252. Decentralization of VC, Why Your Fund Size is Your Strategy, and Why Startup Formation is the Most Important Contributor to Economic Growth (Erik Torenberg)

Erik Torenburg Village Global

Erik Torenberg of Village Global joins Nick to discuss Decentralization of VC, Why Your Fund Size is Your Strategy, and Why Startup Formation is the Most Important Contributor to Economic Growth. In this episode, we cover:

  • Walk us through your background and path to VC
  • What were the biggest lessons learned from Product Hunt that you took to investing?
  • Recently had Ben Casnocha on… anything specific you’d like to add about the thesis behind Village Global?
  • How do you think about working with experienced vs non-experienced angels?
  • How do you think about portfolio construction for VG?
  • Fast forward… some angels have strong early signals of success, others don’t — do you cull the herd or amplify those that are good pickers?
  • Considering this, why do you think so many VCs have concentrated portfolios?
  • How do you think about follow on investing?
  • What is the role of a pre-seed firm?
  • If there’s a weakness in the Village model… what is it?
  • Part of your model is to increase the amount of founders and investors.  What do you say to those that argue there’s too much capital already?
  • What’s does the future look like for Venture?
  • What’s your advice for people getting into venture?
  • Three data points
    • Let’s say you’re approached to invest in an early seed stage SaaS startup…
    • The founder is a technical serial entrepreneur with two solid 8-figure exits.  And she has a credible co-founder that is more business/commercially focused;
    • An MVP of the product has been launched and was the top product of the day on Product Hunt, when it launched;
    • and The Product launched two months ago and currently has $5k of MRR.
    • The catch is, you can only ask 3 questions for 3 specific data points, in order to make your decision.  What three questions do you ask?

Guest Links:

Takeaways:

  1. Erik’s path to tech and venture began when he started his startup — Rapt.fm. The startup never took off, but that experience introduced him to the startup and VC world that grew into his passion. 
  2. At Village Global (VG), they are passionate about the future of venture, and they believe that the future of VC is going to be significantly decentralized.  
  3. To have better expertise across sectors and geographies, VG provides incentives to dozens of people to source, select, and support companies with them and on their behalf.
  4. At VG they work with both experienced and less experienced investors. They want to “uncover the up and coming gems because other people aren’t searching for them as much.”
  5. VC is known to be an anti-network effects business. In theory, the more companies you have, the worse you are at picking and helping because you have less time.
  6. Village Global makes a lot of investments because they see VC as a positive network effect business. The more companies they invest in, the more great founders they have in the network, the more valuable the network becomes. 
  7. “There’s this idea called Schramm’s Law, which is that the idea that the single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years. We produce around 33 unicorns a year, but we need about 100 unicorns to maintain post-war growth rates. And so the only way I know how to do that is to have more capital, more investors, and more founders.” 
  8. Take asymmetric risks: if it doesn’t work out, you’ll learn a ton, you’ll build a network, it’ll be one of the most valuable things you could do just for your own education. And if it does work out, you will have some meaningful upside of that.
  9. The future of venture will see the decentralization of VC across the board and more people on cap tables like dozens, but soon they’ll have hundreds or maybe thousands. 
  10. VC will cease to be only a game of craftsmen, and just like the industries they invest in, they’ll be revolutionized by software, and by people who build products and platforms and, and network effects businesses. 
  11. If you want to get into VC but can’t write checks, do fantasy venture capital. Write down what you would invest in and why.

Transcribed with AI

Intro 0:02
Welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran. And this is the full ratchet.

Nick Moran 0:18
Erik Torenberg joins us today from Arizona. Eric is co founder and partner at Village global $100 million early stage fund backed by some of the world’s most successful entrepreneurs. He’s also founder and chairman of ondeck, a community of people who are looking to start or join their next thing. Prior to VG Eric had a range of experiences, including preparing basketball players for the NBA, founding a video platform for rap battles, and being on the founding team of product. Eric, welcome to the show.

Erik Torenberg 0:45
Nick, it’s it’s a pleasure to be here. I’m a big fan of the show.

Nick Moran 0:49
Awesome yet Talk Talk us through your background. I mean, you’ve had some eclectic experiences. But tell us about your path to tech and venture. Sure.

Erik Torenberg 0:57
So I’ll and I’ll include the basketball reference. I’m glad you dug that up. I don’t usually include that necessarily. When I was younger, I was an aspiring basketball player. And, you know, surprise, surprise, I didn’t have necessarily what it took to to make the NBA but then I was really interested in coaching. And I worked at IMG Academy for a bit preparing, teaching students and sometimes working with with pros to help them get to the next level. But then I realized that that wasn’t what I wanted to do. I didn’t want to spend a decade in the video room like Erik Spoelstra, or Lawrence Frank to make it and I wanted to have an impact right away. And I started a company, I started wrapped FM. It was like Twitch for music, starting with rap battles. And I thought interactive social video platforms would be the next big thing. And it just turned out to be way too early. What was the timeframe on that? This was 2011. So it was a bit after Chatroulette, sort of the hangover from Chat Roulette, and we saw in college, how big that that could have been. And so yeah, I did that for three years. It got some traction, but never really took off. The sort of technology wasn’t wasn’t there yet. But when I that’s how I got into the startups, I when I asked Anthony CLA Knauss, manager to invest in rapt FM, he said no, but I ended up setting setting other startups which he said yes. And that’s when I knew I was really passionate about the startup world, and not the music world in terms of where I wanted to work. So I’d become friends with Ryan Hoover, who’s also passionate about music. And then after rapid FM, I volunteered to help them out for free, and I thought that’d be the best place to figure out what I wanted to do next. Regardless of whether that turned into anything. It ended up turning into something, it sort of took off in 2014. And I just started building this incredible network. And so I started angel investing, Scout investing in companies like scale, rappy, lattice, Numerix, and dozen plus others. And I realized, wow, ProductHunt is really an unfair advantage as it comes to comes to investing. I’m the same person I was when I was running rap FM. But now I can get into all these deals, I have access to all these deals, it’s really just because I have this asset, and I wanted to build more assets. So when I was looking to do my next thing after product 10 I started on deck this event series for people looking to start or join the next thing for place for find co founders that later morphed into the on deck Fellowship, which is the same community but but over 10 weeks. And then I decided to take my passion for community building and networks and building unfair advantages and teamed up with Ben Casnocha and and Dwayne iVillage. Global to build a whole firm based on unfair advantages. Awesome.

