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On the Value of Partnerships

January 27, 2012

Brad Svrluga

I got the crap beat out of me yesterday by my partners. It was painful, but it was great. They saved me from making what may well have proven to be a major mistake, and in the process, I think we’ve really helped a talented team of entrepreneurs.

Those who know me well have likely heard me say that a partnership is a terrible way to run a business. But it’s the way almost everybody in this industry is structured. There’s only a handful of firms out there who have a named CEO (VantagePoint comes to mind). Amongst the vast majority that are partnerships, a scarce few are run with true “managing partners” who play CEO-type roles.

Talk to any partner at a typical firm and they’ll tell you that partnerships are amongst the sharpest of double-edged swords.

  • Edge 1: It’s great to have a group of smart minds around the table. It can be terrifically valuable to have the collection of experiences and perspectives, the added Rolodex power, and the critical minds that force intellectual honesty in investment decision-making.
  • Edge 2: It can also lead to very inefficient decision-making, get people bogged down in politics, and lead non-deal things to fall through the cracks due to lack of clarity around responsibilities.

While there are times when the negative edge of that sword leaves me wishing I could be a sole proprietor, “superangel” style investor with no one to answer to but my investors, those moments are far less frequent than the reminders of why the good edge of that sword can be so powerful.

Yesterday was one of those. I brought Jane, an entrepreneur with whom I’d been working for about a month in to meet my partners. I was quite excited about her business, and felt like we were likely pretty close to offering her a term sheet.

I expected that it would go like these meetings most often do when one of us feels that way. We’d spend an hour hearing her story and digging deep into the business. Then she’d leave and we’d share reactions, thoughts, and concerns. My partners would at some point (maybe immediately) express that they generally share my enthusiasm for the opportunity, and we’d come up with a list of outstanding issues and questions that I need to address before we’d be comfortable moving ahead with an investment.

We had what felt like a pretty good meeting yesterday, but I knew that Jane hadn’t been on top of her game. The story was a little disjointed, the go to market strategy not clear enough. But still, I figured Jane would leave and I’d help clarify and reframe some stuff and we’d be good to go.

And then Russ and Mark hit me across the head with a pair of 2×4’s.

One of them said to me, “it’s critical to this partnership that we’re open and honest, right?” I agreed. “Well, I like the concept they’re trying to get after, but I’m not sure I liked a single thing about how they were going about it.” And he proceeded to very constructively bang through a list of lethal criticisms. My other partner was right there with him – adding, amplifying, and supplementing the litany of body blows the business was taking.

I was disappointed and a little defensive at first. Then I really heard what they were getting at, and I saw that they were absolutely right. I had gotten over-excited by the combination of macro opportunity – my partners agreed with me on that point – and terrific people whom I thought would be great to work with. It’s a great combination, for sure, but that excitement led me to ignore the fact that these guys hadn’t yet come close to adequately connecting the dots on just how they were going to turn this vision into a real business. It was very quickly clear to me that we should not invest in this business as currently conceived.

I feel great about the outcome. The partnership really worked – I got the hard questions I needed to hear, and which it turned out I couldn’t answer. Heck, if I was a sole proprietor Super Angel, I might have just risked flushing a half million bucks on a not-ready-for-prime-time idea.

But stopping what might have been a misguided investment decision is less than half of it. Even better is that in the 24 hours since the meeting I’ve had three conversations with Jane. They’ve been incredibly productive and satisfying conversations, and my enthusiasm for her has only grown. Jane has effectively countered some of my criticisms, but she’s also realizing that much of what Mark and Russ were getting at are critically important issues, and they have her completely rethinking some elements of her business.

While Jane no doubt would have preferred to walk out of our conference room yesterday with a term sheet, I think she actually believes today that this process is getting her business turned in some exciting and important new directions.

I don’t know where this is going to lead, but I know I’m looking forward to working with her on it. It may be that we never get there, but I hope what happens is that Jane and I spend the coming weeks digging in together, collaborating as she refines and improves the business model. If nothing else, that process is going to lead us to have a much better understanding of each other, and a terrific feel for what it would be like to work together. If we do decide to work together, we’ll both have an exponentially greater level of conviction about the relationship than we otherwise would have. In today’s hurried and frenzied deal environment, that’s all too rare.


Back to the Earth: Seedlets and our Return to Real Seed Investing

January 12, 2012

Brad Svrluga

I’m not much of a New Year’s resolution type. In fact, I find the notion a little silly. But I do think that stepping back and pondering the forest from time to time is essential to any business. We do it every year at High Peaks – reevaluating our strategy, doing detailed reviews of the state of affairs at each of our portfolio companies, and reassessing the market landscape we’re operating in.

2011 was a great year for us – perhaps the most exciting and fulfilling of my 12 years in the venture business, as we started investing in earnest the $25MM seed fund we closed at the end of 2010. We expanded our team, built the beginnings of a fantastic portfolio, invested with a world class collection of partners, and generally had a boatload of fun. Time will no doubt expose that we made a mistake or three in there, but at the moment they haven’t yet emerged. We are proud of the deals we’ve done and the momentum we carry into 2012.

I’m particularly excited by some of the things we launched to support the community and bring more value to our portfolio. Our Ambassador Program and Board of Advisors kicked off late in 2011, and both are bearing fruit already.

But as we reflected on the year, something was clearly missing. We realized that the incredibly active, robust state of the early stage market in New York had evolved in a way that was keeping us from doing some of what we like most – old fashioned, roll up your sleeves, small dollar seed investing. There’s been a tremendous grade inflation in the seed market – the average seed round is now well north of $1MM, with some so-called seeds as large as $4-5MM. In many cases we think this evolution has been driving entrepreneurs to overcapitalize their companies before they know where they’re going, and sell too much of their equity in the process. In response to that, today we are announcing our new High Peaks Seedlet Program.

Through our Seedlet Program we are returning to what we think seed investing should really be – small, high risk-high reward bets on great founders with truly nascent ideas. We will write checks as small as $25,000 and as large as $250,000. We’ll do some Seedlets by ourselves, and will partner with angels and other firms on others.  And we’ll move fast in our decision-making.

Admittedly the name sounds a little silly. We batted around a number of options before realizing that Seedlet was a name that everyone would understand. Our Seedlets will target companies that might be pre-product, or might be just a single founder with a brilliant idea. They’ll be high risk bets, but they’ll be made at the formative stages where we like to operate, and where we believe we can be most effective. And importantly for the community, they’ll be made at a stage where despite the hype around seed investing, hardly any institutional investors are actually playing anymore in New York.

We think we’re offering something unique and important here. It will be good for us, good for the companies we invest in, and good for the community. If the early signs we’ve seen since getting focused this stuff are any indication, we’re going to land in the middle of some really exciting opportunities. We hope some of our friends in the business will join us in venturing whole-heartedly back into true seed land.

We will close our first Seedlet this week – a $150,000 investment in an alpha-stage consumer web company (though it will be a couple of months before we announce it). We’re looking at a handful of others, as well. Ideally, we’d like to do 6-10 Seedlets this year.

So send us your ideas and leads. And if you’re an entrepreneur who’s trying to figure out just what kind of round you should be raising, drop me a line and we’ll talk. We’re always happy to objectively help entrepreneurs think through these critical early decisions.

Here’s hoping that 2012 is the year that seed investing returns to what it is really supposed to be, and here’s hoping that High Peaks is a big part of that.

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