Episode 748 | The Ins and Outs of Startup Investing

Rob Walling:
Welcome back to Startups. For the Rest Of Us, I’m Rob Walling, and in this episode I sit down with Einar Vollset, co-founder of TinySeed, and we take it in a little different direction than we normally do. Oftentimes when we talk about TinySeed, we will talk about things that we’ve learned investing across all these SaaS companies that could help you as a B2B SaaS founder, or maybe I’ll interview a TinySeed founder so we can take learnings and apply them to the broader community and the broader audience. But in this episode, Einar and I talked through something that he actually knew quite a bit about when we started TinySeed and I knew very, very little about, and that is startup investing and venture investing and why people would invest in a fund versus investing individually. We talk a little bit about the math of Venture and how and why TinySeed is so different, but we also talk about the fact that the venture industrial complex has really left behind thousands and thousands of startup founders, and that really was and still is the goal of TinySeed. 

As you know, my mission is to multiply the world’s population of independent self-sustaining startups. TinySeed is part of that because no one else was serving that market when we stepped in. And so this episode is a bit of inside baseball. It’s a look behind the curtain of running a venture fund and TinySeed even a bit about the broader venture space. I find this stuff super interesting because it’s not something that I have ever been exposed to before running this fund. And who better to explain it than TinySeed co-founder a r Ette? Before we dive into our conversation, MicroConf Connect applications are open until tomorrow, January 15th. MicroConf Connect is an application only paid community. If you sign up in the next couple of days, you get access to our upcoming workshop with Kate Summa on January 23rd, 2025. You’re going to join Kate live as she delivers SaaS onboarding best practices and tips. Plus does a live teardown of a Connect members onboarding experience. We do a live workshop or event or sometimes it’s a q and a with me once a month every month for paid MicroConf Connect members. Head to MicroConf connect.com in the next 48 hours to apply and get in our January batch. And with that, let’s dive into my conversation with a R in our set. Welcome back to Startup For the Rest Of Us.  

Einar Vollset:
Thanks for having me.  

Rob Walling:
It is good to have you on the show, man. Folks know you from Hot Take Tuesday. They also might know you as the managing partner of Discretion Capital that helps seven and eight figure SaaS companies sell for amazing outcomes as well as co-founder of TinySeed. There  

Einar Vollset:
You go. It’s nice to have you all to myself without Tracy interjecting with her blue sky nonsense.  

Rob Walling:
Seriously, our open source communist  

Einar Vollset:
Blue sky. Yeah, yeah, that’s right.  

Rob Walling:
This is great. Hey Tracy. Hi Tracy. So today we’re going to go a little off the startups For the Rest Of Us beaten path, so to speak. And I have had a crash course over the past four or five years in not only just investing in startups, but then venture investing and what that looks like and how if you are a venture fund and you don’t return what the s and p 500 does, then you crash and burn. And I didn’t even realize that was possible. How valuations are created and frankly, we’re going to talk about TinySeed, the stuff we’ve learned. This is not just a big sales pitch of TinySeed. We are fundraising right now and folks can reach out to you TinySeed dot com slash invest if they want to get in touch if they’re an accredited investor. But the idea here is to share a bunch of the learnings that you and I have had. I think you had a lot more back in 2018 when we started this, but to talk about investing in startups, potential outcomes, and frankly, I also want to talk about TinySeed and really dig into why it’s different from say someone going through yc because we have folks who get into both and who have gone with TinySeed and that blew my mind to me. YC has been the gold standard of gold standards since I was a wheel ad and there really are some differences that cause folks to want to go the TinySeed path.  

Einar Vollset:
Yeah, that sounds good. And also I think it’s just even if you’re not going to go for TinySeed, you’re not investing in VC funds, I think it’s helpful to understand if you are thinking about funding, whether from TinySeed or other people, I think it’s worth understanding what are the incentives, how does this work on that end so that you understand what you’re signing up for.  

Rob Walling:
Yeah, it’s interesting. In bootstrapping, let’s say 10 years ago, gosh, when I did my talk, no, it must’ve been 20, I guess I did a talk 2017 or 18 at MicroConf four. I said, I think bootstrappers are going to start raising funding. And I hinted at it in a five minutes section in one thing and kind of got some pushback. And then the next one, half the talk was about it and it was right as we were starting TinySeed. And some people were like seriously pissed. They’re like, what? 