Nick Moran 3:26
Yeah, I’ve known Julian for quite some time over at on deck. And I’m hearing really good things about that program in that platform. I have heard it’s competitive to get into but once the founders get in, it’s a very supported and supportive and connected community, which I think is is unique in his rare in this world of just ubiquitous online, online communities and slack groups. Yeah,

Erik Torenberg 3:53
no, I appreciate you saying that. And I’ll next growing in an interesting direction where it has this core flagship founder program, but we’re launching sort of programs around it that we think make the founder fellowship stronger. So in conjunction with village global, we’re launching, we launched the angel fellowship. And you know, early next year, we’ll launch a VC Fellowship to really help the founders get funded. And then we’re also launching a writer’s fellowship, and soon we’re in an ounce of podcasters fellowship. So to help them get distribution as well. And then early next year, we’ll probably do fellowships for designers and product managers and growth and sales to help them potentially hire those people. So we’re really excited about we’re on DACA

Nick Moran 4:33
networks on networks. Look at you. Talk to us about the early days of product.

Erik Torenberg 4:40
Yeah, it was man, what a what a journey. i It started as a as a side project that Ryan was running, and I was I was just helping them out. And within six months, I did not only got into Y Combinator, but raised money from an Andreessen Horowitz and really just sort of found lightning in a bottle and one thing that’s born To realize is these communities aren’t built overnight, you know, Ryan, Ryan had launched it as a side project, but they were built off the years prior relationships and related, you know, social capital that he built up via other side projects or, or just being a great sort of, you know, member of the the startup ecosystem. And one big lesson for me was that, at wrapped FM, I learned the idea of a positive some mindset that even if, you know, for example, an investor doesn’t want to invest in me, I’m not going to be sour, I can introduce him to someone else that he might invest in, I can be happy for that person, you know, offering value without, you know, gaining anything in return, because it’ll always come back to you. But I realized that it wasn’t enough to have that mindset, you actually had to have something to offer. And so when I joined Product Hunt, that’s what I stumbled into what it is that you have to offer, right? What does startups have challenges with, you know, getting customers and distribution, that’s what products and helps with hiring, that’s what I started on deck to help do and of course, raising money and listen there, especially if you’re just getting into investing, you’re not going to compete with people have been doing this for decades on winning deals or giving founder advice. And so you have to have some some edge or some asset, a way that you can help founders in a way that they can’t. And so products, I’ve had this ability with distribution and customers, hiring was another one. That’s when I started on deck. And so much of the game, in my opinion, is being able to help founders before they get off the ground, such that when they raise money, they go to you. And then and village of course, is unfair advantage in a few ways. One is the network superpower of the luminary appease that my partner Ben has Casnocha talked about in his podcasts with you that people should listen to his fantastic episode. But then also having this investment team of extended investment team over 30 instead of instead of five, because we partner with Angel investors and incentivize them and get leveraged that way in terms of being able to discover deals better, but then also have more specific expertise to be able to offer our founders.

Nick Moran 6:50
It’s great that VG kind of, you know, the ideas came out of the experience of Product Hunt. I’m curious, as an outsider, you see a startup and you see something like product on and it just seemed like it was up into the right the whole time. But I’m curious internally, where there, was there some seminal moment or some key milestones that it really started taking off? Or? Did it look like it was on the outside where, you know, from the early launch days, it was just working? And, and? And things really came together? Quick?

Erik Torenberg 7:22
Yes, I see a few things. One is that when you’re starting a community from scratch, it’s part of the magic is it’s making it look seem as community driven as possible. While it really being as manual as possible. You know, the stories of Reddit Reddit having fake accounts. On our end, we didn’t have fake accounts, but we were constantly matchmaking, founders and investors. And anytime someone would tweet about something, we would say, Hey, you should post this on product on this. It looks like it’s all community driven. But it’s a lot of manual work. And the reason why it needs to look community driven is because you want to set an example for other people on how to engage in the community. Right? So in the beginning, it took some time. But then once we establish the behaviors, the precedents, it started to take off. And one of the takeoff moments for us was we discovered, yo, like yo was discovered on products on yo is this sort of notification app, and it went to Jimmy Fallon or something, but it sort of blew up. But when it places it blew up on products on Okay, yeah, it was sort of a silly experiment that didn’t end up working out. Meerkat was then discovered on Product Hunt. And that blew up as well. And South by Southwest, I believe 20 2014. And so you started to see, like product, unstarted established itself as the first place people go, and the place to really discover the next big thing. So those were a couple seminal moments. And one sort of thing that product lesson I took from it is when you grow so fast, so quickly, sometimes you use or when you think you’re indestructible. And so you think anything you launch is gonna is gonna grow as quickly. And so we’d launched products on books and, and games, and they didn’t have the same result. We just sort of, were too confident, because we thought we had the magic, but we didn’t really understand the mechanics that that made it work or think, or we just had perhaps too much faith that they would work in other in other categories. And maybe there’s some other startups that sort of grew, it things just worked too easily such that they didn’t build the muscle of repeatedly building it in other categories. But yeah, those are those are some lessons and some reflections from from products on Iris

