Aug 29, 2016 · 16 minutes

Last week, True Ventures announced the close of its fifth fund, some $310 million. For a firm that prides itself on getting in companies at the seed level, that’s a hefty amount of capital. But it’s nothing compared to mega-funds.

True is an interesting firm to watch for a few reasons. For one thing it’s a newer firm, founded by all ex-entrepreneurs who view True as their next startup and approach the business differently from the latest generation of partners in of a 50 year old firm that has a cozy track record to rest on. Like other recent upstart venture firms, the partners think of entrepreneurs as customers and their money as a product, versus a typical “services” business approach.

My biggest question mark about True has always been that the firm allows partners to also run companies. True has argued an investor who is still in the game has all the advantages of taking backing from someone who has been there… and their market knowledge and empathy isn’t dated.

Several VCs have tried this FOMO strategy out, but traditionally those with the best track record are all-in on one job or another. Indeed, for all the talk of how great founders-turned-VCs are many of the best have never founded a company: Fred Wilson, David Sze, John Doerr, Mike Moritz, Jim Breyer just to name a few.

But you have to give True points for discipline in an era where fund sizes keep increasing. True’s first fund raised in 2005 was just $165 million, but since then they’ve mostly been close to the $300 million range… intentionally. It’s borderline religious.  

I reached out to True’s Jon Callaghan last week for an in depth conversation about True’s strategy, his competition, and some of True’s more high-profile investments-- both the hits like Fitbit and the staggering, sudden implosions like GigaOm.

The following are edited excerpts of the conversation.

Jon Callaghan: We named the fund “True” because of alignment; we want to be aligned with our entrepreneurs  and our [limited partners, or investors in a venture fund]. Small funds do that structurally. The reason is simple. The strategy isn’t dictated by fund size.

We are just normal entrepreneurs. In a startup you think about strategy first and then capital. That doesn’t always happen in venture capital. Sometimes those two can be real different. Sometimes venture firms raise a huge fund and now they suddenly have a different strategy.

Our strategy is completely the same. We never thought that more capital was a good thing. What the industry needs is more venture, more risk, more creativity. It doesn’t need more capital particularly at an early stage.

Also, smaller funds aren’t motivated by income from fees. We are motivated by our carry. We make money after our entrepreneurs win and after our LPs win.

Sarah Lacy: Ok, but with all due respect, I’ve covered this industry since the late 1990s, and everyone says that. Why is it that everyone says exactly what you just said and yet fund sizes always creep up in good times? Early stage firms -- even seed funds-- are raising larger and larger funds in order to invest in later rounds and keep their pro-rata. What used to be called “early stage” firms gave way to seed funds, and now seed funds are so big we have “pre-seed” as a category.

JC: Well, it’s a bit of human nature. I do think the industry is changing and more opportunities are opening up. Some have strategic opportunities, and want to keep funding things, and I think that makes sense. We did that with our “select fund,” [which allows True to invest in existing portfolio companies in later rounds.]

But there’s a problem with creeping fund sizes.

I’d say, judge us and others by our actions and not by words. You see other firms raise bigger funds and then change their strategy. It’s the difference between entrepreneurs and professional money managers.

It’s tough the more people you have around a table. Venture capital firms fall into this trap of more, more, more. One of the things I’m really proud of is how we built this business like entrepreneurs. We continue to asses our product. We have a customer that is the early stage entrepreneur. What does that customer need? It’s not the same thing a C round or D round customer needs, and it’s not the same thing as what an incubator needs. Those are great products in the marketplace, but we don’t offer them. We have made sure we are the best at what we offer.

Then you see the strategy take shape and more people want to invest and you think, “Is a little more good?” Sure, a little. But a lot more is not good. Because of that human nature, it can hurt the product strategy.

When I became the chair of the [National Venture Capital Association] last year, I did so because I really wanted to push venture as an industry. To think about innovation and creativity in our industry, with a customer in mind just like a business.

This is where risk needs to happen in the economy. Our fund size enables us to maximize our investment risk into new quadrants, funding big ideas and new markets.

SL: What does that mean? Because a lot of investors would say a larger fund size allow them to take more risks, not a smaller, more disciplined one.

JC: With a $300 million fund, the average investment size-- since the beginning of the fund-- has been in the $1 million to $3 million range. We like investing with founders and alongside angels on day one as they start the company. That means one half to 1% of the fund is at risk with any early stage deal.

