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Reid Hoffman's $30M bet: Send partners, not cash, to startups

197 points by e2e4 7y ago

rexreed 7y ago
This sounds like an acknowledgment of defeat of the "just throw a ton of cash at it" SoftBank approach that is proving to really be a bust. If I'm not mistaken A18Z also has that same philosophy of find the winner-that-you-want and then throw-all-the-money-at-it-until-it-wins approach. Then dump it on the market and hope it can stand on its own. Whatever happened to invest capital in good founders with good products in good markets and let the founders do their thing, with investors supporting them? Or has that venture approach which seems to have worked from the 1970s through the 1990s (and maybe early 2000s) stopped working well enough? The 1970s-early 2000s produced some real companies providing real value and are still around for the long haul. I'm not so sure about the post-recession VC-inflated startups that seem to be more about big money and big egos than big value.
vinay_ys 7y ago
Worst thing that can happen in a startup is trust issues affecting focus and ability to get stuff done. I see many conflicts that need to be addressed for this model to succeed. By having their people directly within the organization (potentially at very senior operational levels), there is inherent information asymmetry that favors SEV over founders and other VCs. Founders will have to figure out how they will protect themselves from SEV insiders screwing them over other startups in SEV portfolio. I'm very curious to see what would be SEV's pitch to the talented people they hire to deploy in these startups would be and how would the three party contract between this talent, SEV and startup would be setup.
ghshephard 7y ago
The best role that VCs have here is in introducing the startup to a network of domain experts that have very specialized skills that a startup needs, but that would be very difficult to find without good contacts. Then, ideally, the VC steps back and lets the startup negotiate their own deal with these domain experts. Doesn't have to be a VC though, back when telecom was a thing, rather than hiring our PBX installer directly, I was able to track down a third party-consultant who knew all the players in the valley (having been doing this sort of thing for 20 years), and we leaned on them to help us track down bids, sort out the competing offers, and do last-and-final negotiation at the table. Saved us around $150K on a PBX install over what our preferred vendor would have charged us. Another great experience was when foundation capital brought in our initial Facilities installer - they took care of everything - second hand furniture, installing new drywall (less than a day), server rooms (back when those were a thing), etc.. But, in both cases, the VCs contribution was in introducing us to great people, who were ready to work. This approach by Hoffman feels like the situation we had at Netscape, where we had a Business Server division, spun off from main HQ, but they were required to use our IT services, which installed systems/networks that made total sense for Netscape IT, but probably were overkill for a small scrappy startup. The incentives were in conflict.
say_it_as_it_is 7y ago
This idea worked out really well for Friendster
jimkri 7y ago
I actually interviewed at a company recently that brought in an Exec because the company had no direction and the founders were too inexperienced. (This is what the exec told me) It was really interesting to hear his perspective on the company and what needed to be done, compared to what others said during the interview. But from that experience one person will have a lot of trouble guiding a company if the other execs are not on board with what they are trying to do. I was going to join the company but was really worried about the inexperience of the other team members, but I really liked the guy that the VCs brought in.
alexfromapex 7y ago
Just like Russ Hannemann
ticmasta 7y ago
This seems like doubling down on the part of taking VC funding that most recipients are the most concerned with; losing control and direction. The post frames it as "having trouble guiding the company through growth" which is a real thing, but I have to ask, who's setting the goals in this model? It really seems like it could ultimately lead to more "successful" startups of the type a lot of us really don't want to see.
ticmasta 7y ago
Fitting old onion post: https://www.theonion.com/americas-homeless-want-a-hand-up-not-a-handout-vs-i-w-1819594266 https://www.theonion.com/americas-homeless-want-a-hand-up-no... Replace the Good Samaritan with Reid Hoffman and the homeless with startups
- commoner 7y ago
  Hilarious piece, but I don't think the analogy is a good fit. The Good Samaritan ("William Wolcott") is asking people to offer homeless folks money in exchange for labor, instead of giving cash handouts without anything in return. In contrast, Hoffman is offering "services" in exchange for equity. Hoffman is not offering founders any money, and since VCs are for-profit, Hoffman is not doing the founders a charitable favor. It's also a disservice to founders to compare their startups to the homeless ("Ed Schenk"), since most founders are very much willing to put in work to make their businesses successful.
roosterdawn 7y ago
At first blush, this looks like new lipstick on the old pig of the venture studio. The issue with venture studios is the same as with corporate "intrapreneurship" -- lower rewards and lower risks. Savvier founders will be more capable of either hiring the right talent and upselling equity, or having access to enough cash to hire the right talent outright. Consultants won't mind additional free leads, but good ones will do just fine without. So, the unit economics just don't work out as well for savvy founders or consultants, so you end up creating a market for lemons. The problem with this model is that consultants will want to be paid in liquid cash, companies will want to pay in illiquid equity, and someone would have to step into the middle and establish valuations and liquidity. This is the bigger problem with the increasing illiquidity associated with VC funded startups. Savvier would-be employees or consultants risk adjusting shares even further towards the direction of worthlessness and insisting on cash. With that said, perhaps the main silver lining I see here is of VCs playing a role in creating some kind of liquidity for shares. By establishing a three party transaction like this pegging exchange rates between hours of labor, shares and dollars, they're setting at least a stated valuation that allows companies to pay with either shares or cash to prospective employees and service providers, with the risk underwritten by the VC.
ChicagoDave 7y ago
I'm not sure how I feel about this. On the one hand, every startup needs an experienced mentor. In the past, my business attorney (M&A guy in Chicago) helped me with all of my entrepreneurial endeavors. On the other hand, startups need cash and the founder should really be enabled to execute their vision. Someone full-time that can exert pressure may dilute the original vision for their own ideas. As a founder, I really want to be in charge of strategy, any pivots, and all major decisions. I wouldn't turn this down out of hand, but I'm pretty sure I'd value funding more.
anthm1988 7y ago
Cynically, this sounds like a way to further concentrate the rewards at the top and ensure rank and file employees get nothing more than a salary.
azinman2 7y ago
very interesting. But they’ll still need cash to hire, pay rent, purchase equipment, buy advertising, pay for bandwidth, create hardware prototypes, etc etc. Is the idea you find the cash elsewhere? What happens if the partners don’t get along with the founders or the current roadmap? How much influence do they have? Can it be retracted if it goes poorly?