Nick Moran 9:31
grit. That’s great. Did your early angel investments were those sourced? Primarily from Product Hunt? Or was it networks, you know, in the valley, or,

Erik Torenberg 9:39
you know, it’s combination of Product Hunt, but then also also the on deck community? One thing I realized is you I don’t have a it’s hard to have a special algorithm to evaluate founders especially, you know, precede before they before they have anything. So the thing I wanted to have was time I wanted to time advantage and so I could see He threw his dinner series, I could see people over months, it sort of a slightly more scalable way and see how they were shipping, see how they were working together, see what they were really motivated by. And so that that gave me an edge. And that’s something we keep today. I think people underrate the value of time and making sure you build those relations early so that you can see how people ship over time. Because there’s a lot of a lot of great talkers out there a lot of charismatic people, but you need to and vice versa, lots of people who can’t talk or big game, but can really ship a big game. And so, so time is really an advantage.

Nick Moran 10:35
I like that time has an advantage. It’s, it’s got some hallmarks of the accelerator model without some of the overhead. But you know, you mentioned this, but we recently had your partner Ben Casnocha on the show. Anything you’d like to add on the thesis, a village that will discuss just

Erik Torenberg 10:53
a time point billboards, global also has an accelerator, its boutique, it’s about 15 startups per per cohort, and that that time is just crucial for helping us help the stars better, but also being able to make a better better follow on decisions. One thing I’ll zoom out and say is that we’re really passionate about sort of the future of venture and we think the future of venture is going to be significantly decentralized. And so the way I like to tell us is I made a joke recently that you think that venture capitalists are capitalists. And they always talk about capitalism and markets. But ironically, venture capital firms operate as if they’re communist central planners, it’s five people making investment decisions across all sectors, all NGOs, all networks, even though they can’t possibly have perfect information on all of them. It’s like a central planner, picking the, the, you know, the price of the loaf of bread. So the joke is that it’s more like venture Soviet Russia. And so why do VCs who believe in capitalism who believe in markets have this top down centrally planning view of of how they do their own business. And one reason is that it used to be the case where where you could do that you could have an investor who covered the entire internet sector. And what’s happened is we’ve had an explosion of new sectors and sub sectors within the sectors and then, and in you, you’ve covered this a lot explosion of entrepreneurship just more globally. And so just like in capitalism, whenever there’s complexity, you want to decentralize knowledge to the edges of a network. And that’s what markets really do well, so there’s no way that five people or eight people can have enough information, all sectors all GEOS to price effectively price a loaf of bread effectively, but maybe 30, can’t maybe 50 Can. And so what village does, is try to create markets and venture by incentivizing dozens of people to Source Select and support companies with us and on our behalf. So we can have better expertise across sectors and NGOs. And

Nick Moran 12:42
you empower the network participants that the scouts and the angels that you work with to make investments on their own. Is that correct?

Erik Torenberg 12:50
Yep. We give them some we work with closely and referral capacity others, we just give out allocation and and they do their thing. So how

Nick Moran 12:59
do you think about, you know, folks that have experienced angel investing versus those that don’t?

Erik Torenberg 13:04
Yeah, we like to, we like to work with both archetypes. And one thing I’ve we’ve discovered about sort of choosing is that there’s the venture is a very inefficient market. It’s really interesting stock market investing is weird, because it takes seven to 10 years to be great. And not necessarily because of the skills you gain. But because it just didn’t even know how you’re doing right? You could invest for two or three years and a bunch of companies and you’re you’re considered a beginner, literally go in a coma for seven years. So you haven’t improved your skills at all, come back and be known as one of the best investors in the world, despite having the same level of skill. I don’t know if there’s any other industry where you can do that. And, and we’re talking about basketball, basketball, for example, you could see LeBron James at 18. And not only realize that he’s going to be amazing later, but he’s amazing right now. And it’s just obvious and it’s apparent, whereas the VC equivalent has to wait seven to 10 years before you can even analyze their performance effectively. And so that suggests that there’s extra arbitrage in finding sort of the 18 year old VC LeBron, or at least the people who are great, but not legibly so. And so So we work with both archetypes, but it’s it’s really interesting to try to uncover the the up and coming gems because, you know, other people aren’t searching for them as much. And it also it’s unclear. You know, LeBron is 18 He’s amazing. But you know, he’s gonna get better at 25 sort of unclear how much better people people get at their craft over time. Sometimes we draw the wrong lessons. Like it’s Chris Sacca better at 45 than he wasn’t 25. I mean, among his worst deals were were Uber and Twitter, he might have better expertise later on or better judgment. But as people get more successful, sometimes they get less hungry or they get less than the flow of emerging young people. And that’s why a lot of first funds performed so well because the person is so well networked and so hungry. So we’d love to work with Sokka Sokka now, but we’re it really interesting inspired by the idea of getting soccer before their soccer, because it’s more arbitrage because they could be better, but also because you’re expanding the pot, you’re expanding the the pool of angel investors that exist. And we’re really motivated by increasing the the amount of founders increasing the amount of investors.