When we designed the firm, we had to acknowledge the inherent biases in this industry, and one of those is “loss aversion” bias. When we write a $5 million to $10 million check on day one, and then follow up with another $5 million to $10 million check... in our view, that’s too much money against the opportunity at a time when you know the least and the founders know the least.

We have to be able to write a check we can lose if we are going to invest that early. Half of one percent can’t hurt the fund. So if we have no loss aversion, we don’t have to think about whether we make money off that check. Then it’s all about what we can learn.

There are things we are doing in digital biology and neuroscience and virtual reality. We are chasing something big, contrarian, or different. That’s exactly what early stage founders are doing. It’s back to alignment.

The downside risk is pretty low on that first check. When the founder wakes up and says “You know what? This is not happening.” We can say “Great, how can we help? Would you like to pivot? Can we move into a different space? Should we wind it down or sell or put more capital in?”

We have a big enough fund, we can afford to go another round or two before it becomes in any way shape or form material. If they have success, we can put in another $10 million, $15 million or $20 million.

People forget, Fitbit was a year late with its first tracker. We invested more capital along the way in between rounds. We start small, but we don’t think small. It’s all about aligning with the founders and removing that massively dangerous loss aversion investing bias.

When you have so much money in that you have to make a company work, it’s different. Creativity and fear don’t work well together.

We typically invest in founders over their entire career. We are interested in everything they do. We think of founders like customers, and we like lifelong returning customers just like Starbucks or Blue Bottle. We’ve had almost 20 repeat founders in the portfolio.

SL: Ok, but to be devil’s advocate, if you have that little of a stake in each deal, do you have enough skin in the game to really care about each company? I know people always say “great companies will always get funded” but sometimes $1 million seed round isn’t enough to know if a company is great. Things always take longer and are more expensive than expected, particularly with a first-time founder.

JC: First of all, the fund is big enough that we can invest an extra $500,000 or $1 million to get to that point. That is easy for us. We have muscle. The fund is structurally aligned to keep going. As to whether or not we have enough of a stake, we are almost always the largest shareholder at that stage. We are always in the 20% range, because we get in early.

We are not gambling. We don’t spray and pray. We are extremely focused on the things we do. We have an immense team that is fully committed to everything we do.

What is the average check size a founder needs to raise at a seed round? Maybe it’s $2 million. We can cobble together a lot of angel funds, most of whom have a tenth of what we have in this fund, they are in the $30 million fund-range. Founders can chose a syndicate with a lot of smaller players or they can raise 70%-80% of the round from us and still include the best angels and have a really substantial capital partner for the next stage of the business.

All the great founders have lots of choices.  

SL: A lot of people associate Fitbit as your big win. What are others?

JC: We’ve had about 45 exits. Goodreads would be one. So many people didn’t understand that one. We very much understood it and seed funded Otis [Chandler] right after he started the business. He only needed $100,000 initially. That was super easy. Definitely every time he ever thought about raising money, we were in. We wanted to put in another $10 million before the Amazon acquisition and we were able to do that. We started small, but we weren’t thinking small.

SL: One of the things I’ve always been concerned about with your model is having partners who are at True but also building their own companies at the same time. A lot of people try to make that work, but it’s had a mixed track record. You have several of them: Toni Schneider at WordPress; Tony Conrad at; Om Malik when he was doing GigaOm. Was that intentional as part of the model from the beginning? And has it worked?

JC: It was totally intentional. We are doing more of it. We’ve added in other people to the firm who have that role. I’ve started a lot of companies and I’ve been in the venture business at least ten years. It’s the same with most venture capitalists at a senior level. “Oh yeah, when I started….” is great, but it’s not current. I’m not in the market today. I wasn’t in a business development deal yesterday.

SL: Maybe I’m showing my age here, but two of the companies that I most associate with True are GigaOm and Wordpress. The former was just a shocking implosion, and left a lot of people wondering where the board was. The latter has had a massive impact on the Web, but has been around a long time without an exit, and some have wondered if that time has passed it by. What do you make of both those bets right now?

JC: [On the topic of Wordpress] great companies take a really long time to build. That’s one of the things we forget about the venture capital business. In general, to get it right, takes a long time. It not only takes tenacity, but having your own vision and not getting caught up in the cycles. Their last round was valued at over $1 billion and we’re thrilled to be investors. [Wordpress founder] Matt Mullenweg never did half of the things that people said would be valuable to Wordpress over the years. He’s running the long play and building something very meaningful. Is it as buzzy or gossipy as other things? I don’t know and I don’t really care. Those interim valuations are not real. They are called “unrealized valuations” for a reason.