Pushing your book, since you’re doing that, you’re saying people should do it. And I was like, no, people are already doing it. That’s why we’re starting TinySeed is because there’s opportunity here. I had already invested in, I don’t know, eight maybe eight or nine, about eight kind of bootstrapped SaaS, mostly bootstrapped SaaS that I just put my own cash into. And so the openness and frankly the stigma of raising funding as I won’t say it’s gone because every once in a while I’ll see an any hacker post on Twitter about this is why I don’t raise funding, quoting some anomaly somebody sells for, what was it? Was it FanDuel or something sold for 500 million and the founder got nothing, but it’s like, yeah,  

Einar Vollset:
A lot more to that story, I’m  

Rob Walling:
Pretty sure. Yeah, there’s more to a story than that. So there’s always these exceptions, and when we surveyed folks for the state of independent SaaS, it’s somewhere around one in four or almost one in three, around 30% of bootstrap founders say they would at least consider raising funding.  

Einar Vollset:
Well, I think it makes sense. And also this has always been my thing. A little bit of a pet peeve thing is like, look, some of these purists on the never raise any funding part is they never raised any funding. Oh, is that because your wife works full time at Morgan Stanley and so basically can support you or you have rich parents or you’re basically wealthy. So it actually sort of democratizes starting your own SaaS business a fair bit for those that don’t necessarily sit on a bunch of cash.  

Rob Walling:
And it certainly makes it possible for less technical folks to do it as well because such a big cost. I was never anti funding. And even in the days of Drip considered like, man, it would be so much easier if I could raise four or $500,000, but I didn’t know anybody didn’t know how to do it. It was 2014. It is like all the stuff that’s available today wasn’t out there. So with all that said, with that preamble, let’s talk a little bit about venture investing, what success looks like and frankly, how many venture funds just miss the mark and don’t even beat an index fund that I could buy a Vanguard index fund?  

Einar Vollset:
Oh yeah, for sure. I mean, yeah, I think it’s just worth for people to think about. I think sometimes people think, oh, investing in VC funds think Sequoia Andrees and whatever, and it’s just like, oh, it’s how you get a hundred x. You read about these outcomes and you think they’re going to a hundred x. The fact of the matter is if you look at one of the golden decades for venture investing in the US was the decade between 2004 and 2014. It includes a bunch of, now well-known names came through that decade. And so you might think to yourself like to be in the top quarter of performance of venture funds in terms of return capital in that quartile, you probably returned, what do you think, like five x, six x, some of that, in fact, the actual math is more like two x, I think it’s 2.16 or something. If you as a venture fund in that decade, which was a good decade for venture funds return 2.1 x, then you were in the top quartile of funds.  

Rob Walling:
So that means if I invested a hundred thousand dollars into that fund, I got my initial a hundred thousand back and then an additional $210,000. Is that  

Einar Vollset:
Right? No, no. You put a hundred thousand dollars in and you got $216,000 back. So it was a 2.1 x  

Rob Walling:
And over the course of what, seven to 10 years?  

Einar Vollset:
Up to 10 years,  

Rob Walling:
Unreal.  

Einar Vollset:
That’s a tough quartile fund. 

And really the reason is because a lot of funds, and also look, I think the median fund still returns at least one x, but there is a good number that returned less than one X. It’s probably 40% of funds, you don’t even get your money back. That’s pretty common. And so then you look further is like, okay, well what’s great performance in venture? Clearly two x over in that same timeframe, the s and p 500 probably went way up. I mean it had the housing crash in 2008, but nonetheless, what is amazing world-class looked like? And that’s actually in that quartile, it was just over five x. So if you five x, if you’re a venture fund, that five xd, then you were in the top 5% of funds in that timeframe. And I think the reason why people sort of misunderstand this, they think venture and then they think like, oh, what do I think about when I think about venture? 

Well, it’s like Airbnb type returns. You hear about yc, they invested at whatever, probably put same. I was in the same batch, so I know what they put in probably 40,000, $20,000 and a thousand x or something like that. And so I think that sometimes translates into, oh, at the fund level, that’s the kind of return. So maybe not a thousand, but you’re getting a hundred times your money. But that’s an extreme outlier for venture funds. And really if you’re looking for a thousand X, you shouldn’t be in venture, you shouldn’t be in venture funds. That doesn’t make any sense. It’s almost impossible to get a thousand. It is impossible to get a thousand X in a venture fund or even a hundred x. If you’re wanting to do that, then you should put all your money into single bets. You should be investing in individual companies and concentrate your position as much as you can into your extreme high conviction bets and just go for that. 

