also have YC for the earliest stage and it's still the best way in the world to "cold pitch" someone but still have a chance to get funded and identified with no existing connections. It worked that way for me, anyway.
This got me thinking... I really do think that better tools for sourcing deal flow are a foundational component of the next age of entrepreneurship. Crowdfunding isn't working as precisely as some have hypothesized. I'd be really curious to see how companies like AngelList & Mattermark are parsing their data to determine correlative attributes of "fundable" companies. Any thoughts/ideas on traction toward successfully automating dealflow?
I have been building my own mini version of Mattermark as a curiosity project. I'm not even interested in deal flow as much as being able to predict rising startups. In terms of being a software engineer, I look at this is a career tool.
I'm sure the bigger VCs and accelerators are building interesting things in this space but I haven't found much that's open source.
As data points, AngelList and Crunchbase are good starting places, but the AngelList API is private and the Crunchbase API is paid.
Hi Garry - awesome news! Couple of questions: you mentioned about funding outside of SF, do you invest outside of the States too (i.e. the UK)?
Also, great to hear about support for smaller team sizes and investing pre-team as it were, but what's the plan for growth sizes? Pushing for unicorns or some of the portfolio aimed at smaller niches?
Edit: also, used to be a Posterous user, and actually had a product in a similar space which Arrington read out on your TWIST episode :)
We've been spending some time in the UK and really think the ecosystem in London is impressive and growing with real companies doing great work. We haven't invested any UK-based startups yet, but have funded many UK founders, if that's worth anything? :-)
We wanna invest in folks early. The fund isn't for investing in B's or C's or later, since there are plenty of people who are good at that.
Congrats to you and the team. I take it your primary focus is SF. Will you look to invest in the broader US? And are you interested in specific areas/industries or more in finding great teams/founders?
We've funded companies all over the place, and it just so happens many of them are in SF. If anything, the ongoing housing crisis that's systemically being ignored by local politicians is making it that much more likely our next startups don't start out in SF.
We've always been pretty sector agnostic, but we're software folks so that's what we know best. A lot of the things we're spending the most time with are "file cabinet" industries — any market where if you walk into the dominant player's office, you see lots of file cabinets or fax machines. A software-enabled startup will probably do a lot in those spaces. What's funny is you can pretty directly extend that to any business that still mainly runs on Microsoft Excel and email too.
Founders matter, but so do markets. We've seen so many of our talented friends end up working on new capabilities that don't solve a specific problem, or don't have a real market. It definitely takes both.
I just read your team page and you feature Palantir somewhat prominently/proudly (you and Alina). If I feel uncomfortable with mass government surveillance, should I simply not apply for any sort of funding from your fund? I see no ethics sub page, could you outline your basic ethics code (what sort of companies won't you invest in, will you invest in competing companies etc.)
This is a serious question, I hope it gets read and answered and not down voted into oblivion.
You're mistaking Palantir for the NSA. Palantir has rock solid access logs and access control that actually prevent the government from breaking with due process without court orders.
Personally I'm anti-surveillance and have been for a long time, particularly the kind of stuff Snowden and others have exposed where there are warrantless wiretaps and long term storage of private citizen information. I've blogged about it many times on my blog. Palantir didn't have anything to do with that and to my knowledge never has.
Initialized doesn't invest in alcohol, tobacco and firearms as a rule because of a mandate from some of our limited partners. Just rationally we believe in funding things that do help people. We generally stay away from investing in directly competing companies and when that does come up (usually through one company pivoting) we make sure that a single partner is assigned to each and those partners are particularly careful to firewall sensitive information. It's similar to what YC and SV Angel have done for years and it works well.
"How does ethics enter into your investment choices? I see you feature Palantir prominently and I have strong feelings about mass government surveillance."
If this is a serious question, maybe don't start with something so aggressive?
Hi Garry, Do you guys hold office hours for startups in your portfolio or anyone can schedule some time with you? And what should one do to be prepared for the office hours?
Hi Garry. I've invested in over 100 YC startups (mostly through Wefunder/FundersClub/Angel.co). Can I invest in your fund? Obviously I believe in the business model. If not where else should I be investing?
Alexis is amazing with all things product, marketing, and community. Alina is best with engineering, hard tech challenges, and hacking growth. I focus most on product and design. Kim helps people with marketing and PR.
We all help people with their ideas, helping founders manage the difficult psychology of starting something new, and making sure that the startup can get to the next milestone: engagement, growth, and profitability.
Try to use plain spoken language to describe what you do, who needs it, and ideally what you've done already. Doing that alone will get you to better than 80% of pitches out there.
We're engineers and designers and product folks, and most investors aren't still (which is crazy, right?) so we figure if we can do what we're doing while being the investors we wanted when we were founders, that's about as good as it gets.