When Your Startup Is A Venture Firm: Thoughts On Building Zero To One

Building any business from company formation to a scaled, successful enterprise - be it a car wash chain, vertical software play, or a new venture capital firm - presents a host of challenges for founders to navigate:

• Building a product or service that resonates with customers at a price point that creates compelling unit economics. 
• Competing with entrenched incumbents and fellow upstarts with their own novel ideas about how innovation can improve an offering or an industry.
• Recruiting, retaining, and motivating a talented team to execute against the mission. 
• The list goes on. 

At Asymmetric, we spend most of our time researching industries, meeting with company founders, and working hand in glove with our portfolio companies to address challenges like these. As a new entrant venture firm, however, we are also a startup ourselves - and as such we’ve spent significant time thinking through how to fashion an investment partnership premised on high-conviction answers to these questions. Today, we wanted to share some of our thoughts on the topic now that we are a handful of quarters into our life as a firm. After all, if we require thoughtful, defensible answers to these questions from the founders we consider investing in, it feels only fair to offer some insights of our own!

We’ll make a couple of simplifying assumptions to start:

• First: any private investment firm must systematically create access to high-quality investment opportunities; this is particularly relevant in a slice of the alternative investment universe where returns are empirically distributed according to a power law (as is the case with venture). For top notch returns, getting into top deals is not optional.
• Second: the highest-quality founders often - although not always - are spoiled for choice when it comes to selecting capital partners for their journey. While we could spend an entire article walking through how our sourcing efforts have evolved over time and their composition today, suffice it to say that we utilize an all-hands-on-deck approach: referrals from our Advisor Partner network and from our existing portfolio company founders, tech-enabled cold outreach, and content generation intended to drive inbound flow in selected verticals, amongst others.

In this piece, we’d like to focus primarily on the second question: if, after completing industry, company, and founder diligence, we have developed conviction that we would like to invest in a given business, how can we build a compelling case that accepting investment from us is in the founder’s best interest - particularly when, as an upstart, we lack the brand halo and multi-decade track record of some of our established competitors?

To inform the discussion, we gathered some polling data from a representative group of high-quality company founders (all data is anonymized below). A subset of responses are from our portfolio, a subset are not, but all have previously raised capital from investment firms, and they are distributed geographically across the US loosely proportional to how venture investment is allocated. The poll questions asked founders to force-rank nine commonly-discussed attributes of investment firms in order of importance to them as they considered selecting venture capital partners. The average ranking of the nine attributes across our founder respondents is shown below.

Figure I: Founder Polling Data

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Note: chart scales from most important attributes on the left, to least important on the right.

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We will focus on how the firm we’ve built is in step with the top responses to our survey questions: (i) genuine belief in post-close value add of firm, (ii) relevant domain expertise of firm, and (iii) brand reputation of firm.

Genuine Belief In Post-Close Value Add Of Firm: 

We found this response landing at the top of our founders’ list aligned with our real-world experience (and was also unsurprising and validating for our strategy as a firm!). Given the inherent difficulty in building a novel enterprise, any rational early-stage founder should prioritize partners with the most credible claims to shifting the odds of success in their favor.

Given the expertise of our firm, we believe our best approach on this front is to partner with portfolio companies across a small number of high-impact domains: hiring, GTM, finance / capital allocation, and strategy / tactics for subsequent fundraises. Perhaps as importantly, we are transparent about the areas in which we do not believe we are capable of adding as much value: primarily product and engineering. To bolster the credibility of our engagement claims against many founders’ understandable skepticism (we are indeed a small team), as well to aid in their execution, we hired an Asymmetric FTE exclusively focused on working with our portfolio companies across these areas.

In addition, we often connect our existing portfolio founders with prospective Asymmetric founders to allow them to speak directly to the impact we have had; while founders tend to empathize with other founders, it also reinforces our existing motivation to live our promise to the companies we partner with to enable this sort of ammunition. Lastly, one framing that has proved resonant with founders has been that given our success and continued existence as a firm run directly through the success of our portfolio companies, we in some sense cannot afford for them to fail - and all of our resources are at their disposal as a result. With respect to more established, branded venture firms, it’s difficult for them to make the same claim.

Relevant Domain Expertise Of Firm: 

The subset of companies in which we invest  - early-stage B2B software and digital marketplaces businesses in selected verticals - is reasonably narrow; the overwhelming majority of startups formed each year fall outside of our swim lane. This is intentional; it enables us to build deep expertise with the application of our selected business models in the small number of sectors we have elected to spend our time in (and neither our business model nor industry selections were at random). If we aspire to a level of expertise that is additive to the best entrepreneurs on earth as they build, the necessary trade-off is the narrowness of our focus (particularly at a firm with six FTEs).

To take it one step further, we never invest in entrepreneurs who do not have a vastly greater body of knowledge and experience in the particular sub-sector in which they are seeking to build a business; rather, we seek to pair the seminal learnings we have generated over time as a firm through evaluating, investing in, and working with thousands of companies with entrepreneurs who possess extraordinary depth in their chosen territory. To give one concrete example, over time we have routinely observed even the very best first-time founders underinvest early in design out of a desire to limit cash burn in the earliest stages. While we applaud their conscientious approach to spend management, we have similarly witnessed the overwhelming majority of startups ultimately regret this decision as (i) poor design and UI typically makes success meaningfully more difficult to achieve in the early days, as potential users judge a product by its aesthetic and UX qualities and (ii) retrofitting high-end design to solve a UX debt is often orders of magnitude more painful and costly than incorporating a thoughtful approach from formation. In a more general sense, the many industries, models, and trends we do not invest in enable us to satisfy our desired partners’ preferences for depth in the areas of the sandbox we do play in.

Brand Reputation Of Firm:

Brands are rarely built overnight, and we would be the first to admit we are in the earliest innings of building ours. Pairing the two bullets above, the brand we are seeking to build is of a firm that is second to none in serving the founders we partner with, and playing as large a role as any investment partner could hope to in enabling a company’s success; without a doubt the founders of our success stories deserve the lion’s share of the credit for what they have built. Post-close value add and domain expertise are but two of the arrows in our quiver in service of that effort. Over time, we believe if we continue to select investments well, serve our portfolio companies in every way we can be additive (and none of the ways in which we cannot), and continue to improve both abilities over time with the benefit of experience, we will continue to create ammunition for building a public brand that is increasingly both the one we desire and an asset to our work as a firm. We hope too, should that happen, never to lose the hunger, humility, and humor that have made building our firm together so rewarding in the early days.

Solving the cold start problem in venture capital is no easy task, and certainly our thoughts will evolve over time as experience refines our view of both. Hopefully this discussion has shed some light on our approach to untying the knot at present - and if you are or know talented, visionary founders for whom it sounds like we may be the right partner, we’d love to chat.

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Image credit: Startuptalky

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