And that’s the way to do that. But a lot of investors, they don’t want to do that. So the question then is why would you invest in a venture fund instead of doing that? The reason is you’re reducing risk. That’s what you care about. You’re basically trading off. You’re saying, look, okay, I’m willing to forego this notion that I’m going to a hundred x my money, but the flip side is I’m less likely to lose it all. The standard outcome if you invest all your money into a single company is you’re going to lose it. At least an early stage company, you’re going to lose all the money. And if that’s not something that you want to do that’s not part of your investment strategy, then investing in a fund makes sense and you’re making that trade off then,  

Rob Walling:
And that makes sense to me. So I entertained, after I sold Drip, I had a little bit of cash on my hands and I entertained the idea of investing in a couple of different venture funds and I never did, but it wasn’t because I didn’t think the returns would be there. It was because I had enough people approaching me through MicroConf and this podcast where I was like, that’s a legit business. Like Jordan Gall, right? With Card Hook at the time, and Justin McGill with lead views and there were just these great little B2B businesses. I was like, I kind of had enough people coming my way at reasonable valuations. To be honest, when I went on AngelList, here was the problem. I went to AngelList. I was like, oh, I’m going to make a few bets. And holy mother of, I mean the valuations for almost no revenue were like 10 million. And I did, I put five grand into one of those and I put 10 grand into another, and all of them either went to zero or returned one return to me, 11 grand from my 10 grand investment. I was like, all right. I consider that’s good,  

Einar Vollset:
Mean it’s probably above way above average return. So good job, yo.  

Rob Walling:
It really is. So I’m in a little bit of a unique position. I mean the whole thing is the deal flow is kind of coming to me.  

Einar Vollset:
Well, I think that’s the key thing. I tell people this and I’m not being unusually humble about this. And the fact is tiny C wouldn’t work if you weren’t there at least the early days. I don’t have the deal flow, I just don’t. And I think because of your background with MicroConf and startup For the Rest Of Us and all this stuff that people know about you, and there’s probably you and I’ve been saying there’s less than half a dozen people worldwide that naturally has that kind of deal flow, quality, deal flow, pricing power that’s coming your way. And I think really that’s part of the reason why you would invest in a fund. Because if you look at it, say you have an amount to invest, whatever that is, a hundred thousand, 250,000, 500,000, whatever, it’s okay. Well, if you do your research and look, you realize you probably shouldn’t just pile into just a single bet. 

You put it all on black as it were. So instead what you want to do is you want to go out and you want to make a lot of bets. Ideally, you probably, I think the math pretty much says if you’re going to have a better than 50% chance of at least breaking even, you should be making at least, I think it’s somewhere like 15 and 20 bets, like investments rather than bets. I shouldn’t call it bets 20 investments. But if you think about, okay, how do you do that? If you have a hundred thousand dollars, you say, okay, I believe the math, I want want to put a hundred thousand dollars in, now you have to write 20 checks of $5,000 each. Now you have more problems than when you started because do you have the deal flow to find 20 quality investments? Are you going to see enough good deals just from your networks and friends and connections and whatever on AngelList or whatever in order to make those investments? 

And I would argue that most of the time you don’t get to access the deal flow, you just don’t have it. But even if you did, so say you were uniquely well connected, now it’s like, okay, now you need to convince people to take a small check from you individually. So now most people aren’t going to take most people who invest, an individual investor that goes along and says, all right, well I want to put $5,000 in. It actually can be quite hard to, even if people are raising money, it can be quite hard to get people to accept $5,000 because it’s such a small check. So there’s usually a minimum before you have to get in.  

Rob Walling:
Absolutely. The minimum, in my experience, I believe every company I invested in was 25,000.  