Nick Moran 15:17
Yeah, it’s an interesting point, you know, more knowledge is not always better, right? And there’s diminishing returns, acquiring more data. And I was talking to a buddy of mine, Romney the other day at 1984, about this, and we were both looking at an investment memo, by you know, appear at another firm that had written like a 25 page, eight point font investment memo on a precede deal. We’re both just kind of everyone’s got a different style. And you know, they this firm may far outperform us. But, you know, often it’s the two things, or three things that really matter. It’s not the 100 to 500 items that collectively, kind of, you know, all fit together for something to work really well.

Erik Torenberg 16:03
Totally 100%.

Nick Moran 16:05
So, you know, I talked to, of course, a lot of LPs, both, from a business standpoint, and on the show here, in many LPs, especially institutions are oriented toward, you know, concentrated portfolios, right, they like investing in, in venture funds that are taking huge ownership stakes and high conviction and, you know, lots of lots of concentration, you know, what’s your approach, I know that you guys do a lot of investments, you have the accelerator model as well. You know, how are you thinking about portfolio construction and village global,

Erik Torenberg 16:37
we think about that a bit differently from from other firms, we have a wide portfolio, and I’ll get to why that is, first, I want to sort of zoom out and just just talk about the math. You know, Vc is is like many other businesses is is a history of in business, the top 2.5% of VC backed companies, you know, 104,000 a year make up all the returns? Yep. Getting into one of those with meaningful ownership is, is everything. The average unicorn hit rate is 2.5%. Sequoia, you know, one of the best firms of all time, if not the best, has 5% corporate rate. So, the idea is that, so if you don’t have, you know, if you don’t have 20 companies, it’s quite nice, at least, you know, I should let me pick,

Nick Moran 17:21
so Sequoia is twice as good as the index, then.

Erik Torenberg 17:24
Yes, yes. So this sort of idea there is, as long as you’re picking or winning abilities, don’t delay or don’t decay, you should do as many companies as you can. But often the math doesn’t meet the reality or match reality, because over time, your picking is compromised, and your ability to helps compromise and your signal is compromised. And so you shouldn’t necessarily keep that that same ratio over time. And there’s some sort of decay point. And the question is, what’s that decay point. And this is why VC has been known to be an anti network effects business. The more companies you have the in theory, the worse you are at picking and helping because you have less time. Now yc is really a challenge to this idea. Why is he flipped around and said, what’s really helpful, it’s not venture capitalist as much as other founders and a network of other founders are, that’s more helpful. So YC does, you know, 400, or 500 companies a year, and yet, they’re one of the best startup credentials in the world, such that when, when founders, you go into TechCrunch, they’re sometimes named YC, back ahead of founders went backwards, even Sequoia back sometimes. And so how do we explain that? And I think, when they see their portfolio, they try to make it and we try to make it is that is a positive network effects business. So the more companies you invest in, if you build a community, right, the more founders you, the more great founders you have in your network, the more valuable the network gets. And then the way we get around sort of the challenges of how do you not make decision making worse? And how do you is, is our network leader or Scout program? So it’s not Eric picking 200 companies, which will happen fund one or are and picking 200 companies, it’s strictly it’s every network leader picking three companies. And so we’re really interested in how to make venture a positive network effects business and how to not have to sort of extend do more deals without having a que educate point. Now in terms of why LPS may not, sort of get get on board with it, I think LPS just like sort of venture capitalist when they fund founders, they’re playing a portfolio game. So they want you know, if you have a, you know, 80% of your portfolio and Uber like Google did, the more concentration means the more chance of getting a much higher return. What diversification gives you is a safer chance at getting sort of the reliable and repeatable 3x Bet LPs are created playing more of a portfolio game so they’re willing to take some of the trade offs that maybe, you know, one individual venture firm might not, but then also, it’s just it’s seen as it’s seen as lower status because venture capital us are interested in making themselves as as unique and uncut modifiable as as possible. And so the more than narrative is that the venture capitalists have the magic to pick winners have the magic to help winners, how to create winners through their through their advice. And that, you know, only people who are experienced in venture capital can be can be venture capitalists, the more special they seem, or we seem, the more you have a diversified portfolio, the more it sort of admits humility on a picking level, and on a helping level, particularly for the venture capitalists. Very

Nick Moran 20:34
good yet, you know, if we were to fast forward a few years, let’s say you have some angels in the extended network that have really strong early signals of success, right, good follow on rates, good logos for those follow ons, good markups, etc, maybe some early exits that are strong. You know, and let’s say some of the other angels don’t write there, there doesn’t seem to be a lot of signal and performance there. I mean, do you call the herd or, you know, do you also amplify those that are seemingly good pickers? Or how do you think about that,

Erik Torenberg 21:05
we do both we amplify the ones that are they’re doing great and really invested in it, we call the ones you know, in in a friendly way that that aren’t aren’t doing great. But the thing that we find is that someone who’s in the flow right now may not be in the flow two years from now. And so these things sort of there is higher turnover. And that’s why we work with them. In a we’re not giving them tenure funds. We’re working with them. You know, every year rear year we we reconsider, we re up people who are doing great, or amplify them. And we sort of call the ones who aren’t focused on Angel investing, or their deals have haven’t taken off. So it’s a it’s a bit of both. But what’s surprising for us is just how fast these these network move networks move.

Nick Moran 21:50
Yeah, it’s interesting, because like, a lot of the acting executives, at least that I know that are in position, like very little time, right? Lots going on, and then as soon as they retire or take a sabbatical or leave, you know, and they have a gap between roles. That’s when they have all the time, but they have less flow. Totally. Yeah. Interesting. Um, you know, why do you think so many VCs have concentrated portfolios, considering the math?

