[PreMoney SF 2016] What Should VCs Do to Prepare? Aileen Lee and Christine Tsai

TL;DR

VCs should prepare by adjusting valuations and round sizes, favoring sustainable company-building, and collaborating with other investors at the risky seed stage. Aileen Lee explains that Cowboy Ventures typically makes about 10 investments per year, writes initial checks of $500,000 to $1 million, and evaluates founder quality and market size. Read on for her views on seed investing, market corrections, and future unicorns.

Transcript

so Dave basically stole my thunder and uh did a nice intro of aen but yes so above all the you know founder of a a seed fund here in Silicon Valley had a very illustrious career before at KP but most importantly coin the term unicorn you probably can't ever get away from that now but okay how many of you are sick of the term unicorn all that's not ... Read More

Key Insights

• 😘 Seed-stage investing offers unique benefits, including lower valuations and a more collaborative environment for investors.
• 🏂 The venture capital industry should focus on developing mentorship programs to educate and support younger partners in becoming effective board members.
• ❓ Commerce companies require careful consideration due to their cash-consuming nature, but Cowboy Ventures remains bullish on the sector.

Questions & Answers

Q: What should VCs be doing to prepare for changes in the venture market?

VCs should recognize that the market is undergoing a needed adjustment after valuations became too high, rounds became too large, and company financial plans became unnecessarily aggressive. Aileen Lee emphasizes giving companies time to build culture, organizational depth, customer love, and customer understanding instead of relying on “shoot the moon” strategies.

Q: How did Aileen Lee’s move from Kleiner Perkins to Cowboy Ventures change her investing approach?

After 13 years at Kleiner Perkins, Lee moved into seed-stage investing through Cowboy Ventures. She values seed investing for its lower valuations and capital requirements, different pace, and greater collaboration among investors.

Q: How many investments does Cowboy Ventures typically make each year?

Cowboy Ventures might make about 10 investments in an average year. Lee contrasts that pace with a general partner at a traditional fund who might make about two investments.

Q: What is Cowboy Ventures’ typical initial investment size?

Cowboy Ventures’ average first check is usually between $500,000 and $1 million. The firm prefers to co-anchor or co-lead investment rounds.

Q: What types of companies does Cowboy Ventures invest in?

Cowboy Ventures is almost 60% enterprise and 40% consumer. Its investments span enterprise security, SaaS, hardware, marketplaces, consumer companies, and audience-based businesses.

Q: How does Cowboy Ventures choose startups to invest in?

Cowboy Ventures operates as a generalist investor rather than following a narrow sector thesis. Lee says the firm focuses more on founder quality and market size than on a specific investment thesis.

Q: Why does Aileen Lee prefer seed-stage investing?

Lee likes seed investing because valuations and capital requirements are lower and the investment pace is different. She also finds it more collaborative, with investors co-investing and working together to help entrepreneurs during the riskiest part of the investment cycle.

Q: Does Aileen Lee expect the number of unicorns to grow?

Lee expects there to be more unicorns in five years than there were at the time of the discussion. Although she says the existing list had been reduced because some companies were overvalued, she believes many industries remain relatively untouched by technology and good software.

Summary & Key Takeaways

• Aen reflects on her transition from working at a large VC firm to running her own seed-stage fund, Cowboy Ventures.

• She discusses the benefits of seed-stage investing, including lower valuations and a more collaborative environment.

• Aen emphasizes the need for mentorship in the venture capital industry and the importance of building strong boards for startups.