Einar Vollset:
Yeah,  

Rob Walling:
Yeah. I mean I’m sure friends, you can get a friend who can cut you a deal or whatever, but if you are trying to make that many investments  

Einar Vollset:
And quality investments, a friend will do it. That’s great. But how many friends do you have? Do you have 20 friends that are really truly rigorously is high quality and that you can put $5,000 in? It starts to get difficult. And then on top of that, even if you get past, can I even get my check in? Can I get the deal flow? Then it’s like, okay, well who’s setting the price here? Are you going to be able to get it? Because whatever VCs tell you the name of the game in VC is entry price, exit price. If you overpay for your investments, then you’re not going to make any money If you invested 50 million pre for pre-product, pre-revenue business, it’s a really big hurdle for you to make a reasonable return obviously because you overpaid for it. And so that’s sort of the third thing that comes into it. It’s like, do you have the pricing power? So can you get the deal flow? Do you have the pricing power to get a reasonable valuation and can you even put your money in? And that’s alongside, okay, well you probably have a full-time job. How often are you doing these investments? Are you learning fast enough to stop doing stupid and start doing good investments? And that’s really the reason why along with spreading a risk, why people invest in venture funds as opposed to just being individual angel investors.  

Rob Walling:
And this is one reason that venture funds became content marketing machines and built brands. Do you remember, this is a recent phenomenon. I mean maybe at best it was between 2005 and 10 is my memory when they started really coming out. Because in the nineties, I grew up in the Bay Area, lived there, I worked construction there. I didn’t work in startups, but there was nothing published by venture funds. It was very, what do you call it, information asymmetry is my memory of the whole thing. It was very opaque. You didn’t know what term sheets, what even, I didn’t even know what terms meant and everybody was hiding everything. And it felt like in their early 2000, mid two thousands, probably around the time yc like Paul Graham and YC started coming up. The VC started marketing themselves as the Andreessen Horowitz and the Sequoias where they were putting out stuff first  

Einar Vollset:
Round, first round first was one of the main ones that did the early days and  

Rob Walling:
Then came 500 startups and Techstars where it’s like, here’s content to help founders. Here’s what a VC term sheet looks like. Here’s what all these terms mean. Here’s how you can get screwed by liquidation. And there’s the preferred and then participating. And there’s all these things that you didn’t even know what they meant. Brad Feld, right? He wrote a bunch of books about it. That was a big thing was for them to start a generating deal flow, but B, to get the trust I think from people so weren’t because you were a commodity before, it’s kind of like if I’m going to go borrow money for my house, who’s going to give me the lowest rate we know with no prepayment penalty? That’s it. It’s commodity, it’s numbers and it’s pricing. And that’s what I think veg was a little, at least from my perspective, was a little more like that at one point. And then it became not right, it became how do I get people to know me such that I do have some type of pricing power and also a lot of inbound interest.  

Einar Vollset:
And I think I know for a fact that’s sort of what YC partly y YC started is because it used to be kind like, how do you get access to this? And it was like, oh, my dad plays golf with this lawyer who can get you an intro and then you could get, but I think in part that’s why VC started out so geograph and remained to this day, so geographically concentrated because sort of what it was, everyone was sort of there and you had to be there. You had to be in Silicon Valley in order to get money and you had to have those connections and be able to work a warm intro. I mean, that’s still the case for the cases. People are figure out a way to get an intro. To me that’s turtle number one kind of thing. So for sure that’s been part of it.  

Rob Walling:
So let’s talk about valuations, how these valuations happen. And there was a big realization at one point where you and I were talking because I had always heard, boy, you need billion dollar exits in order for a venture fund to make money. So TinySeed is this question I think I asked, I think everyone asks, so how does TinySeed make this work without a billion dollar exit? How does all that work?  

Einar Vollset:
Well, I mean there’s a couple of different things here. And actually a billion to a degree, a billion dollar is apparently too small even in some cases. There was actually, I think it was Sam Altman who wrote a piece, not Mr. OpenAI, but used to be president of yc. He wrote a piece How to Invest in Startups, and I think that was like 2018, 2016, something like that. And his main point in that article, which I still think is up, was you shouldn’t invest in anything unless it can be 20 billion or more. Just don’t even waste your time unless you think it can be a 20 billion exit. I mean that article was in part the reason why TinySeed became a thing, because crazy  

Rob Walling:
It is.  

Einar Vollset:
I get it. He’s talking his own book at the time. That totally makes sense. If you have a lot of aum, a lot of money to put on, and you’re writing big checks and big outcomes and this is what you’re doing to a degree, it doesn’t matter. Entry price doesn’t matter, valuation doesn’t matter. You just got to find that thing that goes to 20 billion, that’s the whole game. And while that’s true, if you’re playing that game, then that’s how you should be playing that game effectively. Our argument was like, look, there’s got to be a way in which founders and investors can both succeed, where outcomes are not quite 20 billion. I think most of the people listening to this would agree that a 75 million or a hundred million dollars exit, even if it’s selling to some lowly private equity fund, that’s pretty good. I think a lot of people listening to this would think to themselves, if I owned 80, 90% of a company and sold for 75 million, I’d be having a pretty good Christmas right about now if that’s what was happening. 

