How to balance investors and founders: John Romano

One of the most oxymoronic term I have come across is "Founder Friendly Investor", especially as applied to VCs and angel investors. One does no favor to the founder by founder friendly. Investor/Founder relationship by its very nature, is one of being an adversaries at the time of investment. They have to sit across the table and do an arm's length transaction, taking into account not only potential but also risks to come up with a valuation. A soft valuation does not stand the test of time, it sends a wrong signal to the founder and hurts the interests of investor. A high initial valuation sets up a high bar and makes subsequent investments hard to happen. They weaken the eco-system and make it harder to get venture returns on high risk investments. Incidentally, once the investment has been made, both founder and investor sit on the same side of the table to make the company work. Results are in for the heydays of founder-friendly VCs. They are not pretty. Investing in risky startups is a serious and hard business and it must produce superior returns to safer investments. Incidentally, most VCs do not produce any returns at all. Being a founder friendly VC is just being dumb.

At the time of investment in a startup, it’s a zero sum game between the founders and the VCs. Eg if a investor takes a big liquid preference, the impact will be directly on the investor incase that scenario happens. Very nicely articulated by Kanwal Rekhi. #startups #founders

Ahead of the weekend, here are a couple of stories on venture capital investing for you. -"How a worsening U.S. debt problem could be great for VC": Financial advisors view the national debt as one of the most urgent policy problems, but most experts see few signs that either Democrats or Republicans would slash it after the election. Here's why Bruce K Lee of Keebeck Wealth Management says that makes an even stronger case for venture capital investing and other bets on artificial intelligence. https://bit.ly/3CkNFSL -"VC investing with less startup risk, lower minimums and shorter timelines": With fewer publicly traded companies and a booming private credit market, venture capital investments in the middle to late rounds of funding have emerged as a much more distinctive asset class. Here's a guide to mid- to late-stage venture investing with insights from Sevasti Balafas, CFA, CPWA® and Blair Cohen of GoalVest Advisory, Kaidi Gao of PitchBook, a Morningstar company and Aaron White, CFP® of Adero Partners. https://bit.ly/3AbmwkQ Best of luck out there and have a great weekend. #vc #venturecapital #investing #financialplanning #portfoliomanagement

𝗜𝗻𝘃𝗲𝘀𝘁 𝗟𝗶𝗸𝗲 𝗮 𝗙𝘂𝗻𝗱, 𝗔𝗰𝘁 𝗟𝗶𝗸𝗲 𝗮𝗻 𝗜𝗻𝗱𝗶𝘃𝗶𝗱𝘂𝗮𝗹: 𝗛𝗼𝘄 𝗪𝗲 𝗔𝗰𝗵𝗶𝗲𝘃𝗲𝗱 𝟰𝟯% 𝗜𝗥𝗥 𝘄𝗶𝘁𝗵 𝗖𝗼-𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁? Stories and lessons inevitably accumulate when managing $30M in investable capital. Perhaps you’ve experienced the long lifecycles of traditional funds, waiting a decade or more for returns. Or maybe you’ve tried your hand at angel investing, only to discover that even the most promising founders can fall short of delivering exits.  Let me share how we sidestepped these pitfalls by leveraging a co-investment model—a way to invest like a fund while avoiding the overhead, long lock-in periods, lack of liquidity, and rigid structures that often characterize traditional venture funds. 𝗪𝗵𝗮𝘁’𝘀 𝗪𝗿𝗼𝗻𝗴 𝘄𝗶𝘁𝗵 𝗧𝗿𝗮𝗱𝗶𝘁𝗶𝗼𝗻𝗮𝗹 𝗠𝗼𝗱𝗲𝗹𝘀?  Let’s be honest about funds. They charge 2% annually, regardless of whether the capital is utilized effectively. And if you’re an LP, you have zero control over deal flow, investment committee decisions, or liquidity. You’re just sitting there, hoping for a unicorn to make it all worth it.  Angel investing? Even worse. If funds are roulette, angel investing is Russian roulette. One wrong choice and your capital disappears faster than a founder with a failed MVP.  𝗢𝘂𝗿 𝗔𝗽𝗽𝗿𝗼𝗮𝗰𝗵: 𝗙𝘂𝗻𝗱𝘀 𝗪𝗶𝘁𝗵𝗼𝘂𝘁 𝘁𝗵𝗲 “𝗙𝘂𝗻𝗱”  We asked ourselves: why run a fund when you can invest like one? Our co-investment model focuses on the top of the funnel: sourcing, screening, and tracking. We look for startups that Tier-1 and Tier-2 funds are already interested in and co-invest alongside the best VCs in the industry.  𝗛𝗲𝗿𝗲’𝘀 𝘄𝗵𝘆 𝘁𝗵𝗶𝘀 𝘄𝗼𝗿𝗸𝘀:  1. Funds do the heavy lifting. They handle due diligence, draft term sheets, and manage portfolio headaches.  2. You invest like a fund but keep control. You decide which startups to back and when to exit.  3. Risk is diversified. Instead of spreading your capital across 15 startups, you can allocate it to 50—creating an index-like effect.  𝗪𝗵𝘆 𝟰𝟯% 𝗜𝗥𝗥?  It’s all about the math. We focus on startups likely to be included in the portfolios of top funds, which historically outperform. This gives you access to the same opportunities as those funds but without the traditional capital drag. While traditional funds impose a 20% overhead over 10–12 years, our costs are three times lower. This is thanks to the absence of management fees and the need for a large team to build and manage the portfolio. As a result, you get an IRR comparable to the top quartile of funds but with far lower expenses.  𝗪𝗮𝗻𝘁 𝘁𝗼 𝗟𝗲𝗮𝗿𝗻 𝗠𝗼𝗿𝗲?  Contact me, and let’s discuss how co-investment can become your growth engine. #VC #startup #investments #wealth