Erik Torenberg 22:17
Yeah. You know, there’s this great quote, I think Parker Thompson said, he said, spray and pray is a term one VC uses for another VC that just has a more diverse, diverse portfolio than their own, sort of like everyone before me is throwing darts. Everyone after me is is a banker, I think most venture capitalists really see themselves as a as craftsmen and crafts woman. And that’s awesome. I’m a big fan of that. But they don’t necessarily see themselves as like building a network effects business, or really building a product or really building a platform or really building a company. And often, that’s why they’re VCs, otherwise, they’d be building a company, they’d be building building startups. And so if you were to be a venture capitalist in 1990, and then you went into coma for 30 years, and you came back, you probably wouldn’t be surprised at that much like the industry really hasn’t, hasn’t changed that much. And there bunch of people who, who’ve tried to do things, but really the only one with a lot of success seems to be Y Combinator sort of flipping at least the portfolio construction on its head and turning it into a positive network effects business. But I think the reason why most VCs don’t do it is because it’s hard. It takes a different kind of skill. It takes a community building skill, it takes a product skill, it takes data skill, and that’s, that’s not actually what they got into VC for, or it’s not necessarily what they’re what they’re gifted at. And it’s working for them. what they’re currently doing is working for them. And so they don’t want things to change. If you’re at the top now, you know, why do you want the industry to turn on and turn on its head? Well,

Nick Moran 23:50
it’s to some degree, confidence and conviction, even to some degree arrogance and banging the table like that can that sells right going in and saying, you know, what? We, the picking? We think we might do better, but we’re not sure. And that’s why we need to cast a wider net. The humility I think, probably doesn’t convert, as well. As, you know, Uber confidence. Yeah.

Erik Torenberg 24:18
When it comes to it’s a more sober, it’s a more sober story. And you’re going to need, you know, and people say, Oh, YC Oba yc is a fluke. And so you’ll need more examples and villages is taking a different approach, but it’s similar philosophy and, and hopefully will be one for other people. And they’re, you know, you’d have had hustle on there. They’re doing a great job. Lots of others sort of are espousing this as well.

Nick Moran 24:43
How do you guys think about reserves and follow on? Yeah.

Erik Torenberg 24:48
I think people don’t think enough about about the following to sort of take the default path which is to you know, is a I’m gonna make a number of bets and the reserve for follow on to double down on my winners, but it’s, it’s sort of artificially limiting your pool like the best series A firms don’t just look at the companies in your portfolio, they look at every good firms, right companies do. So if you’re putting $1 into, you know, pro rata a company, that dollar has to compete with every other investment opportunity you have, if you put $1, at seed, and then and then separately, if you put $1, at seed for every $2, and reserve at the A, what you’re basically saying is you’re a series a fund, even though you’re marketing yourself as a seed fund, and then most venture funds don’t know what the returns on their reserves are, but it’s often worse than their first check. And so the question is, why did they put more into reserves than the first check? Why should they I don’t think that they should, sometimes it’s because they think they truly have an advantage. But deep down, I think it’s because they fit, it fits their model of what they think it means to be a VC, what we think is that or what we’ve seen in last couple years, that price often gets beat up faster than the risk has gone down. And so we tend to put much more upfront, because that valuation is just just been crazy. And we don’t want to limit the sort of following opportunities just to our portfolio. That said, the, the flip side of this is if you have differentiated insight into your portfolio, don’t just do the pro rata really double down. And so the that’s sort of my my conclusion is don’t follow them blindly. Because every following dollar competes with every other company that could be invested in. And if you identify something in your in your portfolio, don’t just don’t just do the product really double and triple down, you know, beyond. And so that’s how we think about it internally. Yeah, it’s

Nick Moran 26:40
like a precede or a seed fund, that the average valuation they pay after follow ons is, you know, 30 million plus, your know what you no longer look like a seed fund on paper. And we had a good chat with Eric Paley of Founder Collective probably a few years ago now on on that subject, sort of a classic episode, I’d encourage folks to go check that out, if you want to go deeper down that rabbit hole, but But yeah, that the following checks are not going to produce, you know, the outcomes of the early checks. I mean, the multiples just aren’t going to be the same. And I’ve I’ve had analysts from I’m in Chicago, of course, from Northwestern in Chicago, run all sorts of Monte Carlo scenarios on this. And the answer is always put the money in upfront if you can get the allocation. So it’s kind of kind of an interesting exercise. Eric, you know, what, what do you think the role is of a precede firm?

Erik Torenberg 27:31
Yeah, I got this analogy from Ali Ahmed, who, at COVID is really smart. precede is about proving customer value, more so than revenue. And so the analogy you gave me is, consider a restaurant, that KPI to track is not whether customers ate and paid, it’s whether they finished their plates, took some food home, and then came back again, right. And so started to proceed or trying to prove customer value. So they have some idea of what our LTV is long term value, lifetime value. And so don’t spend money acquiring customers before you know how valuable those customers are to you. If your customer is worth 100k to you, you can hire a sales team. If they’re worth 2k, you need to do marketing and ad campaigns. And so seed funds expect these businesses to already be growing, but without a hypothesis an LTV is so you can’t know how to best acquire customer. And so I think that that’s what precede firms are set to do is is help startups prove and figure out their customer value so that they can earn the right to go raise a seed round and get more customers. And how do

Nick Moran 28:31
you help the founders prove lifetime value and customer value? Are there exercises you take them through or their knowledge base? Or is it just you know, coaching and support?

Erik Torenberg 28:42
The biggest thing we tried to do is introduce them to customers. So they can continue to do it. And so we spent a lot of time with the companies are luminaries represented the companies or network leaders represent really building that that customer network such that we can make warm introductions to to our companies.