And so effectively what we were thinking with TinySeed is like, look, there’s got to be a way where you can have that be success and everybody makes out well. And that’s sort of the ground thinking on the investing side for TinySeed is like, how do we make that happen? And really what that boils down to is a couple of different things. One is I don’t think it works for every single industry, every kind of product, every kind of service. There’s just some things that are just requires a lot of capital is extremely capital intensive. It makes total sense to keep raising money. And if you keep raising money and burning money, then the sort of winner take all stuff makes total sense here. Your Airbnbs, your hell, your new open AI stuff, it makes total, I’m not reasonable, gazillion a trillion dollars and this whatever. 

And even some of the smaller stuff is like, look, my standard thing is like look, if you’re going to be doing a home grooming startup service type thing that it’s going to be capital intensive. It’s like a Uber, you got to spend money on it and you’re going to get diluted up to wazoo and you have to gun for an enormous outfit to make any money. But what we realized is like, okay, but there is this subset of specifically B2B SaaS where it can work because for a couple of different reasons. One is it’s so capital efficient. A lot of the time the gross margins are like 95%. That’s not unusual. And quite often on the discretion side, I talk to founders and they’re like, yeah, do you think I’m profitable enough? I got 65% free cash flow. I’m like, okay, yeah, I think you’re profitable.  

Rob Walling:
This is great on recurring revenue, on millions in recurring  

Einar Vollset:
Revenue, you expanding revenue. And it’s like, it’s crazy. I mean you even see this and some of the go public companies like Zoom, and I think Zoom actually is the sort of poster boy for this, the Zoom, I think they went public with more money in the bank than they raised  

Rob Walling:
Something like that. It’s just incredible once they hit escape ity.  

Einar Vollset:
Yeah, and that’s sort of what B2B SaaS is like. And so I think it works for that and in a sense that there is this notion that basically if you take a little bit of money once and then you don’t need to raise anymore. You can if you want to, but you don’t need to. And so that’s what works for TinySeed or mostly Bootstrap or TinySeed like companies. And if you combine that then with what we consider to be reasonable valuation. So I think if you’re playing the classic VC game, 20 billion a bust, yeah, you’re right. It doesn’t matter that you’re paying 25 million for a pre-revenue product at YC demo day as a seed investor, it’s fine. Who cares if you could invest 25 at 25 million valuation into open AI or Airbnb, then great investment, go do it, but 25 million say and then it goes to a billion dollars. 

Let’s just say that rather than 20, let’s be a little less ambitious than Mr. Altman was. That’s a 40 x return on your money. That’s a good return. That’s a great return, sadly. And we can get in the math area, you might not be good enough for an investor like a fund investor, but the flip side of that is a billion dollars is still a billion dollars. It’s still kind of an unusual outcome. And I’m not saying valuation here. I’m saying actually cash like IPO or selling or whatever, not just make-believe valuations actual money in the bank. And I think that’s pretty rare. And the fact of the matter is if you come in, the kind of valuations that we do at, and it’s capital efficient enough that these companies aren’t raising money all the time. So say if we come in at a couple of million and 1.8 I think is our average, and then you 40 x that, that’s 70, 72 million. 

72 million is still a lot of money, but it happens a lot more frequently than a billion dollars in discretion capital. We’ve done several deals this year that have been sort of in that range, and that’s just us and nobody ever reads about them. We actually did one years ago now we did that iceberg, the measuring the depth of the software iceberg title based on Patty eleven’s quote and observation there around most people don’t know how much money exchanges and so about for these kinds of outcomes and how common the big ones are or the reasonably sized ones. So that’s what it boils down to. Basically what we’re arguing is like, look, if you’re going for that kind of enormous outcome, then yeah, it makes total sense. Raise it 25 million and capital will go for it, become open ai become Airbnb. But there’s also this other class of startups where if you’re B2B SaaS and as an investor you can put money in at a couple of million and then they sell for 50 to a hundred million dollars, that’s as good. It doesn’t matter to you if you get 40 x your money, what do you care whether it 40 x means 75 million as an exit or 40 x means a billion dollars? It doesn’t. I mean other than bragging, right? It doesn’t matter. It just end price. Exit price.  