I've had the opportunity to witness numerous pitches in the venture capital world. Often, the room is left pondering the potential of a founder's idea and the likelihood of success. However, sometimes a decision to pass on investing is made due to the lack of economies of scale needed for substantial investment. It's a delicate balance between recognizing potential and aligning with investment criteria. You might ask why we'd pass on a "good" company. Give this article a read: https://lnkd.in/gYZSA4f9 (I know you're going to look at that article and see that it's long. So if you don't have time to read it all, look at the graphs and the paragraph following each, to understand some quick VC ROI dynamics.) So for us, understanding the key elements of a pitch is crucial. Having a standout VC requires picking a portfolio of potential "monsters." Knowing this, founders often emphasize the "hockey stick" growth curve in their pitches to showcase massive ROI potential, and avoid the issue I described above. The art for us lies in evaluating the authenticity of these claims and deciphering genuine growth opportunities from embellishments.

Great Startup Daily article by Simon Thomsen with advice from Alan Jones about how startups can get the best from #syndicates. TL;DR: 𝗕𝗲𝗻𝗲𝗳𝗶𝘁𝘀 𝗼𝗳 𝗮 𝗦𝘆𝗻𝗱𝗶𝗰𝗮𝘁𝗲 𝗳𝗼𝗿 𝗦𝘁𝗮𝗿𝘁𝘂𝗽𝘀: 🤸♂️ 𝗙𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆: Syndicates allow startups to raise capital on a deal-by-deal basis, offering more control over funding rounds. ⏱️ 𝗘𝗳𝗳𝗶𝗰𝗶𝗲𝗻𝘁 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗥𝗮𝗶𝘀𝗶𝗻𝗴: They can fill smaller funding rounds quickly, making them ideal for startups with immediate financial needs. ✅ 𝗦𝘁𝗿𝗲𝗮𝗺𝗹𝗶𝗻𝗲𝗱 𝗗𝘂𝗲 𝗗𝗶𝗹𝗶𝗴𝗲𝗻𝗰𝗲: Syndicates often have established processes, reducing the time and effort required for due diligence. 🧑🤝🧑 𝗔𝗰𝘁𝗶𝘃𝗲 𝗖𝗼𝗹𝗹𝗮𝗯𝗼𝗿𝗮𝘁𝗶𝗼𝗻: Syndicates foster closer relationships between startups and investors, encouraging active engagement and support. Finally, startups should also 💰 𝗙𝗶𝗻𝗱 𝗮 𝗟𝗲𝗮𝗱 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿 before approaching a syndicate to maximise their chances of a successful syndicate investment. Blossom Capital Partners: https://lnkd.in/dYhjxJ7s

Really insightful observation about angel groups from Gregory Raiz. Great food for thought. Good startup investors are conviction driven and take counter intuitive bets, using information asymmetry, and relying on the Power Law (aka the 80/20 law, or Pareto Law) to find the elusive deal that wins big. Consensus driven investors are still useful, but will they catch the mythical unicorn? For more on this line of thinking, see Sebastian Mallaby's "The Power Law", a history of VC in America, starting with the early days of Fairchild Semiconductor and investor Arthur Rock in San Francisco ttps://https://lnkd.in/e6yk477G Amazing how these guys discovered the financing model best suited for innovating deep-tech entrepreneurs. Really love these posts Gregory Raiz. Love the hard hitting insights! Gregory Raiz and his partner Jessica Lynch are starting their own VC firm, Raiz Capital (https://raiz.vc/). Prior to this, Greg was the managing director of Techstars Boston. I attended Greg and Jessica's Ditch the Deck event in Cambridge last week - a well attended, well selected group of entrepreneurs. Four pretty good demos of product. The event will be repeated in August. Check out Greg's LinkedIn stream, he's been pretty active with his posts!