- cl42 7y ago
  I'm not here to defend the model (just posted my own comment supporting it), but just one note on the "getting along with founders". This is true for board members, early employees, etc. and I don't think their model makes this part any different. Opex for the VC fund, on the other hand, I'm not sure about.
cl42 7y ago
I really respect the attempt at trying something new here, but framing it against a traditional VC model might be a bit of a mistake (on the journalist's behalf?). I'd suggest thinking about this as an innovation on the venture studio model, or later-stage accelerator model (e.g., YC's Series A cohorts). I've spent the last few months toying with the idea of a venture studio and the economics are hard to swallow for some founders and for later-stage VCs... A model like this, where you get an operating, experienced serial entrepreneur to help you and kick your ass... I like that a lot. It's different and worth following, if nothing more.
- mike_d 7y ago
  > framing it against a traditional VC model might be a bit of a mistake Google Ventures for example has a similar capital services model. Once you took money, you had access to a pool of GV folks who could help you with design, finance, engineering, etc. Having this talent to tap in to helps you avoid spending early money on things that aren't worth a full FTE but need to be solved. The only thing new here is that they took out the writing of the check first.
- bjornsing 7y ago
  > I've spent the last few months toying with the idea of a venture studio Me too. :) > and the economics are hard to swallow for some founders and for later-stage VCs... Can you elaborate on that a bit? What model are you considering and what constraints do you see?
  - cl42 7y ago
    Sure, happy to. The concern I've had others raise + I agree with is that really great founders don't want to give up a portion of their founding equity to a venture studio, and "hired guns" won't be as good at this stage. I think if the venture studio founder has a really great track record (e.g., Max Levchin) or access to a lot of capital, then this might be different. If I were a Series A investor, I might take issue with the initial cap table being so diluted by a venture studio, but I' not a Series A investor. I'm being very pithy here-- happy to discuss at any point if you'd like.
deleted 7y ago
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bcrosby95 7y ago
I'm somewhat dubious about this. The sorts of technical decisions modern startups tend to make primarily make sense if you're looking at the company from an "eat the world" point of view. So if you squint hard enough at their decisions they look good from the POV of that you have barrels full of cash and the only way you're going to succeed is when you have thousands of people working for you so you may as well build for that case from the start. But if you take away those barrels full of cash those decisions no longer look good. Maybe they can offer technical advice on how not to do this and plan and build their product in waves to optimize each step in growing the company. But in my experience there is a huge lack of people that can accomplish this in the startup ecosystem nowadays.
- cortesoft 7y ago
  I am guessing these wouldn't be the only investors... the cash would come from some other investors.
AndrewKemendo 7y ago
I'm not suggesting this is why Hoffman et al are going this direction, but this is almost exactly what I would do if I felt that there was an epidemic of portfolio companies not being completely transparent about the state of their companies. This gives the an amazing amount of "insider information" that, ostensibly a VC would have but I have found in practice VCs don't have the ability to really get from the regular CEO/operator updates and growth boards.
- zentiggr 7y ago
  Ok, I don't have any startup experience, but this sounds an awful lot like either injecting a spy, or a commissar, depending on how much influence the person has on operations and strategy. If I were going to try to ramp up an idea, I'd be extremely wary of accepting someone that way, especially if they were expecting to assume any amount of control.
- otoburb 7y ago
  >>This gives the an amazing amount of "insider information" Couple this with a proof point that specialized teams like Latacora[1] are proving themselves out so they figure why not also get the inside scoop while turbo-charging their portfolio companies. [1] https://latacora.com/ https://latacora.com/
  - tptacek 7y ago
    I'm interested in this for the obvious reason that I co-founded Latacora but I'm not sure what you're saying. We don't invest in our client companies.
    - otoburb 7y ago
      I was referring to the idea of even more highly specialized VC/PE operating partners managing functions which were traditionally seen as irreplaceable. Latacora manages a startup's entire infosec function for a period of time allowing founders to focus on more important parts of their business. I don't believe anybody would have thought your model would be possible during a startup's early stages without being managed directy by a tech founder, but Latacora's sucsess invalidates this assumption. If infosec can be managed externally, why not other sacred cows like engineering, marketing or other key gaps where founders need help during their initial year(s)? I think Sweat Equity Ventures is going to explore this question more deeply with this model. I understand that Latacora doesn't invest in client companies -- that's where my analogy ended.
danbrooks 7y ago
That sounds a lot like working at a startup!
tempsy 7y ago
Seems like it’d only make sense if you had a hard time hiring senior people because of lack of brand and/or funding, but a startup would still need to raise money so how does that fit in with this? Wouldn’t you still raise a traditional round? And what would those investors think if you diluted your stock with something like this?
milofeynman 7y ago
I can't imagine any founder with a few years of experience with VC would want a VC mole in their day to day business. This might work with early startups who don't know any better. Also will other VCs invested in the same business benefit or lose out from a situation like this.
irjustin 7y ago
Finding good experienced, talent/knowledge is difficult, so I'm on board with the idea here. In place of cash seems backwards to me. Maybe if the companies that you invest into are great cash cows but need talent to accelerate? But if that was the case, you can usually afford talent. A medium injection of cash + talent can go incredibly far in setting up your investment for success.
brenden2 7y ago
Maybe I'm missing something here, but it sounds like they aren't putting any skin in the game. The VC will benefit from all of the upside while literally taking none of the risk. How could this possibly be good for entrepreneurs? If someone approached me with this idea to help my startup, I would promptly move that email to my junk folder and stay focused on building a great product. If someone wants to invest money, sure I'd be happy to take it, but the last thing I need is more "advice" from armchair experts.
- katzgrau 7y ago
  > If someone approached me with this idea to help my startup, I would promptly move that email to my junk folder and stay focused on building a great product I'd advise you to let them give you a quick pitch by email and see if it sounds reasonable. As a founder, you have so much to learn. Be wise with your time, but don't shut out potential ideas from someone who says they want to help you. It's not every day (or any day, in my experience) that something like that happens.
  - commoner 7y ago