Nick Moran 28:59
If there’s a weakness in the village model, what is it?

Erik Torenberg 29:02
I think, you know, we were trying to get 5% upfront the weakness of the village model is that we’re never going to be able to spend as much time with an individual company, as you know, as a firm that has, you know, 15 or 20 companies in their portfolio. And so, sometimes we lead sometimes we co lead but if you really want someone who’s going to talk to you every day, and you know is you know homebrewer you know, what are these other firms are the firm for you. Now, we’d like to partner with a lot of those, we think after one sort of really institutional lead who who takes you know, Otter responsibility in every single way. There’s sort of diminishing returns to having multiple of those and a lot of companies don’t even want that, like they’d prefer the founder fun model of, hey, give me money when I need it. You know, give me a good brand. Introduce me your network, but let me build a business. You know, don’t don’t get in my way. Don’t try to I’m sort of, you know, pretend you’re operating the business because you’re a founder. And that’s your that’s your instinct. But, but that’s a potential weakness is for companies really want that hand holding and deep coaching. You won’t get it with village alone. But that’s why we like to partner with with those, those people in our sort of 5% allocation target. lets us do that usually.

Nick Moran 30:21
Eric, part of your your model is to increase the amount of total founders and total investors. I mean, it’s pretty clear from the the networks that you’re building and sort of the the focus on company creation. What do you say to those that are arguing? You know, there’s too much capital in the market already. There’s too much company formation by those that shouldn’t be starting companies.

Erik Torenberg 30:44
Yeah. The I say that, who are they to say, you know, I think it’s very convenient. I think the people who often say that our founders who are looking to hire people who are frustrated that everyone they want to hire who wants to start a company, and then, you know, venture capitalists who, you know, why do they want more competition into the market? The there’s this idea called tramps law, which is that the idea that the single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years. We produce around 33 unicorns a year, we need about 100 unicorns to maintain post World War Two growth rates. And so the only way I know to do that is to have you know, is for more capital, more investors and more founders. And even if it’s the same amount of capital, it’s what we’re talking about earlier about decentralizing venture, it’s distributed into into more hands. And so, village global is focused on getting more investors by giving dozens of investors capital to invest on our behalf, and really just getting numbers on the board for these people so that they can build a track record, especially with how the venture so inefficient, they got to start early. And we’ll get to how to break into Vc, Vc later, on the founder side, sort of datafied some of the bottlenecks we feel are as you having a co founder, having the right idea, having a community of other founders, healthcare, immigration stipend, and so the on deck founder fellowship has tried to systematically tackle all of those bottlenecks. And so, but then there’s also this cultural, you know, sort of ethos that people should go on and build companies that it doesn’t have start companies that especially early in their career, if they want to, it doesn’t have as much risk, I sort of separate between job risk and career risk job risk is the risk that your job might not exist in two years career risk is the risk that something will be a negative on your resume, and I have a negative blemish on your resume. And I think starting a company just like I did with raptor FEM sort of is a badge of honor, even if it doesn’t work out, you learn so much you build a network, it’s the fastest way to learn. And I think that helped Ryan Hoover, you know, bring me on as a founding team member is just the ability to handle ambiguity, the ability to be entrepreneurial as a as an employee. And so these are some of the things I think we need to get better at as it as an ecosystem to help get more investors and more founders. But But first we need to, we need to believe in it, we need, we need to want to do it. And it might be you know, it might cost you personally if you’re a relatively if you’re a founder, or you’re a venture capitalist, but you have to think it’s better for the ecosystem.

Nick Moran 33:19
It’s funny to think how, when I was young, how much emphasis I’d put on the, you know, the fear of risk of failure and the way that other people would see that. And, as you mentioned, the blemish on the resume. And I’m older, I just realized how faulty that logic was, like, if you get out there, and you do something really good, even if it doesn’t work out, the network’s you build the connections you build, you know, if you really show people signal and effort and quality and everything else, then the opportunities within that passion space, you know, become limitless. And yeah, it’s just it’s it’s disappointing to think about how many people don’t do it because they’re worried about, you know, what other what other what other folks might think. And

Erik Torenberg 34:00
you have to realize, when people have to realize that they’re there, people get known for their with their wins, not their losses. So Reed Hoffman started social net, which is a social service, I think, was dating site, actually. So social network totally failed. Well before Facebook and MySpace, and nobody remembers it. Nobody knows it. Marc Andreessen started naming this well, after Netscape and his other success, a lot of clouds cetera. And it was it was, I think it was social network for dogs, or it was another social network. Nobody knows it. And so, you know, we have long careers, you and I sort advises taking asymmetric risks, risks that if you, if they don’t work out, at least you’ll learn this sort of thought or product. You’ll learn a ton, you’ll build a network, it’ll be one of the most valuable things you could do just for your own education. And if it does work out, well, you have some meaningful, meaningful, meaningful upside of that.

Nick Moran 34:51
Love it asymmetric risk. Eric, what do you think the future holds for venture?

