Starting a Fund vs. Starting a Company: Turtles all the way down?

I recently had a fun and wide-ranging conversation with a Founders Co-op limited partner (i.e., an investor in our fund) who’s now a principal at another early-stage fund.

One of the recurring themes in the discussion was the fractal similarities between starting a new company and starting a new fund — as my friend observed, “it’s turtles all the way down.”

Like most comparisons, you have to squint a little to see it, but based on my experience to date, here are the top five similarities between starting a new venture fund and starting a venture-backed business…

  1. Always Be Raising

    Unless your startup gushes cash — and sometimes even when it does — good entrepreneurs are always weighing cash on hand vs. monthly burn with an eye on the next raise. Wait too long and you (and your current investors) can get stuffed by a round raised under duress. Raise too early and you risk wasting a ton of time (and having your deal be perceived as “stale” by the investor community) chasing cash when you should be chasing customers and partners.

    Fund cycles may seem longer — the typical venture fund has a 10-year life — but the investment period is much shorter, usually just 3-4 years, with the balance consumed by follow-on investments, portfolio support and (hopefully) liquidity. You never want to be perceived as being “out of market” — not having funds to invest in new deals — and venture fundraises can take as long as (or longer than) any company raise. So by the time you’re a year or two into your investment period you’d better be warming folks up for your next fund so you don’t cut it too close.

  2. It’s All About the Talent

    Great companies are built by great people, and the best founders have a gift for finding amazing folks and convincing them to sign up for whatever dream they’re currently working on. (Really exceptional founders often have a “warm bench” of amazing people that they call into battle each time they start a new company). Especially now, when the market for engineering talent is as tight as I’ve ever seen it, quality recruiting is the engine that powers everything else a company does.

    The relationship between money and talent has changed significantly over the past several years. As the capital costs of starting a software business have fallen, the power dynamic between funders and entrepreneurs has done a 180. Back when it took $1 million or more just to get in business, talent had to chase money. Now that any skilled developer can start a commercially viable, globally visible company on a few thousand bucks, the tables have turned and money now chases talent.

    To a fund investor, the founders themselves are the talent pool we’re targeting, and we need to deliver an incredibly compelling value proposition to get them to join our “team” — which in our case is our portfolio of invested companies. The shortest, simplest description for what we do at Founders Co-op is this: we’re talent scouts, looking for the most incredibly talented entrepreneurial engineering teams in the Pacific Northwest. If we build a great team, we’re well on our way to building a great fund.

  3. Distribution is King

    Most first-time entrepreneurs don’t appreciate the power of distribution. In a world of nearly perfect competition in software — where plummeting capital costs and the dream of easy success spawns dozens of entrants for each new idea — winning the fight takes more than great product. Killer execution on “distribution” — my loose description for the intertwined disciplines of sales, promotion, PR and partnerships — is usually the difference between the top dog and the also rans.

    Effective fund investors bring the same focus on “distribution” to their “product” — the founders and companies they back: building trust with the next tier of venture investors (the ones most likely to lead follow-on rounds in your portfolio companies); understanding the corporate development needs of the most active and strategic acquirers; even building an audience of blog readers or social media followers can be seen as a “distribution” strategy for investors looking to maximize the opportunities for their portfolio companies to succeed.

  4. Mentors Matter

    Building a company for the first time is a wild plunge into the unknown. Almost everything about the experience, from setting up the entity to building a team, raising money, navigating competitive markets and engineering an exit (or winding down gracefully) are new experiences for the first-time founder. Luckily, there is a huge and welcoming community of experienced entrepreneurs who understand the journey you’ve embarked on and are willing to help (typically with no expectation of compensation).

    Leading accelerator programs like TechStars have built their entire brands around the idea that effective mentorship is a critical ingredient to startup success (and as a TechStars mentor and co-host — with my partner Andy — of the TechStars Seattle program, I’m 100% convinced that it’s true).

    When we started Founders Co-op, I didn’t even know what I didn’t know about being a professional investor. We started out doing what we’d done as angel investors — looking for great teams and trying to help them succeed in any way we could. And that was — and continues to be — a part of what we do every day.

    But running money for other people isn’t the same as making your own bets. You have to understand why they gave you the money — what job they’re expecting you to do, and what role that check plays in their overall asset allocation. Instead of playing checkers — looking for one great deal at a time — you have to learn how to play chess, building a portfolio and a firm that can deliver returns to founders and investors that more than justify your fees and carry over the long haul.

    We’re just two funds in at FC and I still have a ton to learn about how this game is played. Fortunately for us, we have an amazing group of advisors and mentors, many of whom have been in the business much longer than we have (and have both the trophies and scars to show for it). We continue to be incredibly grateful for their advice, feedback and patience as we learn the craft.

  5. It’s a Long Journey, Enjoy the Ride

    The more time I spend with entrepreneurs, the more convinced I am that entrepreneurship is a benign pathology, not just a personal choice. Just as artists have an innate need to realize their visions, so too do entrepreneurs. The “vision” of the startup founder isn’t a painting or object made of metal or clay, but an idea about the world as a different and better place. The “work” of the entrepreneur — which may take several attempts to be realized, if it’s realized at all — is to relentlessly pursue that vision with the help of talented team members, like-minded investors and all the luck that hard work can produce.

    Most founders have more than one vision in their heads at any given time, and are always coming up with new ideas about how the world is broken and needs to be fixed. There is no endpoint to entrepreneurship, it is a life journey that — once embarked upon — is almost impossible to turn away from.

    When Andy and I started Founders Co-op, I didn’t really know where it would lead us, all I knew is that it somehow “felt right” as the next step in our partnership. I had no real appreciation for how long a journey it would be — each time we raise a new fund we re-up for another 10 years together — or all the new things I’d have to learn to even approach competence in my new role.

    What I know now — just four years in — is that we have given ourselves the greatest gift I could have imagined: a lifetime pursuit full of meaning, for ourselves, for the entrepreneurs we work with, and — if we’re lucky — for the community in which we and our families live.

    As Brad Feld has been known to say, building entrepreneurial communities is a 20-year journey. We’re just getting started, there’s a long road ahead, and I can’t imagine doing anything else.