Reflections on CoFound II
Last week we officially announced CoFound II, our first institutional-backed $15M venture fund investing in pre/seed software & healthcare startups.
Since Business Insider shared our journey, I’ve received many questions from aspiring fund managers, and even some experienced GPs looking to start their own solo GP funds.
Below I share some lessons learned in the spirt of paying it forward.
First the origin story…
CoFound’s mission is to help founders build a repeatable sales motion.
It’s an elegantly simple mission statement that was a culmination of a decade of frustration watching startup founders botch early stage GTM.
10 years ago, I cofounded CloserIQ, a leading GTM-focused executive search and recruiting firm. As a rare MIT engineer turned startup GTM leader, I was inspired to build a recruiting firm that would apply systems thinking to scaling GTM organizations.
Since then, CloserIQ scaled 900+ startups. The democratization of GTM knowledge has come a long way but it is still the least understood business function by founders and investors.
Narrative Violation: GTM is just as important as picking great markets and teams…
Founders who can’t close deals, hire the right salesperson, or successfully pass the torch will squander otherwise great market opportunities.
Forward thinking VC firms recognized GTM importance and invested heavily in building networks of advisors and operators. The concierge model does help but there’s just an insatiable need. There are significant advantages of having a GTM expert directly on the cap table.
In late 2019, I launched CoFound to be a first-check VC fund who helps technical founders with GTM.
Raising a venture fund turned out much harder than I thought. Despite its best efforts, the VC industry is still very insular and hard to assimilate as an outsider.
So here’s what I’ve learned so far:
1. You also need a GTM strategy
Pre/seed venture investing is the easiest place for new investors to build portfolios that can compete on the efficient frontier with incumbent firms. Barriers are low and decreasing. Competition is increasing.
The future of early stage VC will look like a cottage industry of domain experts, seasoned operators, and super-networkers. Multi-stage firms are deploying into early rounds but with alpha dollars constrained, it’s unclear why they will suffer the brain damage of writing small toehold checks.
Mindshare is everything when founders have literally (tens of) thousands of options across angels, micro-funds, and established firms. To differentiate, funds are building their brand on an industry, thesis, geography, and many other dimensions.
Everyone will all ask you what is your superpower?
2. Patience is a competitive advantage.
From day 1, my intention was to build an institutional fund. But how do you build a track record when you don’t have one? I relented to starting with a $2M proof-of-concept Fund I as a way to show future proof points.
I invested in 22 companies over 2 years and that portfolio currently sits at 5.7x TVPI with a 0.75x DPI (both top 5% for its 2019-Q4 vintage). Sure its a tiny fund but provides real data points, not dissimilar to a pre-seed startup with revenue vs. without.
When starting out, unless you’ve got the luxury of an established LP network, just close some capital and do good deals. My first close in Fund I was $100K of my own capital. Start making good investments and deliver on your founder promises. Portfolio momentum is perhaps the only meritocracy in fundraising.
Starting small also allowed access to a broader set of investment opportunities and simply got me in the flow of learning by doing. Venture investing has very slow feedback loops with lots of overnight success stories. But it makes for a very long career if you’re successful.
Venture capital is a war of patience in so many ways.
3. Do the work on portfolio construction
VC is more art than science but you need to do your portfolio math.
I read as many blogs as I could and spoke to any GP that would give me the time. You realize quickly there are big differences in investment process, portfolio construction, and strategic advantages. Developing conviction on your own strategy helps you fundraise because you’ll meet LPs with wildly different mandates and strong beliefs on check sizing/ownership, reserves, number of investments, etc.
I remember feeling deflated after an LP told me I would surely fail as a new manager with less than 40 investments in Fund I. But having done the math, I felt confident and agreed to disagree. Venture is an industry of exceptions but there are first principles you have to take time to understand. Most importantly, your portfolio construction has to align with the rest of your strategy and play to your strengths.
Figure out your superpower and avoid playing other people’s game.
4. Don’t cut corners on back office
Part of the difference between angel investing and running a venture fund is that you have a fiduciary duty to your own investors. LPs are not only trusting you to generate returns but to be a good steward of capital.
In addition to managing your fund expenses and choosing sensible vendors, this also means communicating regularly via investor updates, managing cash, and staying compliant. Most of this is really easy now with tools like Carta, AngelList, and boutique professional service firms.
Experienced early stage fund LPs understand you won’t have big fund ornaments like exorbitant annual meetings, pedantic investment memos (written by their poor analysts), and expensive branded swag, but they expect the important basics.
Back office fund operations can seem like a black box but all you have to do is ask around. I actually found that many VC’s at larger firms don’t even know their own fund operations. So there are no dumb questions, and if you’re doing it for the first time, most people I found are nice enough to share templates and pay it forward.
The only requirement to be a venture capitalist is curiosity.
5. Surround yourself with smart people
The investment diligence process is effectively coalescing a very constrained set of data points and arriving at a binary decision. It’s hard to develop truly independent conviction in venture investing.
It’s tempting to prove yourself as a contrarian as co-investing with experienced investors feels like copying someone’s homework. But what is even more difficult as an emerging manager is balancing the desire to be contrarian with the need to make great investments.
What makes the innovation ecosystem unique is that everyone is genuinely working together to grow the pie. There’s more collaboration and sharing than I would have expected both pre and post investment. Each investor brings their own superpowers to compliment the needs of the founder.
So lean into your network and learn as much as you can. If you are lucky enough to cross paths with sharp investors who have the patience to share their experiences, don’t squander those opportunities!
On that note, my journey wouldn’t be the same without the generous support and mentorship of prior generation investors like Jesse Beyroutey @ IA Ventures, Leo Polovets @ Susa Ventures, Angela Tran @ Version One, Alex Davidov @ Abstract Ventures, Nick Chirls @ Notation Capital, and so many more.
It turns out if you ask smart people nicely, they will teach you what you need to know.
About CoFound
CoFound invests in early stage software and healthcare startups transforming the American economy. We have a strong affinity for underserved end-users where founders have have lived experiences.
Once we invest, we help founders build a repeatable sales & GTM motion. Teaching founders how to sell to the enterprise, build pipeline, and make great hires leveraging our network. Please reach out if you’re an aspiring founder or VC interested in collaborating.