Rob Walling:
Exactly. And that’s the thing, the epiphany that I think I had at one point, or you kind of explained that to me, and it totally makes sense when you didn’t name the numbers, but the fact that the venture industrial complex is so focused on valuations and so focused on these large exits has almost to a point, like I’ll say brainwash some folks into thinking that’s the only way to do it. And what it does is it leaves out, I talk about my 1 9 90 rule where I say around 1% of startups should go after venture, about 90% should bootstrap. And I think about 9% should raise probably some type of funding. Maybe that’s TinySeed, it’s angels, but it’s not venture track. And the idea there is that going for 10 billion, 20 billion outcomes, it leaves out so many founders, thousands of founders who maybe should or maybe want to raise some type of money and still have a great outcome. 

And there is really no outlet for that. Before that we knew about it. Before us, it was ind BC and us. And then there’s obviously some individual investors. There’s a handful of others, but that’s where it is. And so what’s a trip is every application process for TinySeed, we do run it twice a year. Every six months, we inevitably get one company that we make an offer to and they come back and say, we’d love to take your money. We want to be part of it. But we were looking for a 10 million valuation. Or someone came, remember someone said 20 million and they were doing 30, 40 KMRR, whatever. I mean it was a respectable company, but it’s like, no, we’re like, no, you don’t understand. You don’t get your cake and eat it too. You don’t get TinySeed at that valuation. That’s not how we work.  

Einar Vollset:
And I think also some people, although I think awareness is raising a little bit, what some founders don’t understand is, look, there are trade-offs to this. Obviously if you can raise it a hundred million valuation, billion dollar valuation, there’s really great things about that. But some of the bad things are, there’s a whole universe of outcomes that are not the doors closed for you. If you raise it $25, the chances that you’re going to be able to or be allowed to sell for 50 is very low. In some cases. If you have extreme power and all this stuff and you didn’t give you any rights, that’s fine. But if you push valuations, the highest possible investors are going to put control provisions in there that sort of says, okay, look, the reason why we’re giving you this high valuation is because you’re saying you’re gunning for this enormous outcome. So we’re going to put some barriers in place. I mean, that pushes you, that aligns everyone to that kind of outcome or nothing, not get a high valuation and then sell for a reasonable amount. That door is very often closed.  

Rob Walling:
And that’s the challenge is especially if you’re a first time founder or have never had a big exit, I heartily believe this, and I’ve heard Dharmesh say this as well, so it makes me think it’s a really good idea, is if you haven’t had an outcome yet and you get some type, you get an offer for never have to work again, money. I don’t know man, I’ve the mind to take it and maybe that’s 10, maybe it’s 20, maybe it’s 30, it’s nowhere near what we’re talking about here, but get one, get a win, then you can do whatever you want. And I’m so much more an ascriber to that to kind of tucking that away. So I know of a company, I’ll keep anonymous, that raised, let’s say a prize was under 40 million in venture over a few rounds and due to liquidation preferences and other things, they would’ve had to sell for something like 80 something million for anyone but the VCs to get money, right? 

It’s like two x, I dunno all the details, but that’s the kind of stuff that I’m not sure people are aware of when they’re like, I’m going to raise it 10 or 20 million. It’s like, oh man, you’ve just really cut off a lot of your optionality. And that was such a big thing. I don’t say this as much when I talk about TinySeed these days, but in the beginning it was just optionality. We are optionality you can raise, you cannot do what makes sense for you. And we have had a bunch of people raise series. We’ve had a handful of folks raise several million,  

Einar Vollset:
A handful, but actually just to change track a little bit, not as many as I thought. It is funny, we raised our second fund in 2021 and obviously 2021 was a good time in the markets. And at the time I remember looking, I was like, oh, about 30% of the companies have raised money. That’s what I used to say. About a third, about a third. Then I was coming around to fundraising again. I was like, okay, let’s look at this. Actually it’s 8%, our tiny company less than 10  

Rob Walling:
Because 2022 and 2023 was such a disaster. There’s not that much capital. It’s very expensive now. And so that the number just plummeted. Right?  