    > someone who says they want to help you Why should a founder take a claim like that at face value? VCs are not charities, and their "potential ideas" are constructed with their own interests in mind. brenden2 has decided that this type of offer (giving away equity in exchange for services implemented by the VC's affiliates) is categorically unsuitable for his company. It's patronizing to assume that brenden2 is inexperienced for reaching this conclusion.
- clintonb 7y ago
  > The companies pay SEV in common stock shares, the same held by the startups' rank-and-file employees, and SEV's team, in turn, get paid salaries by the firm and also receive part of the firm's carry like a traditional venture model. The VC pays for employees. The company pays the VC in the form of stock. The risk to the VC is the stock they've received is worthless or worth less than the cash they have paid employees.
katzgrau 7y ago
I don't usually cling to the status quo, but I do believe that the CEO must have the ability to set the vision and get the "right people in the right seats." Every management book in the last decade pays homage to this idea put forward in Jim Collins' book Good to Great. I guess this model presumes that the right people will be supplied by the investor to fill predetermined seats. Does the CEO have a say in that? Is it possible to fill seats without the CEO in the decision making process? If they do have a say prior to investment, then why not raise capital and hire people of that caliber regardless? If the issue is that some founders with good ideas are simply clueless and a team that knows better must be built around them, it seems conflict between the CEO and the new team will be inevitable.
- echelon 7y ago
  When you're new to everything, how do you find the right people for those seats? How do you perform a proper search while wearing lots of other hats? I suppose it's a never-ending exhausting task?
  - staticautomatic 7y ago
    You fuck most of it up. Repeatedly. If you're lucky, you don't fuck it up so badly or in such a way that you can't recover from it.
  - AndrewKemendo 7y ago
    This assumes that the CEO is effectively incompetent. Startup CEO is an exhausting task, but it's not never ending that's why you recruit and hire. Top level (C suite, VP etc..) recruiting is one of the primary jobs of a CEO and being able to do that effectively is a core task. I think this really underscores the fact that VC's don't fundamentally care about the leadership abilities of their companies. They are investing in a growth curve around a product or series of products primarily, not strong leaders.
- taurath 7y ago
  How do you build trust in your own team when an investor installs or pushes people they have a long relationship with into your company? Where will loyalties lie?
victor9000 7y ago
So they wanna trade equity for a couple of bags of hot air? That hardly seems like a good trade-off.
jl2718 7y ago
Had a VC send me this a while ago. My feedback: these guys are all finance, operations, and management. No actual builders. It would be great to outsource these roles to keep control and save equity, but this seems like the opposite. It’s still a great deal for founders because of the connections that VC brings, but it’s likely a bad deal for the company, which is now run by people abstracted from the vision. For more info, see: “conjoined triangles of success”.
- boxcardavin 7y ago
  Moreover, the kind of builders you want as an early stage startup are almost certainly not the type who would be hired guns for this kind of VC.
- deleted 7y ago
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- varjag 7y ago
  Historically, there never was a shortage of people willing to tell other people what to do.
  - bjornsing 7y ago
    I can’t upvote this enough. I’m putting it on a teeshirt. :)
godzillabrennus 7y ago
http://Hf.cx http://Hf.cx hackers founders They pioneered this model.
altrum 7y ago
This is a fascinating concept, but I wonder how it can impact the overall culture of a startup. More and more, I’m inclined to believe that the initial group (say, first 10-15 employees, including the founder) are the most important. This, in turn, almost looks like a more specialized version of contractors. For those startups in the early incubation stage, I’m concerned this may actually hurt their chances of possibly—prolific development. If carried out properly, however, I think this has really great potential; cash can often be a double-edged sword that also limits creativity and innovation. An effective “mentor” in this sense, will be way more beneficial than straight, cold, cash
cheerioty 7y ago
This sounds like a very bad idea. I hardly believe any VC has any great builders just sitting around to jump on and off to the next thing. I'd also not feel trusted but more like watched all the time. I'm lucky that all the investors I had in the past always trusted my and the team's ability to build, grow and push things forward without suggesting putting their people in. I might be wrong, but it feels the only people that could think this is a great idea are coming from the venture side :) It just sounds very wrong to me tbh.
PragmaticPulp 7y ago
My experience with investor-provided talent has been very poor. Historically, the problem is that VCs tend to send "subject matter expert" type consultants who give advice. Startups need someone to do the work more than they need someone to give the advice. The VC-provided talent usually generated more work than they solved with questionable returns for the company. Unless Reid Hoffman has cracked the code of sending the right people to get work done, I'm suspicious.
- pmart123 7y ago
  I can see that. In my experience, it works to have a subject matter expect at as a consultant/mentor to a few young and hungry employees. Essentially, the expert can help lead a team through big technical decisions or when there is a roadblock. However, the expert likely doesn’t want to put in the hours or do the necessary grunt work.
- deleted 7y ago
  [deleted]
- alasdair_ 7y ago
  I could see VC-provided specialists, like a lawyer, CPA, perhaps also specific skills like a data scientist before a startup has enough cash to employ one full-time but I don’t see why this would be any better than the startup employing the contractor themselves with cash.
  - jjeaff 7y ago
    I can see a much better situation where the VC gives you cash so you can hire your own CPA and lawyer. We had a VC pull this garbage once. Although it wasn't for equity. They just offered it as a service "at cost". We dropped their $90/hr Manhatten based book keeper and $800/hr attorney just as quick as we could without ruffling too many feathers.
- enra 7y ago
  Also, I think VCs pick operational talent on "political" reasons, mainly people they have gotten to know somehow from previous companies they invested in or as founders. These people while might be good, do not necessarily have a good skillset or fit for your company.
jayd16 7y ago
This shifts allegiances in interesting ways. Key employees are no longer employees but contractors hired by the VC. As stated, the contractors are not startup employees but gain any research knowledge are on patents. Do these partners still have non-compete contracts with the start up or can they freely leave with IP? It seems like this system allows the VC to pull support easily. You can't force someone to continue to work for you. If the partners are time splitting how would you approach that situation? Can you fire them? Seems much more complex than cold, hard cash.
rdlecler1 7y ago
Most founders will have no interest in this. (1) 90% of VCs add negative or zero value. Okay maybe you have a part time employee but how much equity are you really going to give up for that? (2) Top founders don’t need you. They can attract their own talent at market rates and they don’t want someone running their business. (3) Startups need to pay their people.
ehead 7y ago
This is an interesting concept. Another thing that would be interesting is if recruiting firms started operating like this...
gt565k 7y ago
I can see this work very well. It's like a very hands on incubator where the VCs are basically providing human resources and are invested in getting the start-up off the ground and moving by providing exactly what the start-ups need. Instead of giving start-ups cash to hire, they provide the expertise as needed. Marketing gurus, tech gurus, generalists, etc... It can save money and time, especially if the VCs have good technical leaders that have lots of experience building products efficiently.
- reustle 7y ago
  Agreed, I think the model could work very well and look forward to seeing the results here. Essentially, why throw money at me as a founder and hope I spend it wisely, when you could instead lend me your vetted team members to help directly.
afinlayson 7y ago
This works really well, if it's partnered with cash. Like a competitive advantage of why you'd want to work with his VC company, but without money it's worthless.
rjsen 7y ago
How is this not just management consulting?
deleted 7y ago
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hobofan 7y ago
That doesn't sound too different to what some VCs already do. E.g. from what I heard about Rocket Internet from some of their portfolio company, they act in a very similar way. Yes, they also provide cash as part of the funding deal, but they will most likely place one C-level executive in your startup. They'll also happily provide you with more headcount than you probably need and if your numbers aren't where they are supposed to be, you are expected to buy consulting services from them, so in the end a good chunk of the funding amount flows back to them. That's why a lot of their companies are as soulless as they are.
CalChris 7y ago
I don't understand this. Sending a partner is sending someone who is fully committed to the VC and not fully committed to the startup. If the VC sends money, that money will be fully committed to the startup. VCs have entrepreneurs in residence, a bankable executive without an idea. Matching an EIR with a startup is midway between sending a partner and sending money. But still, this EIR isn't fully committed. They're committed to both the VC and the startup, two masters. This is just not a good fit at this time.
PopeDotNinja 7y ago
If you want cash, ask for advice. If you want advice, ask for cash.
drenginian 7y ago
This scheme disconnects the founders from responsibility for the outcomes. God the politics that would arise from this would be soul crushing. Imagine being in a company like this..., who is really the boss? Is the founder in charge, or is the line of reporting to the VC via the injected people? The sense I getfrom a scheme like this is that the VC knows best and the founders need the brains of the VC to succeed - that dynamic I think might sink the company. Imagine being a founder with someone injected by your investors constantly second guessing you and telling you how to do it right. Ugh....
semerda 7y ago
This assumes all problems are solved by throwing people at them. Isn’t this also one of the common reason why startups fizz out burning unnecessary capital too early? Grow grow grow at all expense. I see the value in having someone else help with recruiting et al but also see possible tension from burning unnecessary cash on headcount for the sake of growth too early. What I miss?
dclowd9901 7y ago
Wow, these CEOs and founders really actually do think they’re special. My guess? VC substituted startups are far less effective than ones backed with considerable funds. Why? With luck being equal, money is the real break.
- anthm1988 7y ago
  > Wow, these CEOs and founders really actually do think they’re special Do you not realize what site you're on?
t_mann 7y ago
Sounds a bit like the Silicon Valley version of McKinsey.
- 55555 7y ago
  how so? does McKinsey regularly get paid in equity for consulting services instead of cash?
zweep 7y ago
When I had a VC-backed company what I really wanted was something like this... where everything that was "commodity" would be delivered from the VC, who can negotiate better terms for it. Office space, internet, payroll services, accounting, recruiting, etc... all should come from a VC who can get it in bulk. Even one level deeper... if it's a consumer Web or enterprise SaaS startup... it could probably be all built on the same tech stack. Why not have the VC own 60% of the business and provide the tech infrastructure and have only the frontend and business logic implemented by the operating team?
- omneity 7y ago
  Every time I find myself involved in a startup producing a platform, I always wonder a very similar derivative idea: create an incubator (or a fund?) to kickstart small startups leveraging that platform. Previous such projects were a fast mobile app builder, an automation platform, and currently my latest project [0] is in a similar situation. In fact we're considering building a sister company that verticalizes the solution and builds it on top of the first one, as we had several very focused requests hinting at juicy industries that could benefit from something built on that platform, yet each of these use cases are pretty diverse. [0] https://monitoro.xyz https://monitoro.xyz
- anthm1988 7y ago
  Why not just hire founders as PMs and pair them with an engineering team then?
- lowdose 7y ago
  And risk it all for 40% with another founder? It's not that AWS has a special tier for VC's.
  - zweep 7y ago
    It would make the chance of success more than twice as high if done right.
decentralised 7y ago
One of the first examples of this "expertise-sharing" approach I can recall was from Toyota who sent some of their lean experts to help a NY charity run more efficiently. story: https://www.nytimes.com/2013/07/27/nyregion/in-lieu-of-money-toyota-donates-efficiency-to-new-york-charity.html https://www.nytimes.com/2013/07/27/nyregion/in-lieu-of-money...
sub7 7y ago
I personally know some of the Talent partners hired at this firm and they are A+ people with amazing candidate rolodexes.
yveys 7y ago
Smart/sweat capital usually turns into a bad deal.
HacklesRaised 7y ago
Being diluted by a round of funding is dispiriting!! But this!!
saadalem 7y ago
What is this $30M for ?
haakonhr 7y ago
Doesn't it sound a bit like private equity, but for startups and without skin in the game?
Ace__ 7y ago
Hello. The investor provided talent could be a good approach to provide more relevant and needed support. In reality on many occasions I have had to question what the hell is going on: 1. I have come across many of the talent, where what they lacked in talent was compensated by strength of personal connection. 2. People just sprouting some inspirational fluff, and whose attitude is I am here, listen to me, do as I say, don’t question, without even getting into the trenches. 3. Then they start talking about the sacrifice and hard-ship, when they have no real comprehension and haven’t walked that path. 4. As for getting paid in equity, that is between startup and whomever, although I personally don’t like it, and won’t do it. 5. You can’t come in and work with early stage startups and charge them what you charge more established startups, and certainly not what you charge VC or family offices. Drop your rates man, and come correct. There are enough leeches on, and vultures hovering around, startups and founders. Cheers, Ace.
ghc 7y ago
Example of how "co-founding" a company with a VC can be a successful model: https://www.thirdrockventures.com/ https://www.thirdrockventures.com/ The difference is Third Rock also sends tens of millions in cash, so...
ykevinator 7y ago
This is really insulting.
facethrowaway 7y ago
There’s a VC firm that already uses this model with their billion-dollar investments. It’s called Benchmark. Several of their former portfolio company founders can tell you all about how it’s worked out for them.
- drenginian 7y ago
  How about you tell us? How did it work out? You can’t allude to something juicy and say nothing.

197 points by e2e4 7y ago

This sounds like an acknowledgment of defeat of the "just throw a ton of cash at it" SoftBank approach that is proving to really be a bust. If I'm not mistaken A18Z also has that same philosophy of find the winner-that-you-want and then throw-all-the-money-at-it-until-it-wins approach. Then dump it on the market and hope it can stand on its own. Whatever happened to invest capital in good founders with good products in good markets and let the founders do their thing, with investors supporting them? Or has that venture approach which seems to have worked from the 1970s through the 1990s (and maybe early 2000s) stopped working well enough? The 1970s-early 2000s produced some real companies providing real value and are still around for the long haul. I'm not so sure about the post-recession VC-inflated startups that seem to be more about big money and big egos than big value.

vinay_ys 7y ago

Worst thing that can happen in a startup is trust issues affecting focus and ability to get stuff done. I see many conflicts that need to be addressed for this model to succeed. By having their people directly within the organization (potentially at very senior operational levels), there is inherent information asymmetry that favors SEV over founders and other VCs. Founders will have to figure out how they will protect themselves from SEV insiders screwing them over other startups in SEV portfolio. I'm very curious to see what would be SEV's pitch to the talented people they hire to deploy in these startups would be and how would the three party contract between this talent, SEV and startup would be setup.

ghshephard 7y ago

The best role that VCs have here is in introducing the startup to a network of domain experts that have very specialized skills that a startup needs, but that would be very difficult to find without good contacts. Then, ideally, the VC steps back and lets the startup negotiate their own deal with these domain experts. Doesn't have to be a VC though, back when telecom was a thing, rather than hiring our PBX installer directly, I was able to track down a third party-consultant who knew all the players in the valley (having been doing this sort of thing for 20 years), and we leaned on them to help us track down bids, sort out the competing offers, and do last-and-final negotiation at the table. Saved us around $150K on a PBX install over what our preferred vendor would have charged us. Another great experience was when foundation capital brought in our initial Facilities installer - they took care of everything - second hand furniture, installing new drywall (less than a day), server rooms (back when those were a thing), etc.. But, in both cases, the VCs contribution was in introducing us to great people, who were ready to work. This approach by Hoffman feels like the situation we had at Netscape, where we had a Business Server division, spun off from main HQ, but they were required to use our IT services, which installed systems/networks that made total sense for Netscape IT, but probably were overkill for a small scrappy startup. The incentives were in conflict.

say_it_as_it_is 7y ago

This idea worked out really well for Friendster

jimkri 7y ago

I actually interviewed at a company recently that brought in an Exec because the company had no direction and the founders were too inexperienced. (This is what the exec told me) It was really interesting to hear his perspective on the company and what needed to be done, compared to what others said during the interview. But from that experience one person will have a lot of trouble guiding a company if the other execs are not on board with what they are trying to do. I was going to join the company but was really worried about the inexperience of the other team members, but I really liked the guy that the VCs brought in.

alexfromapex 7y ago

Just like Russ Hannemann

ticmasta 7y ago

This seems like doubling down on the part of taking VC funding that most recipients are the most concerned with; losing control and direction. The post frames it as "having trouble guiding the company through growth" which is a real thing, but I have to ask, who's setting the goals in this model? It really seems like it could ultimately lead to more "successful" startups of the type a lot of us really don't want to see.

ticmasta 7y ago

Fitting old onion post: https://www.theonion.com/americas-homeless-want-a-hand-up-not-a-handout-vs-i-w-1819594266 https://www.theonion.com/americas-homeless-want-a-hand-up-no... Replace the Good Samaritan with Reid Hoffman and the homeless with startups

commoner 7y ago
Hilarious piece, but I don't think the analogy is a good fit. The Good Samaritan ("William Wolcott") is asking people to offer homeless folks money in exchange for labor, instead of giving cash handouts without anything in return. In contrast, Hoffman is offering "services" in exchange for equity. Hoffman is not offering founders any money, and since VCs are for-profit, Hoffman is not doing the founders a charitable favor. It's also a disservice to founders to compare their startups to the homeless ("Ed Schenk"), since most founders are very much willing to put in work to make their businesses successful.

roosterdawn 7y ago

At first blush, this looks like new lipstick on the old pig of the venture studio. The issue with venture studios is the same as with corporate "intrapreneurship" -- lower rewards and lower risks. Savvier founders will be more capable of either hiring the right talent and upselling equity, or having access to enough cash to hire the right talent outright. Consultants won't mind additional free leads, but good ones will do just fine without. So, the unit economics just don't work out as well for savvy founders or consultants, so you end up creating a market for lemons. The problem with this model is that consultants will want to be paid in liquid cash, companies will want to pay in illiquid equity, and someone would have to step into the middle and establish valuations and liquidity. This is the bigger problem with the increasing illiquidity associated with VC funded startups. Savvier would-be employees or consultants risk adjusting shares even further towards the direction of worthlessness and insisting on cash. With that said, perhaps the main silver lining I see here is of VCs playing a role in creating some kind of liquidity for shares. By establishing a three party transaction like this pegging exchange rates between hours of labor, shares and dollars, they're setting at least a stated valuation that allows companies to pay with either shares or cash to prospective employees and service providers, with the risk underwritten by the VC.

ChicagoDave 7y ago

I'm not sure how I feel about this. On the one hand, every startup needs an experienced mentor. In the past, my business attorney (M&A guy in Chicago) helped me with all of my entrepreneurial endeavors. On the other hand, startups need cash and the founder should really be enabled to execute their vision. Someone full-time that can exert pressure may dilute the original vision for their own ideas. As a founder, I really want to be in charge of strategy, any pivots, and all major decisions. I wouldn't turn this down out of hand, but I'm pretty sure I'd value funding more.

anthm1988 7y ago

Cynically, this sounds like a way to further concentrate the rewards at the top and ensure rank and file employees get nothing more than a salary.

azinman2 7y ago

very interesting. But they’ll still need cash to hire, pay rent, purchase equipment, buy advertising, pay for bandwidth, create hardware prototypes, etc etc. Is the idea you find the cash elsewhere? What happens if the partners don’t get along with the founders or the current roadmap? How much influence do they have? Can it be retracted if it goes poorly?

cl42 7y ago
I'm not here to defend the model (just posted my own comment supporting it), but just one note on the "getting along with founders". This is true for board members, early employees, etc. and I don't think their model makes this part any different. Opex for the VC fund, on the other hand, I'm not sure about.

cl42 7y ago

I really respect the attempt at trying something new here, but framing it against a traditional VC model might be a bit of a mistake (on the journalist's behalf?). I'd suggest thinking about this as an innovation on the venture studio model, or later-stage accelerator model (e.g., YC's Series A cohorts). I've spent the last few months toying with the idea of a venture studio and the economics are hard to swallow for some founders and for later-stage VCs... A model like this, where you get an operating, experienced serial entrepreneur to help you and kick your ass... I like that a lot. It's different and worth following, if nothing more.

mike_d 7y ago
> framing it against a traditional VC model might be a bit of a mistake Google Ventures for example has a similar capital services model. Once you took money, you had access to a pool of GV folks who could help you with design, finance, engineering, etc. Having this talent to tap in to helps you avoid spending early money on things that aren't worth a full FTE but need to be solved. The only thing new here is that they took out the writing of the check first.
bjornsing 7y ago
> I've spent the last few months toying with the idea of a venture studio Me too. :) > and the economics are hard to swallow for some founders and for later-stage VCs... Can you elaborate on that a bit? What model are you considering and what constraints do you see?
- cl42 7y ago
  Sure, happy to. The concern I've had others raise + I agree with is that really great founders don't want to give up a portion of their founding equity to a venture studio, and "hired guns" won't be as good at this stage. I think if the venture studio founder has a really great track record (e.g., Max Levchin) or access to a lot of capital, then this might be different. If I were a Series A investor, I might take issue with the initial cap table being so diluted by a venture studio, but I' not a Series A investor. I'm being very pithy here-- happy to discuss at any point if you'd like.

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bcrosby95 7y ago

I'm somewhat dubious about this. The sorts of technical decisions modern startups tend to make primarily make sense if you're looking at the company from an "eat the world" point of view. So if you squint hard enough at their decisions they look good from the POV of that you have barrels full of cash and the only way you're going to succeed is when you have thousands of people working for you so you may as well build for that case from the start. But if you take away those barrels full of cash those decisions no longer look good. Maybe they can offer technical advice on how not to do this and plan and build their product in waves to optimize each step in growing the company. But in my experience there is a huge lack of people that can accomplish this in the startup ecosystem nowadays.

cortesoft 7y ago
I am guessing these wouldn't be the only investors... the cash would come from some other investors.

AndrewKemendo 7y ago

I'm not suggesting this is why Hoffman et al are going this direction, but this is almost exactly what I would do if I felt that there was an epidemic of portfolio companies not being completely transparent about the state of their companies. This gives the an amazing amount of "insider information" that, ostensibly a VC would have but I have found in practice VCs don't have the ability to really get from the regular CEO/operator updates and growth boards.

zentiggr 7y ago
Ok, I don't have any startup experience, but this sounds an awful lot like either injecting a spy, or a commissar, depending on how much influence the person has on operations and strategy. If I were going to try to ramp up an idea, I'd be extremely wary of accepting someone that way, especially if they were expecting to assume any amount of control.
otoburb 7y ago
>>This gives the an amazing amount of "insider information" Couple this with a proof point that specialized teams like Latacora[1] are proving themselves out so they figure why not also get the inside scoop while turbo-charging their portfolio companies. [1] https://latacora.com/ https://latacora.com/
- tptacek 7y ago
  I'm interested in this for the obvious reason that I co-founded Latacora but I'm not sure what you're saying. We don't invest in our client companies.
  - otoburb 7y ago
    I was referring to the idea of even more highly specialized VC/PE operating partners managing functions which were traditionally seen as irreplaceable. Latacora manages a startup's entire infosec function for a period of time allowing founders to focus on more important parts of their business. I don't believe anybody would have thought your model would be possible during a startup's early stages without being managed directy by a tech founder, but Latacora's sucsess invalidates this assumption. If infosec can be managed externally, why not other sacred cows like engineering, marketing or other key gaps where founders need help during their initial year(s)? I think Sweat Equity Ventures is going to explore this question more deeply with this model. I understand that Latacora doesn't invest in client companies -- that's where my analogy ended.

danbrooks 7y ago

That sounds a lot like working at a startup!

tempsy 7y ago

Seems like it’d only make sense if you had a hard time hiring senior people because of lack of brand and/or funding, but a startup would still need to raise money so how does that fit in with this? Wouldn’t you still raise a traditional round? And what would those investors think if you diluted your stock with something like this?

milofeynman 7y ago

I can't imagine any founder with a few years of experience with VC would want a VC mole in their day to day business. This might work with early startups who don't know any better. Also will other VCs invested in the same business benefit or lose out from a situation like this.

irjustin 7y ago

Finding good experienced, talent/knowledge is difficult, so I'm on board with the idea here. In place of cash seems backwards to me. Maybe if the companies that you invest into are great cash cows but need talent to accelerate? But if that was the case, you can usually afford talent. A medium injection of cash + talent can go incredibly far in setting up your investment for success.

brenden2 7y ago

Maybe I'm missing something here, but it sounds like they aren't putting any skin in the game. The VC will benefit from all of the upside while literally taking none of the risk. How could this possibly be good for entrepreneurs? If someone approached me with this idea to help my startup, I would promptly move that email to my junk folder and stay focused on building a great product. If someone wants to invest money, sure I'd be happy to take it, but the last thing I need is more "advice" from armchair experts.

katzgrau 7y ago
> If someone approached me with this idea to help my startup, I would promptly move that email to my junk folder and stay focused on building a great product I'd advise you to let them give you a quick pitch by email and see if it sounds reasonable. As a founder, you have so much to learn. Be wise with your time, but don't shut out potential ideas from someone who says they want to help you. It's not every day (or any day, in my experience) that something like that happens.
- commoner 7y ago
  > someone who says they want to help you Why should a founder take a claim like that at face value? VCs are not charities, and their "potential ideas" are constructed with their own interests in mind. brenden2 has decided that this type of offer (giving away equity in exchange for services implemented by the VC's affiliates) is categorically unsuitable for his company. It's patronizing to assume that brenden2 is inexperienced for reaching this conclusion.
clintonb 7y ago
> The companies pay SEV in common stock shares, the same held by the startups' rank-and-file employees, and SEV's team, in turn, get paid salaries by the firm and also receive part of the firm's carry like a traditional venture model. The VC pays for employees. The company pays the VC in the form of stock. The risk to the VC is the stock they've received is worthless or worth less than the cash they have paid employees.

katzgrau 7y ago

I don't usually cling to the status quo, but I do believe that the CEO must have the ability to set the vision and get the "right people in the right seats." Every management book in the last decade pays homage to this idea put forward in Jim Collins' book Good to Great. I guess this model presumes that the right people will be supplied by the investor to fill predetermined seats. Does the CEO have a say in that? Is it possible to fill seats without the CEO in the decision making process? If they do have a say prior to investment, then why not raise capital and hire people of that caliber regardless? If the issue is that some founders with good ideas are simply clueless and a team that knows better must be built around them, it seems conflict between the CEO and the new team will be inevitable.

echelon 7y ago
When you're new to everything, how do you find the right people for those seats? How do you perform a proper search while wearing lots of other hats? I suppose it's a never-ending exhausting task?
- staticautomatic 7y ago
  You fuck most of it up. Repeatedly. If you're lucky, you don't fuck it up so badly or in such a way that you can't recover from it.
- AndrewKemendo 7y ago
  This assumes that the CEO is effectively incompetent. Startup CEO is an exhausting task, but it's not never ending that's why you recruit and hire. Top level (C suite, VP etc..) recruiting is one of the primary jobs of a CEO and being able to do that effectively is a core task. I think this really underscores the fact that VC's don't fundamentally care about the leadership abilities of their companies. They are investing in a growth curve around a product or series of products primarily, not strong leaders.
taurath 7y ago
How do you build trust in your own team when an investor installs or pushes people they have a long relationship with into your company? Where will loyalties lie?

victor9000 7y ago

So they wanna trade equity for a couple of bags of hot air? That hardly seems like a good trade-off.

jl2718 7y ago

Had a VC send me this a while ago. My feedback: these guys are all finance, operations, and management. No actual builders. It would be great to outsource these roles to keep control and save equity, but this seems like the opposite. It’s still a great deal for founders because of the connections that VC brings, but it’s likely a bad deal for the company, which is now run by people abstracted from the vision. For more info, see: “conjoined triangles of success”.

boxcardavin 7y ago
Moreover, the kind of builders you want as an early stage startup are almost certainly not the type who would be hired guns for this kind of VC.
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varjag 7y ago
Historically, there never was a shortage of people willing to tell other people what to do.
- bjornsing 7y ago
  I can’t upvote this enough. I’m putting it on a teeshirt. :)

godzillabrennus 7y ago

http://Hf.cx http://Hf.cx hackers founders They pioneered this model.

altrum 7y ago

This is a fascinating concept, but I wonder how it can impact the overall culture of a startup. More and more, I’m inclined to believe that the initial group (say, first 10-15 employees, including the founder) are the most important. This, in turn, almost looks like a more specialized version of contractors. For those startups in the early incubation stage, I’m concerned this may actually hurt their chances of possibly—prolific development. If carried out properly, however, I think this has really great potential; cash can often be a double-edged sword that also limits creativity and innovation. An effective “mentor” in this sense, will be way more beneficial than straight, cold, cash

cheerioty 7y ago

This sounds like a very bad idea. I hardly believe any VC has any great builders just sitting around to jump on and off to the next thing. I'd also not feel trusted but more like watched all the time. I'm lucky that all the investors I had in the past always trusted my and the team's ability to build, grow and push things forward without suggesting putting their people in. I might be wrong, but it feels the only people that could think this is a great idea are coming from the venture side :) It just sounds very wrong to me tbh.

PragmaticPulp 7y ago

My experience with investor-provided talent has been very poor. Historically, the problem is that VCs tend to send "subject matter expert" type consultants who give advice. Startups need someone to do the work more than they need someone to give the advice. The VC-provided talent usually generated more work than they solved with questionable returns for the company. Unless Reid Hoffman has cracked the code of sending the right people to get work done, I'm suspicious.

pmart123 7y ago
I can see that. In my experience, it works to have a subject matter expect at as a consultant/mentor to a few young and hungry employees. Essentially, the expert can help lead a team through big technical decisions or when there is a roadblock. However, the expert likely doesn’t want to put in the hours or do the necessary grunt work.
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alasdair_ 7y ago
I could see VC-provided specialists, like a lawyer, CPA, perhaps also specific skills like a data scientist before a startup has enough cash to employ one full-time but I don’t see why this would be any better than the startup employing the contractor themselves with cash.
- jjeaff 7y ago
  I can see a much better situation where the VC gives you cash so you can hire your own CPA and lawyer. We had a VC pull this garbage once. Although it wasn't for equity. They just offered it as a service "at cost". We dropped their $90/hr Manhatten based book keeper and $800/hr attorney just as quick as we could without ruffling too many feathers.
enra 7y ago
Also, I think VCs pick operational talent on "political" reasons, mainly people they have gotten to know somehow from previous companies they invested in or as founders. These people while might be good, do not necessarily have a good skillset or fit for your company.

jayd16 7y ago

This shifts allegiances in interesting ways. Key employees are no longer employees but contractors hired by the VC. As stated, the contractors are not startup employees but gain any research knowledge are on patents. Do these partners still have non-compete contracts with the start up or can they freely leave with IP? It seems like this system allows the VC to pull support easily. You can't force someone to continue to work for you. If the partners are time splitting how would you approach that situation? Can you fire them? Seems much more complex than cold, hard cash.

rdlecler1 7y ago

Most founders will have no interest in this. (1) 90% of VCs add negative or zero value. Okay maybe you have a part time employee but how much equity are you really going to give up for that? (2) Top founders don’t need you. They can attract their own talent at market rates and they don’t want someone running their business. (3) Startups need to pay their people.

ehead 7y ago

This is an interesting concept. Another thing that would be interesting is if recruiting firms started operating like this...

gt565k 7y ago

I can see this work very well. It's like a very hands on incubator where the VCs are basically providing human resources and are invested in getting the start-up off the ground and moving by providing exactly what the start-ups need. Instead of giving start-ups cash to hire, they provide the expertise as needed. Marketing gurus, tech gurus, generalists, etc... It can save money and time, especially if the VCs have good technical leaders that have lots of experience building products efficiently.

