Fun idea, but holy conflict of interest: the founders want to take an investment from this fund in order to get a personal cut of the fund's returns, but the other common holders (think early employees) want the fund that provides the best value to the company as a whole. Maybe there's a way to manage it, but otherwise this seems to put the founders on one side and early employees on the other.
The obvious solution (which I'd recommend) is that the cut should go to the funded company, not the founders. The majority of the cut would still go to the founders, since they own a majority of the stock. But this gets everyone (founders, employees, investors) on the same page.
Overall, this is a great idea. The point of a value added investor is to increase the likelihood of positive outcomes. This is a great way to do that.
I don't know. If they give a founder a sliver of a point in the fund, that's motivating. If they give it to the company, then the employees are getting... what? 0.1% to 2% of a tiny sliver of the fund? The more you spread this around the less motivating it is... Might be a nice benefit, but their goal is to change behavior (motivate potential founders to be interested in their fund and motivate portfolio founders to help each other).
The other problem is that it's founders who invest time to support portfolio companies, not shareholders/employees of the company, so the incentive seems appropriate and aligned IMHO. I can personally speak to the fact that the best support, in my experience, seems to come from founders currently operating their own company, currently in the trenches, and they usually have the least time to offer.
The last thing we want to have happen is to make a founder uncomfortable or to misalign their interest. For our fund to do well, we need every company to do well.
The amount of carry involved is interesting but in no way will misalign a founder's interest in their own company doing well. Their interest in seeing their own company perform is many more orders of magnitude higher than the shared carry.
The other thing to consider is that the shared carry will give the founders of other companies in the portfolio added incentive to help. This help would benefit every shareholder.
> For our fund to do well, we need every company to do well.
That's an odd statement. Even in the most successful of funds, the vast majority of companies return modest amounts of capital or no capital at all. The general rule is that most of a fund's overall return will come from ~20% of the portfolio companies.
Based on the article instead of being alone it's allowing founders to work as a network. Pass on opportunities, etc. YC has a large founder network which benefits it's companies.
That's a good point and honestly, that kind of sucks for early employees, but it's not going to affect whether or not a founder decides to take money from this fund or if it's successful.
Early employees at many successful startups have a long, accomplished history of getting royally screwed over on their equity to work ratio. In my experience, I've seen how that can build into real resentment over time, but of course they can't leave until they've vested, so they're just stuck doing all the work and getting compensated well, but no where close to they might deserve or what the founders end up with.
Employees, early or not, have absolutely zero input into what investments founders decide to take. It's also possible that employees may join before a start-up gets an investment from this fund, making the (potential) screwed-overness even worse. Employees can get as mad about this as they want, but they'll have pretty much zero recourse in any situation.
I suspect only founders with lower-than-average confidence in their own companies would choose a bit of diversification over a better deal for their company elsewhere. I wonder if that could create an adverse selection effect. Maybe I'm misremembering, but wasn't that the main problem with First Round Capital's exchange fund?
That said, Kent's a great guy to work with - if you don't like his experimental fund structure, the opportunity to work with him should more than make up for it.
Everything comes out of the fund's carry. Founders give up nothing. We want to work with founders who believe they will each be creating the most impactful company in the portfolio.
But this is about much more than diversification, it's about the community that forms when the founders have an interest in one another's success.
I am no expert, but do you think this will create, "too many chefs in the kitchen?"
In my experience, buying love is not nearly as effective as winning it.
When a founder helps a fellow company out of the goodness of their hearts or just for Karma, or with hopes of reciprocity, that help will likely be more valuable than a bunch of founders who feel somewhat invested in the other companies and maybe think they know better.
I think this is an interesting experiment...but I wonder how this will actually play out. I can see it having the exact opposite effect you are hoping for.
I imagine the theory here is that a fund with founders helping each other out will actually provide MORE value than just having 1 VC partner who thinks about your business for a few hours a month.
As a founder myself, I would love to have exposure to the other startups in my investors' portfolio and more importantly, I want other founders to have exposure to my company!
Upside offers an attractive option to gain a small amount of exposure and to recognize the help that founders provide other founders. I know a number of other founders who have helped me get where I am, but unfortunately they don't have any exposure to our stock. Typically, the logistical headaches and liquidity needs would stop most people in their tracks but Upside simplifies that process substantially.
Regarding the conflict of interest concerns, I don't agree at all. I personally help the other founders in my network generously and most CEOs that I know are very generous with their time as well. To have a formal recognition of that would be awesome and if any of us are successful, it's nice to know that we played a tiny piece in it.
Compared to typical VC arrangements, Upside offers something new that aligns interests of everybody involved. It's an innovative approach to an old-style business and delivers real value to entrepreneurs.
Most importantly though: Founders should always pick a VC based on the partner with whom they'll be working. Kent is one of the best, smartest, hardest working, and most importantly fair and honest. Not all VCs are alike and Kent is a class act.
Full disclosure: Kent was on my board of directors and I endorse him so strongly that I am LP in Upside VC.
That's really interesting, but to be fair, did you need that financial exposure to help out? From what I saw on the VC side, the solution was usually an advisory role or sometimes an explicit board one to recognize a particularly valuable individual. Beyond that, I wonder if the incentives here run into the "Israeli day care" problem - by putting a financial price on what was previously help, more freely offered, you might have the adverse effect of making it more transactional.
That being said, best of luck to Kent - experiments are a good thing, and the marketing alone is a good start.
This is kind of tangential to the submission, but I just read through the "Israeli day-care" paper[1], and thought it was quite interesting. The existence of the fine clearly shifted the equilibrium, but I wonder whether or not the introduction of the fine partway through the start of the year contributed anything to the increase of late parents. Redoing the experiment with the addition of a third group of daycare centers, where the fine is specifically laid out at the beginning of the year, might shed some insight into that?
While the stated goal of this is "to build a really strong founder community", this structure looks like a marketing ploy designed to boost dealflow.
I can't help but question, however, whether it will bring good dealflow. As an entrepreneur, the notion that I could profit from the fund's success even if my own company fails is not at all attractive. Additionally, the fact that this structure offers a formal incentive to focus less than 110% on my own company would be a huge turn-off. The conflicts of interest abound.
Personally, I'd be wary of a founder who didn't recognize this and who wasn't concerned about the effects, perceived and real, of having a personal stake in the venture fund that had invested in his or her business. Incidentally, given the lackluster returns of the vast majority of venture funds, I'd also question said entrepreneur's savvy.
Dealflow comes from doing great work with and being supportive to founders. Period. That's what I hope will drive introductions for Upside as well.
I'd also be wary of founder's who only wanted to work with us for an economic stake in the fund. I want them to want to work with us because the partnership as a whole, is the most supportive in all of venture.
That's a fair response, but if I was looking to raise capital, this structure would result in me avoiding your firm regardless of your track record and reputation. The conflicts of interest that this structure creates, perceived and real, would be deal-breakers.
Even if you made participation in this structure optional, having to address it as part of a capital raise would add unnecessary complication to what already tends to be a time-consuming and distracting process for entrepreneurs.
Its a neat idea, but I suspect its primarily value is in marketing and the actual number is limited. That being said, the fund gets interesting if there's a unquestioned fundmaker (a Dropbox / Pinterest / AirBnB / What's App); do founders want to pick the firm because they hope to get a small share of that upside?
There are much more cost effective ways to get marketing value. A material portion of the fund's carry is being set aside. It's pretty well into the double digit percentages. Spread across multiple founders it will have less impact - founders will not be distracted from making their own businesses successful.
Treating founders as partners is something in which I genuinely believe. Investors ask founders to help guide other companies in the portfolio, they ask for founders for introductions to new companies, they ask them to help with diligence on prospective investments. So founders should have a stake in the fund.
For everyone's sake, I do hope there is a Dropbox type outcome in the fund. The idea was inspired in part by the way in which other classmates in Dropobox's YC class dis well by investing a small amount into the company.
I always thought it would makes sense for Entrepreneurs to join a shared pool to spread the risk around a bit. This way instead of 60-90% getting nothing when their startups fail, they can all share in the top successes. This fund is helping them do this, which seems like a good idea.
Yes, I wondered about that too but I'm not sure about the legal issues involved. Though once they allow regular people to invest in startups, founders can sell some equity and use the money to invest in a pool of startups.
As a serial entrepreneur, I find this model very interesting. Nowadays I prefer to go it alone without outside capital, but there are times I wish I could pool my risk and upside with other vetted entrepreneurs.
No hard and fast geographic limitations but at the seed stage, I think it's important for founders and investors to build a strong working relationship and rapport. Because of that, the focus will be on California and mostly the Bay Area.