Einar Vollset:
Exactly. And so they just haven’t done that. They just haven’t, have you raised any money? Money? And actually that sort of relates back to how the TinySeed different, and it’s like why I think people maybe don’t understand is how do venture measure performance on the way? Because the issue with a venture fund is like, well, good and bad. You don’t know for any good for at least 10 years. So if you’re a charlatan, you can kind of keep going for 10 years and say, oh, I’ll prove you’re right in a couple of years here. But I think it’s understanding how does most VCs, how does that make our life hard? Why is it a problem for a venture fund that only 8% of your companies have raised further funding? And the answer is, as traditional venture fund, it’d be a failure if only 8% of your companies raise money. 

And the reason for that is the way that venture investments work is that you as an investor when you come along or GP like a VC, basically you come along and you’re basically, every quarter or so, you send an update to your investors, to your LPs basically that says, this is what my portfolio is worth. And the way that you do that, obviously they’re not publicly traded. And so what you’re doing is you’re basically doing two things. You either keep the market the same, if they’re just nothing material has changed, IE, they haven’t gone out of business or they haven’t raised money, or if they raise money, then you mark it up to this new valuation because of the length of these funds, most of the time a successful VC can raise several funds without returning any money at all. It could just be like, Hey, I’m raising fund number three and look at my performance on my fund one and my fund two is up three x or whatever, two x five x. 

And it’s all based on markups. It’s all based on how successful are you, are your portfolio and raising subsequent raise more money at higher valuations to a large degree what success is in vc, if you can have a fund that, this is probably why YC is such a great business. They invested one point, whatever they do, and then it’s like the standard valuation markup three months later at demo day is like 25 million. Well, that’s an enormous markup straight there. It blows everyone else out of the water. They capture a lot of that value to be perfectly honest. And so what do we do well? So we have to come up with something different, which is always kind of challenging. And I think the difference for us is what we’re trying to do is to say, look, these companies, this successful companies don’t really need to raise any more money after this because they’re so capital efficient. 

So how do we capture the fact that the successful companies don’t raise any more money so there’s no automatic markups? And actually it is funny guys, in 21 when we had more markups and stuff, I remember doing it this way and I was just like, okay, well we will mark out why not? We’re not going to handicap ourselves. People would ask ’em. There’s really not necessarily quite of a correlation between the success of the company and the valuation markup. Because in 21 in particular, and this is true in all bubbly things, you would have people who raised because they were doing really well, and then people who raised because they were doing really badly and they were running out of money and they were going to go under unless they raised money. And so they were able to do so, and then they got marked up above what even some of the best performing companies that we had. 

And so what we decided to do was basically say, look, we’re going to give you a market price. And so we have a couple of different variants on this, but sort of our sort of base case valuation, which is most of the numbers we share out, it’s basically some sort of a revenue multiple based on growth mostly. And it’s somewhere between two X and somewhere between seven x. And really what that valuation is is different to even a typical VC markup in the sense that, look, if you raise a series A at billion dollars, that does not mean you can sell your company for a billion dollars. That’s just not happening. Obviously if you raise a 200 times a RR, you’re not selling it 200 times a RR. It’s not possible. Our base case valuation though, is more like what is the market price currently? What is the clearing price  

Rob Walling:
Sell for?  

Einar Vollset:
Yeah, what is the liquidation price of the portfolio at the moment? And that’s what we go to market with, which is kind of a handicap, I’ve got to be honest with you.  

Rob Walling:
Oh, big time. Much more conservative.  

Einar Vollset:
Much more conservative. And we provide the optimistic case, which goes up I think to up to 11 x, and we have one which includes the markups whenever they happen and they’re a little bit more, but most of the time we’re referring to the base case. So liquidation type valuation. And the reason for that is mostly that I want to be as conservative as possible. A, I basically want to be able to argue because we’re already doing something different. We’re not your typical what everyone else is expecting and like, oh yeah, this is how you get through an audit at Carta because the markups is from Andreessen and blah, blah blah. So we had to be a little bit more conservative. It can be a challenge. Although I will say, and although it’s not apples to apples, I was pretty stoked when card, which is our fund management platform, they came out in the spring with a performance metrics of 1800 funds, which actually includes us. And we were in the top five to six to 16% based on the venture metrics there, even using our most conservative metric evaluation. So that felt good, but it’s still a challenge because it’s new. People would rather have, in some cases, people are like, look, I believe that this company is worth a billion dollars because Andreesen says so even though they’re only doing 500,000 a RR more than I believe that this company is worth five XARR.  