I am thrilled because most of those structures are going to blow up most of those companies. Matt knows where he’s going with Wordpress and it’s a long game. We first invested in 2005; we identified Matt when he was 19, I think, as someone we wanted to be in business with for his entire career.

GigaOm was absolutely brutal. It was tough. We absolutely loved the company. We-- all of us, but Om, of course-- loved the business and love building smart journalism for this industry. I realize I am singing to the choir here, but you know how hard that is to do. The revenue model just didn’t support the size company we had. We scaled it erroneously into what we thought would be a larger opportunity in research. We got upside down.

We invested in four round, starting with $250,000 when we first met with Om in a conference room all the way through the end. It was a big loss for us, and emotionally really, really hard to give up. But more money wasn’t going to solve the problem. It turned out there wasn’t a market opportunity for what we wanted to build. The blog didn’t support the rest of the business and the research opportunity didn’t exist.

It was super sad. We take a lot of different kinds of risk. There is market risk. Or product risk. Sometimes we jump into markets that we don’t know exist. Sometimes we fund things before they have a product. Sometimes the risk is just timing… when will a market emerge? So when you get any one of those wrong, it’s failure.

But that’s part of what we are supposed to do as an industry. We can’t save a company when a market doesn’t exist. Capital doesn’t solve problems. You can have all the money in the world, but that couldn’t have created a research market for GigaOm. There are certain things you can fix in our industry but a lot of things you can’t.

When it’s not there, it’s not there.

SL: What do you make of spaces like hardware or Internet of Things or wearables? These are all areas where there was a lot of excitement-- and you guys in particular lead early on-- but investors have soured on them lately. A lot of this came out of the enthusiasm with Kickstarter and crowdfunding, but a lot of VCs who backed huge Kickstarter projects didn’t wind up making much money. Do you still believe in categories like these? Is it still just too early?

JC: It’s still way too early, and we still think these are phenomenal categories. Our story on hardware has been phenomenal. We have invested $100 million in 40 companies, including Peloton, Ring, and Fitbit.

SL: I’m sitting ten feet away from my new Peloton right now. I feel like I am cheating on SoulCycle, but I needed something more flexible. I love it.

JC: They are on fire. They’ve created this massive movement. A lot of the reason we invested there had to do with our understanding of software and media and hardware and how it can all work together.

I don’t want to be critical of other investors, but just because something can be built doesn’t mean it should.

Ring is another one you should pay attention to. Not just because it builds a doorbell, but because it’s basically a security system for a neighborhood. We catch a criminal a day. Once you install it, you can’t ever think of living without it. It’s because of the software and the experience as much as the hardware.

Hardware is really, really hard for the industry to get it right. I’ve never been a particular fan of the Kickstarter style of building companies. I think it’s flawed structurally. A techy early adopter customer doesn’t indicate you’ll have a strong customer base. We really haven’t done any of those.

SL: It seems like one hot category of late that you guys didn’t bet heavily on was the whole on demand economy. Did you make many bets there?

JC: Not really. We definitely missed a couple, but largely our concerns were around economics and scale. I’m not arguing about Uber. But it’s hard to see how a lot of those food and delivery and others ever get to any significant margins and scale beyond digitati markets. Having something that works in San Francisco doesn’t necessarily mean it will scale.

SL: Ok, last question. Until this year, you were the head of the National Venture Capital Association. But “venture capital” as we talk about it includes a lot of things that aren’t traditional venture capital. People keep talking derisively about the “tourists” in this industry, but a lot of them don’t seem to be going away. Is the “venture capital” business as we know it a flawed concept? Is it a misnomer?

JC: I think the industry is in a state of transition. I’m hopeful about it. There are all kinds of new innovations. Pre-seed, you mentioned is a thing. There are different strategies being built. There are people building new products that fit into these gaps. There are recent successes like Andreessen Horowitz and Foundry and Spark, and new platforms that have done really well at reinventing core venture capital, like AngelList. Then there are the handful of phenomenal brands that just execute.

But other than that, there’s an enormous part of the industry that’s being left behind. They are in a big identity crisis. You have seen lately a number of firms who are just momentum investors, just piling money into unicorns. I don’t think that’s going to end well. That’s not the role of venture capital. Maybe hedge funds or mutual funds.

I don’t think venture capital is flawed as a concept, but it is in a state of flux. There are a lot of firms who need to hone their products and strategies. They need to understand they have a customer. And that’s at odds with just raising as big of a fund as you can.