Erik Torenberg 34:58
Yeah, I think we’re gonna continue to see decentralization of venture across the board. And we’re talking about more, you know, more capital getting in the hands of more individual investors. But I also think more people on cap tables, you know, Cap cap tables, now, you know dozens of people on them, but soon they’ll have hundreds or maybe 1000s and will truly, truly be able to unbundle value add in capital in a meaningful way. I think it’ll be much more fun managers, I think rolling funds will enable 1000s of people to raise money directly at all these creators, content creators who have loyal audiences, and in business and technology that sort of make money on substack, or Patreon, I think they’ll be able to start rolling funds, I think that’s a new business for creator, that’s really fascinating. And then broadly, I think venture will will cease to be only a craft a game of craftsmen. And just like the industries they invest in, they’ll be revolutionized by software, and by people who build products and platforms and, and network effects businesses. And then also, I think venture will sort of renew its place as solving for technical risk, I think, you know, trying to solve really hard problems, instead of MBAs running spreadsheets, trying to figure out CAC to LTV. They’re funding companies trying to be funny companies trying to cure cancer, develop flying cars, extend life, get us to the moon, I think those are the outsize bets that equity is uniquely designed to fund versus alternative, you know, sort of investment vehicles, or financial instruments. And I think we’ll look back at sort of 2019 2020 and say, Wow, I can’t believe founder sold 50% of the companies before IPO to pay for Facebook and Google ads. And so those are, those are some of my predictions.

Nick Moran 36:40
So glad that I found my way from private equity to venture, looking at spreadsheets just doesn’t quite compare with the things that are upcoming, and and going on right now. In our industry. Eric, you mentioned earlier, you know, young folks breaking into Vc, do you have any advice for those folks?

Erik Torenberg 36:58
Yeah, so So first is is confirm you want to be a Vc, Vc is sort of a become a fairly high, you know, relatively high status thing, or the thing that it’s a new investment banking, a lot of people want to get to it and confirm you want to get to it for the right reasons. If you if you want to be a founder, eventually, you don’t need to be a VC. So some people think that, it’s sometimes it’s probably it might be harder, because you get a little too comfortable, or you’re a little too, sort of cynical. And similarly, if you want to be a Vc, Vc, you don’t need to start a company. You know, it’s helpful if you if you want to do it, but you know, there’s nothing like getting better at the thing than then doing the thing itself. So you know, if your hands on, you know, want to have a massive, we want to micromanage or have a massive control over your destiny, you always have that more with being a founder. But if you’re more intellectual than that hands on, or like having a breadth of activity, or then the BBC could be great. So it’s confirming you want to do it first, then confirming what kind of VC you want to be. I mean, Sam Altman is different than Mike Maples, who’s different than Sarah tabelle, who’s different than, you know, being a later stage VC and the questions there, how much of it is you enjoy operating, you know, building a product, you know, running a firm versus the actual craft of, of investing. And then at what stage, if you’re more, if you’re much more people driven and market driven, you want to go earlier stage, and vice versa. And then it’s, you know, how deep on each individual company do you want to go, if you want to go pretty deep, well, then you want to have a more concentrated portfolio, if you want to be more hands off, or more excited about building the product, or the firm or company building, then adventure, then maybe you want to have a more diversified portfolio. And then, in terms of getting into it, one thing is just trying to get numbers on the board as quick as possible, and not not, you know, sort of going to Vegas, and just, you know, just sort of as if it’s a gambling casino, but like we were talking about, it does take seven to 10 years to build a track record. So you got to start investing early. And whether it’s your own capital, if you’re fortunate enough to do it, or whether it’s, it’s, you know, finding a scout position. And the way to find a scout positioning, by the way is just too as add value to venture capitalists, and then just ask them, you know, could I be a scout or what we need to be true to be a scout, the way I did it when I was at Product Hunt, was I started sending deals to these firms, and they would do some of them. And at one point, they were like, hey, it’s just more efficient if we give you capital instead of us, be the US be the middleman and they did it to sort of secure my allegiance to them. So that’s one way to think about just get get numbers on the board. I think investing in your friends especially if you have friends building you know a technology companies is a good strategy to minimize regret, but also because you have special insight into them. Except of course you’re you’re not so smart friends be their advisor. My line editor Lastly, I think you have to think about why is your Capital not a commodity, you know, what, why are you seeing deals or getting deals that that others can’t? And this is sort of the question I asked myself at, at rapid when I was doing rap defense and setting deals and, and trying to get into the game and wasn’t until a product that I really realized, Oh, this is why you need to help startups with a core problem they have. And so whether it’s, you know, customers, whether it’s hiring, whether it’s raising money, whether it’s some core expertise, you know, the full ratchet, you know, Nick, you have this asset that gives you access to a bunch of fascinating venture capitalists, you have evidence of a big network, you could certainly help founders, you know, raise their their round when it when it’s time to do so. And so that’s an example of an asset. And people need to think more strategically about networks, that sort of one thing to have a big network, it’s another thing to sort of be strategically networked, you know, you know, all the people in say, trucking and that your expertise makes you the go to person in that. And it’s another thing to sort of, have created communities of these networks, such that people that they have sort of loops of their own sort of started the key conference, or fellowship, or podcast or group that brings these people together and continues to bring them together over time, compounding your sort of legibility as a key expert, and Keynote. So I would think about how can you build one of those things? What’s sort of easy for you, but hard for others? And how can you turn that into a compounding asset, whether it’s any one of the examples we we just mentioned,

Nick Moran 41:21
it’s really good advice. So we’ve had a lot of people on the show over the years with a lot of different venture models. And the point didn’t really sink in, to me, the difference in the disparity and styles and approach until, you know, we hired two new folks on the new stack team this year. And they do a lot of calls with other associates and analysts and principals at at other venture firms, and debriefing with them, and learning how different everyone’s job is, and how different sort of the quality of their experiences. It just really hit home. And I guess, you know, if the goal for young people is just to get into Vc, getting a logo, I guess, is an advantage. But I would probably challenge a lot of the young folks to think hard about what sort of culture you’re going to fit into what the existing people at the firm are saying about, you know, the the culture and the approach and the style and finding the style that that is a really good fit.

