A Viral VC Model

Posted on April 25, 2016. Filed under: startups, venture capital |

I’ve been spending some time thinking about disruptive models in venture capital lately…here’s a little thought experiment:
If you are a founder raising seed capital…while personalities and people deploying capital vary, the product investors are selling (institutional seed capital) is for the most part pretty consistent…money is money. Yes, folks tweak terms so that their product is more or less dilutive, more or less controlling, etc…but standardization of docs and rampant access to capital have kind of leveled out these variables, and really reduced a founders’ choice of provider down to “do i like this person? do i think they can help me? and do i care or do i just need the money and believe they won’t hurt me?” I’ve seen a few interesting wrinkles in the capital structure/vc product that enable different investment approaches on the investor side (i.e. angelist, special purpose vehicles, etc), but most of these variations from the standard don’t dramatically impact founders math or incentive structures when making decisions about with whom to partner.

Something that is pretty clear, is that more and more founders are and want to be investors as well. In 2010, when I first joined Kenny and Ben as a Partner in Lerer Ventures, while simultaneously building Hyperpublic, people really had a hard time understanding how I could or would want to do be an investor and an operator at the same time. Today, you can’t swing a dead cat without hitting a founder/operator who isn’t also a venture partner/advisor/scout/angelist syndicate lead, etc… for some vc related entity. I’m exaggerating a bit, but it’s obviously a thing. Over a 5 or 6 year period, exercising both my investment and operational minds, I found many points where one activity would feed and improve the other…so much so that I don’t think it’s surprising that more operators are looking to get involved in early stage investing while executing on their own endeavors. It’s great data, a great networking platform, and it keeps you creative and broad while your deep into your own endeavor.

What if there was a new VC fund that bent the financial product being offered to you, the perspective founder…let’s call this new fund ViralVC. ViralVC doesn’t exist and I don’t plan to make it exist, but for purposes of this explanation, the pronoun “I” represents the Managing Partner of ViralVC. What if my $200K investment in your company came with a matching $200K check for you to invest in another company? What if taking my investment enabled you to make an investment without risking your own personal capital? If the deal works out, you can keep half the carry and build your credibility and track record as an investor. If the deal doesn’t work out, no worries…make it up to me by crushing it with your own business, which we’re already partnered on by way of my initial investment. I kind of like this idea of every investment a fund makes perpetuating a second investment, and using the initial portfolio of founders/their DNA as the filter for who else is interesting and special and of a similar value set.

Most seed funds hit a point where their partnership doesn’t scale to cover the number of investments they want to make/manage, but what if a portfolio of founders played a more active, yet non-distracting, role in investment identification and management. Theoretically, a seed fund could scale to distribute very large sums of money without bumping up against the constraints of today…I could see a path to deploying funds well beyond the $100M fund size that most seed funds max out at…in fact, i could see a path to responsibly, intelligently, and profitably deploying on the order of billions of dollars of capital into the seed stage asset class, simply by giving every recipient of capital a matching check to invest capital, so long as they agree to shepherd the investment and treat it with care. If you make great initial decisions on where to invest capital and in what founders, and apply a simple rule for portfolio founders like “your matching check is unconditional, so long as I, the managing partner, gets to meet the recipient, and we together agree it is a good investment. if i don’t agree, we don’t invest in this company, but you retain your matching check, go find someone else/better/different.”

It’s not a new idea for seed funds to invest in “connecting founders to each other” or “platform” as a form of scale, but it is new to make founders in your portfolio into investors of your capital, in an unconditional, non-one off way. I think the key would be to build great systems of communication and reporting to mange the network of investments and founders as it scaled beyond the first few generations of investment…and to build a crystal clear and well understood set of values for the community to abide by…so clear that even at large numbers, the group could operate as a cohesive unit to maintain and manage a consistent brand to the market and perspective founders…also key would be to deeply scrutinize the dna of early founders/recipients, knowing that the out years DNA of the portfolio will emanate directly and as much from them as it would from you, the Managing Partner of the fund.

So now, as a founder you could take someone else’s money, or you could take ViralVC’s money that comes with a matching check for you to deploy, significant upset economics, new experience and information, admission into a community of like minded founders, and the ability to give this exact same gift/value proposition you’ve received to whoever you believe in, regardless of how well networked or branded or popular they might be.

Kind of an interesting thought exercise…as ViralVC, you could lose a lot of money quickly executing on this model…but you could also completely upend the seed stage asset class if you did it right…

Come to think of it, what fun is a thought experiment without putting it to the test. I’ve got a $25K angel check for anyone who’s raising. If you earn it, I’ve got another $25K check for you to deploy (you keep 50% of the carry). Any market, any layer in the stack…just be original and genuine and creative and wierd. jordan.cooper@gmail.com (put ViralVC in the subject).