reustle 7y ago
Agreed, I think the model could work very well and look forward to seeing the results here. Essentially, why throw money at me as a founder and hope I spend it wisely, when you could instead lend me your vetted team members to help directly.

afinlayson 7y ago

This works really well, if it's partnered with cash. Like a competitive advantage of why you'd want to work with his VC company, but without money it's worthless.

rjsen 7y ago

How is this not just management consulting?

deleted 7y ago

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hobofan 7y ago

That doesn't sound too different to what some VCs already do. E.g. from what I heard about Rocket Internet from some of their portfolio company, they act in a very similar way. Yes, they also provide cash as part of the funding deal, but they will most likely place one C-level executive in your startup. They'll also happily provide you with more headcount than you probably need and if your numbers aren't where they are supposed to be, you are expected to buy consulting services from them, so in the end a good chunk of the funding amount flows back to them. That's why a lot of their companies are as soulless as they are.

CalChris 7y ago

I don't understand this. Sending a partner is sending someone who is fully committed to the VC and not fully committed to the startup. If the VC sends money, that money will be fully committed to the startup. VCs have entrepreneurs in residence, a bankable executive without an idea. Matching an EIR with a startup is midway between sending a partner and sending money. But still, this EIR isn't fully committed. They're committed to both the VC and the startup, two masters. This is just not a good fit at this time.

PopeDotNinja 7y ago

If you want cash, ask for advice. If you want advice, ask for cash.

drenginian 7y ago

This scheme disconnects the founders from responsibility for the outcomes. God the politics that would arise from this would be soul crushing. Imagine being in a company like this..., who is really the boss? Is the founder in charge, or is the line of reporting to the VC via the injected people? The sense I getfrom a scheme like this is that the VC knows best and the founders need the brains of the VC to succeed - that dynamic I think might sink the company. Imagine being a founder with someone injected by your investors constantly second guessing you and telling you how to do it right. Ugh....

semerda 7y ago

This assumes all problems are solved by throwing people at them. Isn’t this also one of the common reason why startups fizz out burning unnecessary capital too early? Grow grow grow at all expense. I see the value in having someone else help with recruiting et al but also see possible tension from burning unnecessary cash on headcount for the sake of growth too early. What I miss?

dclowd9901 7y ago

Wow, these CEOs and founders really actually do think they’re special. My guess? VC substituted startups are far less effective than ones backed with considerable funds. Why? With luck being equal, money is the real break.

anthm1988 7y ago
> Wow, these CEOs and founders really actually do think they’re special Do you not realize what site you're on?

t_mann 7y ago

Sounds a bit like the Silicon Valley version of McKinsey.

55555 7y ago
how so? does McKinsey regularly get paid in equity for consulting services instead of cash?

zweep 7y ago

When I had a VC-backed company what I really wanted was something like this... where everything that was "commodity" would be delivered from the VC, who can negotiate better terms for it. Office space, internet, payroll services, accounting, recruiting, etc... all should come from a VC who can get it in bulk. Even one level deeper... if it's a consumer Web or enterprise SaaS startup... it could probably be all built on the same tech stack. Why not have the VC own 60% of the business and provide the tech infrastructure and have only the frontend and business logic implemented by the operating team?

omneity 7y ago
Every time I find myself involved in a startup producing a platform, I always wonder a very similar derivative idea: create an incubator (or a fund?) to kickstart small startups leveraging that platform. Previous such projects were a fast mobile app builder, an automation platform, and currently my latest project [0] is in a similar situation. In fact we're considering building a sister company that verticalizes the solution and builds it on top of the first one, as we had several very focused requests hinting at juicy industries that could benefit from something built on that platform, yet each of these use cases are pretty diverse. [0] https://monitoro.xyz https://monitoro.xyz
anthm1988 7y ago
Why not just hire founders as PMs and pair them with an engineering team then?
lowdose 7y ago
And risk it all for 40% with another founder? It's not that AWS has a special tier for VC's.
- zweep 7y ago
  It would make the chance of success more than twice as high if done right.

decentralised 7y ago

One of the first examples of this "expertise-sharing" approach I can recall was from Toyota who sent some of their lean experts to help a NY charity run more efficiently. story: https://www.nytimes.com/2013/07/27/nyregion/in-lieu-of-money-toyota-donates-efficiency-to-new-york-charity.html https://www.nytimes.com/2013/07/27/nyregion/in-lieu-of-money...

sub7 7y ago

I personally know some of the Talent partners hired at this firm and they are A+ people with amazing candidate rolodexes.

yveys 7y ago

Smart/sweat capital usually turns into a bad deal.

HacklesRaised 7y ago

Being diluted by a round of funding is dispiriting!! But this!!

saadalem 7y ago

What is this $30M for ?

haakonhr 7y ago

Doesn't it sound a bit like private equity, but for startups and without skin in the game?

Ace__ 7y ago

Hello. The investor provided talent could be a good approach to provide more relevant and needed support. In reality on many occasions I have had to question what the hell is going on: 1. I have come across many of the talent, where what they lacked in talent was compensated by strength of personal connection. 2. People just sprouting some inspirational fluff, and whose attitude is I am here, listen to me, do as I say, don’t question, without even getting into the trenches. 3. Then they start talking about the sacrifice and hard-ship, when they have no real comprehension and haven’t walked that path. 4. As for getting paid in equity, that is between startup and whomever, although I personally don’t like it, and won’t do it. 5. You can’t come in and work with early stage startups and charge them what you charge more established startups, and certainly not what you charge VC or family offices. Drop your rates man, and come correct. There are enough leeches on, and vultures hovering around, startups and founders. Cheers, Ace.

ghc 7y ago

Example of how "co-founding" a company with a VC can be a successful model: https://www.thirdrockventures.com/ https://www.thirdrockventures.com/ The difference is Third Rock also sends tens of millions in cash, so...

ykevinator 7y ago

This is really insulting.

facethrowaway 7y ago

There’s a VC firm that already uses this model with their billion-dollar investments. It’s called Benchmark. Several of their former portfolio company founders can tell you all about how it’s worked out for them.

drenginian 7y ago
How about you tell us? How did it work out? You can’t allude to something juicy and say nothing.