Rob Walling:
I call it brainwashing or whatever it is. It’s a standard. It’s the safe. It’s nobody gets fired for buying IBM, right? It’s just the way,  

Einar Vollset:
Right? I mean, that’s always the case. I mean venture, I’m going to side ran here about venture and branding and stuff, but venture, I think a lot of the time it’s sort of a self-fulfilling prophecy. If you get lucky very early on in the early fund and you get the brand built, then you sort of like capital comes to you and deal flow comes to you and it’s sort of self-fulfilling prophecy that you do pretty well. So my one piece of advice, if you want to be a classic VC and you want to start a new venture fund, is to be extremely lucky with your investments in your first fund. That’s the way to do it.  

Rob Walling:
That’s all you got to do. Just be lucky.  

Einar Vollset:
Just be lucky. That’s good.  

Rob Walling:
No hard worker or skill. Let’s just go all after luck on this one. Yeah,  

Einar Vollset:
I’m not investing hard luck or skill. I’m just saying given a choice, you would rather have be lucky than good. You’d rather be  

Rob Walling:
Lucky. Yeah. So as we wrap up, if folks are listening to this, if someone is an accredited investor, we are raising our next funds to invest in ambitious B2B SaaS companies. They can hit you up directly, TinySeed dot com slash invest. If they fill out that form that goes directly to your inbox. Anything else you want folks to know?  

Einar Vollset:
No, I mean, I think that’s it. I mean, it’s a little unusual. We’re just sort of like, this is, again, like we were saying, it takes 10 years to know if you’re good in this game. And we’re like, we’re in year five and indications are good.  

Rob Walling:
That’s what it is. The markers, yeah, the arrows are going in the right direction.  

Einar Vollset:
Things are good. We’re not a little bit unusual too. We’re not vastly increasing the size of our fund, which is quite common in the VC world. It’s very often you start with a small fund and you quadruple it and then that works out and you quadruple it again. And we’re not doing that. We’re just sort of like, look, this is what we feel good about. This is the size of this opportunity and we’re keeping the funds sort of the same and just keep executing the way it has been because it seems to be working. We think it will be continued to,  

Rob Walling:
And the reason VCs do that is that’s how you make more management fees is the bigger your fund, the more money you make. And we’re like, you know what? The opportunity that the deal flow we see in a six month period is X. It’s been really consistent, which is great, and we don’t want to raise twice as much money. Then what are we going to do invest in? We’re not going to double our deal flow in the next six months, maybe we’ll over years, but  

Einar Vollset:
We might put more. There’s opportunities we could put more money Dividual companies do. We do all this stuff. But fundamentally, the core strategy of TinySeed sort of remains the same. This is the size of the opportunity. This is what we think believes, and there are numerous venture funds that have done well at say, being a 25 million fund, and because they’ve done so well, lots of people are interested and then they decide, let’s raise $250 million. But if you’re 250 million, all of a sudden you’re doing different kinds of investments, maybe even in different kinds of companies, different stages. Who’s this? You’re good at that. Just because you’re good at writing $250,000 checks does not mean you’re good at writing $5 million checks into later stage companies. And your competition might be different and your deal flow might be different and your pricing power might not be there at that stage and all this stuff.  

Rob Walling:
So we’ve invested in almost 200 companies over four and a half years, and we’re going to stay at that pace. So the indexing across a lot of ambitious B2B SaaS companies seems to be working for us so far.  

Einar Vollset:
It allows us to keep the sort of batches small, right? It’s nice to have that, some of that intimacy. We’re not 150, 200 people in batches. We’re talking 20 people, 25 people, which is nice.  

Rob Walling:
TinySeed dot com slash invest if anyone’s interested. And a R volt on Twitter X Twitter. If folks want to see you posting about these San Francisco Giants  

Einar Vollset:
Or a r volt.com on Blue Sky. No, I’m only  

Rob Walling:
Kidding. Oh my God. Record scratch. I was like, what? You’re on Blue sky. You’re going to lose your bet. You’re going to lose your be to Tracy, thanks again man. Thanks for coming on the show.  

Einar Vollset:
Thanks for having me.  

Rob Walling:
Thanks again and R for joining me this week on the show. Thank you for joining me this week and every week. This is Rob Walling signing off from episode 748.