Erik Torenberg 42:15
Yeah, I totally, and I think it’s easy, it’s much easier for people to go it alone right now. Rolling funds is, is new, but you could start a 500k Rolling fund, you could start a million rolling fund, you know, Chris, aka spawn, first one was super small. If you want to go your own way, if you want an apprenticeship, you know, learn from some of the best in the business at Bessemer. Or Greylock or whoever, that that’s a different path. It’s an awesome path, especially if you want to do series A Series B craftsman craftsman investing one other example I like to and not just talking points, but also Scout programs like like village global. One example of a person who’s really great example this is Turner Novak. And it would he proved is that even if you can’t write checks, do fantasy venture capital, you know, write down what you would what you would invest in and why. And, you know, he found a company that we also found dark store. He wrote about it. He said this was his thesis, it was at the time that they were raising the receipt company. And that’s just a great way to to sort of build a build a reputation without having to put capital online if you can’t, so I think way more people should should do that. What do you have to what do they have to lose 100%

Nick Moran 43:26
There was a founder I met with about three years ago, and he had been doing this fantasy style and blogging about it for years. And I looked through his potential portfolio. And it looks really impressive. So it didn’t end up being a fit for investment. But I certainly thought about hiring him if he chose to go a different way. Eric, what resource would you have you found valuable that you’d recommend to listeners?

Erik Torenberg 43:49
One thing I’ve found valuable is anytime I’m interviewing somebody, or founder or a potential hire, I will always ask them to Rockstar. One thing I found valuable whenever interviewing a prospective founder or prospective hire is seeing if they’ve ever done podcast interviews before. It’s such a great way to get to know people. And on the flip side, I recommend that companies create internal podcasts about what they’re about who they are. And so I recommend people to and people who are looking to sell themselves create great podcasts, personal podcasts, just here’s my philosophy. Here’s what I’m about. I think just there’s something about the audio medium. That’s such a great way for people to give context on each other in a way that that writing can’t. So I recommend listening to podcasts behind people you admire or people you’re looking to get to know. And I recommend creating them as well.

Nick Moran 44:42
It’s such a good insight. There was a point probably four or five years ago, where the fastest growing and most active syndicates on AngelList. Were three podcasters it was Tim Ferriss, Calacanis, and then us or maybe three of the top five and I had this epiphany at that point. There is something about this audio medium that reaches through to people in the way that the written word does not. I

Erik Torenberg 45:05
mean, Nick, this is the first time we’re ever talking, but I feel like I know you for years. I mean, just just listen to the full ratchet. So it’s and people feel similarly listen to my podcast today, it’s very powerful medium. Yeah,

Nick Moran 45:17
check it out venture stories, that that will be the resource plug that I give, because you’re probably too humble to do it yourself. Eric, what do you know, you need to get better at

Erik Torenberg 45:26
when you when you start out as an as an investor, often your your, your, your people driven, especially early on, especially you’re an angel, you’re just getting into the game. And that’s perhaps how you should play it. But as you sort of rise up within the ranks, and you start writing bigger checks, and you start doing bigger funds, and, you know, you start wanting more ownership, you you also have to be a market investor. And you also have to be a market driven investor and also have to be an investor of record. And so it’s one thing to just, you know, keep building assets such that you can get a 250 K check in or 500k check in and make people make room for you. It’s a total another thing for people to be say no, Eric or Ben or, and is going to be the lead investor in my company. And so I think that being able to develop the skill sets that some of these people have been doing it for for a decade, plus, whether it’s the core expertise in certain certain markets or core expertise in certain, you know, company building fundamentals is a is something I need to get better at over the over the next decade plus is sort of ventures sort of like a taekwondo or something, you know, that’s gonna sound cliche or lame, but in the sense that it’s this craft that you just endlessly need to keep improving, and need to keep showing up every day to get better at

Nick Moran 46:43
so true. Eric, what’s the best way for listeners to connect with you?

Erik Torenberg 46:49
My DMS are open. So I’m most active on Twitter, both publicly and privately. I tried to get to DMS can’t get to all of them. But certainly publicly if you, you know, reach out to me. I’ll, I’ll see. And I’ll get back to you.

Nick Moran 47:02
Last question of the day here. Does Michigan play football this year?

Erik Torenberg 47:07
I don’t know. I don’t know. It’s funny. I’ve never been a huge football guy. My parents were immigrants and we didn’t we never watched it growing up. But I did. I was a manager briefly for the basketball team when I wanted to be a coach. And Michigan basketball is amazing. And it’s been incredible to see Tim Hardaway Jr. and Trey Burke and Karis, levert and all these other players. Just have awesome careers in the NBA and in playoffs, and, and the NBA Playoffs is better than ever. I’m glued glued to the screen watching it right now.

Nick Moran 47:39
Well, good. Well, I’ll keep that in mind for when I’m ready to talk smack when my Hoosiers play your Wolverines?

Erik Torenberg 47:46
Yeah, I look forward to it. That’s a great, great, great team as well. Awesome.

Nick Moran 47:50
Well, this is a huge pleasure. I’ve been a big fan of yours for a long time, been following you on Twitter, and always enjoy your insights and your input. Of course, the podcast is one of the best in the business. I’ve recently heard from a very young person and venture that it’s, it’s his favorite even more so than TFR. So I gotta give it a lot of credit. And thanks so much for spending the time here with us today. Nick, it’s

Erik Torenberg 48:13
been a pleasure.

Speaker 3 48:20
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same accomplishment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening