SuperVenture 2024 Edition: Founder Friendly vs. Portfolio Diversification.

What you will learn:

• The challenge of balancing portfolio diversification with focus on high-potential startups, especially during economic downturns.

• Being truly "founder-friendly" means transparently setting expectations and making tough decisions, not over-committing.

• The importance of disciplined time management for VCs mirrors the fiduciary duty they have toward their financial capital: being 'founder-friendly' should not lead to investor burnout.

🕒 est. reading time: 5 minutes

The oft-touted "founder-friendly" ethos is really put to the test during economic downturns.

Venture as an asset class relies on diversification to mitigate risk. Investors find themselves caught between their dedication to supporting founders and the harsh reality of concentrating resources on startups with the highest likelihood of weathering the storm. It's not just about cutting the check - it's about where you spend your time and energy.

This internal conflict, amplified by the current challenging times, forces venture capitalists to confront difficult decisions that can strain their portfolio relationships — or burn out investors. This article digs into the messy business of how investors navigate this balancing act when the going gets tough.

The Reality of Diversification and Selective Focus

Venture funds have asymmetric returns: A seed fund must diversify its bets. A typical portfolio counts around 25 companies. Only a small number of ‘winners’ will generate most of the fund’s return.

Yet, in the beginning, every company has what it takes to “return the fund.” As the fund’s portfolio grows, the challenge becomes: How will investors manage their attention? They do not know where this outsized success might come from. So they have their eyes everywhere and cannot “spend” too much attention on one.

Mickaël Bellaïche, partner at Redstone, shares: “Many 'winners' endure significant existential crises before they succeed. Additionally, despite a general understanding of the power law dynamics in VC, it remains challenging to explain to Limited Partners (LPs) why certain investments are written off just two years after being made. There's also the profound commitment we make to founders, their teams, and the importance of maintaining a reputation as 'founder-friendly.' With all of this in mind, focusing my time effectively and efficiently sometimes feels like an unsolvable paradox.”

Back to the math of portfolio construction: 25 companies means more than 50 founders. Worse, it means ever-changing team constellations. Even for firms with many partners, an investor might sit on up to ten boards simultaneously. From my experience, I can tell you that ten board seats take a lot of time in your calendar—time that you would need to engage with individual teams. That means you often have to simplify team decisions by making assumptions about individuals without context.

Robin Haak, founder & solo GP at Robin Capital, shares a key learning from his mentors: “Industry leaders like Vinod Khosla and other top-tier VCs advise to focus on the visionary upside of outlier opportunities rather than conventional metrics like IRR. These mentors advocate for allocating resources toward new ventures with the potential for a 20x return, rather than sustaining those with a mere 3x prospect. Moreover, they teach the importance of strategic withdrawal—stepping back from a board seat when a venture reaches a critical turning point, reallocating resources where necessary. This approach is not just practical but necessary in the VC world.”

Bellaïche adds: “I believe that transparent and honest communication is the most sustainable approach and is highly appreciated by most founders - well, people in general. If you clearly explain early in the process that your fund will not invest in the next funding round, that you need to step back from a board role because you cannot allocate enough time, or that you are reluctant to join a funding round under terms that are a bit too 'founder friendly' in order to protect your LPs' capital, it allows founders to manage their situation effectively. This forthrightness is not only the right thing to do but will ultimately be perceived as genuinely founder-friendly.”

The VC Ethos and Founder-Friendly Claims

While VCs grapple with diversification strategies, it's crucial to explore how these decisions align with the ethos of being "founder-friendly" in the world of venture capital.

Being “founder friendly” means for investors to negotiate fair deal terms, to be accessible when asked for advice and to support founders decisively when they are hitting a rough patch.

What happens if all founders in their portfolio are hitting a rough patch? Under the pressure of a bear market, investors are often hitting their limit.

There is a point of no return when the partnership agrees that a company is being officially written off. After this, no funds will be freed up to support the business anymore.

One of my bosses taught me early in my venture career: “Never throw good money after bad money!” But it’s in fact time — not money — that is an investor’s scarcest resource.

Investors are in the business of raising and deploying capital from external sources. They rarely can scale the time and attention of their senior partners.

When investors make themselves available to a previously written-off company, they often do so out of a sense of duty (“doing the right thing”) or to save reputation (“we cannot be seen letting them hanging”).

Haak shares his perspective on the dilemma: “My commitment to the teams I work with is unwavering. The ethos "no one ever fails alone" guides my actions. Yet, despite over a decade in the field, the emotional impact of a venture's failure remains profound for me. Often, the founders I work with become friends, deepening the emotional stakes.”

It pains me to say: From my vantage point as an executive coach and advocate for fairness and humane treatment in entrepreneurship, investors limiting their availability to written-off portfolio companies is a logical decision. 

Following the same logic in a bear market leads to an interesting situation: if every founder is clamoring for investor capital and attention, will investment teams write off earlier to be able to dedicate their time effectively?

Be A Disciplined Investor — Of Time

Investors need to be more intentional than ever about how they allocate their precious time and attention. It's not about playing favorites; it's about being smart and strategic with their "time and attention capital." From the get-go, investors need to set clear expectations with founders, letting them know what level of support they can realistically provide. Sure, they can always go above and beyond, burning the midnight oil to help a struggling startup or calling in favors to open doors. But here's the thing: that road leads straight to Burnout. Only a sustainable investor can be a founder friendly investor.

Reputation is everything in venture: it's tempting for investors to keep saying yes to every request — to be the hero that saves the day. But that's a surefire way to spread themselves too thin and end up doing more harm than good. The best investors know that being disciplined with their time and attention is just as important as being disciplined with their financial capital. They're not afraid to say no when they need to, to focus their energy where it can make the biggest impact. It's not about being stingy; it's about being smart and sustainable in the long run.

Being founder-friendly cannot imply that investors are burning out.

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