The Follow-On Dilemma ⚖️ One of the trickiest aspects I’ve recently come to appreciate in venture capital is deciding on follow-on investments. At first look, it seems straightforward, but these choices really shape both the startup's trajectory and the fund's long-term success. 💰 The Reserves Challenge & The Pro-Rata Fence 🚧 Allocating capital for follow-ons is no small task. Ideally, funds would know from day one which companies will skyrocket, but the reality is much more complex. VCs must make early calls on how much to reserve upon the creation of the fund, balancing flexibility with potential returns. Then comes the “pro-rata” dilemma: funds often have the right to maintain their ownership in later rounds, but this right comes with trade-offs: - Exercising pro-rata can drain capital that could support the portfolio winners. - It might lead to over-investing in companies with uncertain futures. - It limits diversification across more startups. And here’s where it gets more complicated: choosing pro-rata can feel like sitting on the fence. If the fund is truly confident, why not double down and increase the stake? On the flip side, opting out can send an unintended message to the startup and future investors, signaling a lack of confidence. In a market that often follows a herd mentality, choosing not to follow-on will make it harder for the startup to raise, risking the initial investment altogether. 🎯 The Balancing Act Ultimately, follow-on decisions require balancing several things: - Supporting founders while optimizing fund returns - Reserving enough capital for potential fund returners - Maintaining a reputation founders and future investments can trust Fund size, market conditions, and strategy all play a role in how VCs approach these decisions. Some funds prioritize always participating in follow-ons, while others focus on one investment round and then diversify into new startups. Navigating follow-ons is far from straightforward. It’s all about balancing founder support and positioning the fund for long-term success. What do you think? Should VCs prioritize backing founders in follow-ons to give them more time to figure things out, or should they focus reserves on the next potential winners?

Why Are Angel Groups Terrible Investors? Before my peer angel investors get the pitchforks out, let me explain… I’ve been a member of several angel groups and maintain my membership with a few today. The members of these groups are exceptional people, and anyone who is helping founders by giving their time or money is admirable. Their efforts are appreciated, but these groups highlight some issues in early-stage investing that need to be discussed. 1. Successful Investors Are Non-Consensus To be a great investor, you need to see things that others don’t see. You have to understand the inefficiencies in the market and invest in founders that other people don’t believe will succeed. This non-consensus approach gives the investor a financial advantage. Angel groups are, by definition, consensus-driven. Unlike a venture fund where you have highly concentrated decision-making, angel groups often require larger group consensus. Because of this, non-consensus founders are less likely to be funded by these groups. This adverse selection normalizes toward good investments but makes it less likely to fund great investments. 2. Decision-Making by Committee Angel groups often make decisions through a committee process. While this can bring diverse perspectives and reduce individual biases, it can also lead to groupthink. Bold and innovative ideas can be diluted in favor of safer, more conventional wisdom. This investment process can be slow and risk-averse, which is detrimental in the fast-paced world of startups where speed is crucial. 3. Deal Sourcing Great deals and exceptional founders are rare. In many cases, the best deals never make it to angel groups. Top-tier founders seek out investors who can provide more than just capital; they look for strategic support, mentorship, and connections. Venture capital firms or individual investors with a strong track record and industry expertise are typically more attractive to these founders. Consequently, angel groups end up with a pool of opportunities that aren’t necessarily the cream of the crop. This limits their potential for high returns compared to more specialized investors. 4. Diligence I’ve seen startups go through the angel group process, prepping, pitching, and getting reviewed, only to have no one in the group volunteer to do due diligence. When no one has strong conviction, the deal dies. This is also true when no one is willing to write the deal memo or stick their neck out for a founder or company. Advice for Angels - Joining groups is great but have conviction outside of these groups. - Don’t bring a deal to a group unless you’re personally already committed. - Add value and be an expert. Find an area where you can attract the best founders and add value in addition to money. - Keep helping founders, they really appreciate it.

This is the first in a series of posts intended to “de-code” Front Porch and provide more detail on who we are, what we do, and how we make investment decisions. It won’t surprise anyone in/around this industry to hear that it is a bit of a confusing cluster — and one of our goals is to demystify our position in it for you. So, before you meet with us, read the few paragraphs below — and save us all 10 minutes of saying the same thing that we always say and you’ll probably never remember in full because we have said it so many times that we say it too fast now! First thing — Front Porch is a “hybrid fund.” (What is a hybrid fund?) A hybrid fund invests in both venture capital funds AND directly into startups, but through a single investment vehicle. Our funds include 15-20 venture capital fund investments and 25-30 company investments. Four more things in the link below!