How Equal Operates
Join the discussion on Linkedin
Having worked at a few different investment firms at this point, I can safely say there isn’t a single way to win in venture. While we will all opine on the merits of portfolio theory, bicker over opportunistic vs. thesis-driven investing and debate over optimal fund sizes, there is only one thing that is singularly true for building an investment firm – do what works best for you and your team.
With that, I often find the process of how firms operate to be far too obscure. Outside looking in, it seems like a black box and I can’t ever really understand why. At the end of the day, I want us and our founders to arrive at conviction in each other as quickly as possible on both sides. I want that conviction to be on our merits, not on our marketing. The worst thing that could happen to us is partnering with a founder who is looking for something categorically different (we see this all the time with other companies and it’s a mess). For that reason, I believe in transparency. We have posted prior iterations of our voting form, we publish our frameworks and research (despite feedback that these are our guarded secrets) and I’m likely far less restrained with my words than I should be. For better or worse, I want folks to know what we are (and what we aren’t), so they can decide whether we are for them. This is just as true for founders as it is for prospective LPs, employees, and co-investors.
With that, I wanted to break down how we operate as a firm. We’re not some sacred cabal practicing alchemy in the darkness…we have a process that is pretty straightforward and I believe works for us. That process is centered around the “Prepared Mind” - our core capability that we believe yields a compounding advantage against the competition. We develop and execute the prepared mind across 5 reinforcing core activities that contribute to what we do as a venture firm. The graphic below details how we see these feed into each other but I think it’s worth delineating with a bit more detail.
Step 1: Exhaustive research into what we consider to be the most exciting ideas in the market. We validate these ideas with market experts (organic relationships, rather than paid sources of information) who become embedded members of our firm (either as LPs, investors in our companies or other partnership frameworks). We use this research to identify the top 3-5 ideas in each of our sectors, ultimately forming our “Hunting Range”. Sometimes we will publish our findings, other times we won’t (more on this later).
Step 2: We engage in aggressive outbound sourcing (or what we call “hunting”) for opportunities on our Hunting Range. In many cases we will meet with dozens of companies related to a single opportunity (in one case, we met with >100) to find the singular team that we think is capable of executing upon that category. For the most part, these founders are not actively raising and sometimes they aren’t even doing the business we are looking for, but have demonstrated the willingness to pivot to the business we are interested in (we call these Phoenix Rounds). Example companies that have come from “hunts” include Threeflow, Odyssey, Upwards and Revive (just to name a few). That said, we are not exclusively “hunters”. This method best resembles how growth stage / PE investors operate, but less so at Seed. We also “gather” deal flow that is in process from founders actively raising. This is far more akin to the way I see most seed stage firms operate. Generally speaking, these companies are operating in an area that we have prior experience (an industry we focus on or a model like “Rigup or X”) that provide an inside edge. Example companies here include companies like vQuip, DayZero and Wrapbook. Lastly, we “hatch”. Hatching is a term that I will “borrow” from Joel Cutler / General Catalyst, referring to their method for incubating companies. For these companies, we are partnering with founders to start a business with a shared thesis. While a lot of firms prefer to scale their incubation methods, we feel the opposite. Joel once told me “Only hatch a business if it’s a thesis you believe in so deeply that you’d start the company yourself and if you have a founder that is so exceptional that you’d back anything they did.” That’s a high bar, but one we think we’ve held to. Example companies here include Leap, Texture and Starday.
Some of our companies fall somewhere between these stages, but we try our best to meet founders as early as possible given our evaluation process (which we’ll discuss below), rather than sitting on our hands waiting for deals to happen.
Step 3: Our diligence process differs from most firms. For seed stage investments, we rarely care about your traction (especially if you have not raised capital before). More so than anything we want to see 1) the quality of the founder, 2) alignment on a shared vision for how to transform that market and 3) the potential for a category-defining company (you can see a prior example of our voting form here). We have many frameworks we use to asses the total magnitude of a given opportunity (and how best to achieve that), but it all begins with getting feedback from customers. Generally speaking, we heavily discount existing customers and strongly prefer to introduce companies to customers in our network. We believe this is additive to the company regardless of whether we invest, but also ensures that we get feedback from trusted experts who understand how we operate. We aren’t asking whether customers will buy this today, but rather assessing the potential for where the product and market are heading (skating to where the puck will be, if you will). With that, we attempt to ignore interim signal data and focus on how impactful the company could be if we’re able to achieve the shared objective and how we (the company, us and our network) can enable that shared objective to be realized. The depth of our customer networks (what we refer to as Bridgers) is paramount in this process.
Ultimately, there are several forms of risk you can take as an investor, but I primarily think of market risk (does the customer want your product?), technical risk (can this product be built?) and execution risk (can the team execute on this opportunity?). We believe the nature of our prepared mind and Bridger networks significantly alleviates market risk and largely align on our conviction in a market opportunity before even meeting with a founder. For the most part, the companies we invest in don’t have significant technical risk (for better or for worse, I’m not exactly the most technical investor). This leaves execution risk as the primary risk we are willing to take. We mitigate this by partnering with exceptional founders, but untangling luck from skill is a key component in determining whether the team is able to execute and, truthfully, is the hardest risk to effectively mitigate prior to investing.
Lastly, deals generally require 2 team members to sponsor them and everyone on our team votes (we do two sets of votes). If we agree to invest, we empower a 3 person team to go win the deal. For total transparency, we’re currently investing $2.5-3 million for our initial investment and averaging over 15% ownership with the hope to build to above 20% in subsequent rounds.
Step 4: Given that we are primarily focused on execution risk, we tend to work very closely with our portfolio companies. We’re almost always the largest shareholder in the company at the seed round (if not through the life of the company), so we think it’s important for us to be as impactful as possible on behalf of both the founders and the other stakeholders we represent as board members. Over the years, we have evolved to deliver on the high service levels that I expected of myself and I believe have developed an approach that is somewhat novel called “3 Hats”. Every new investment we make gets 3 people assigned to them – myself, a product owner (our industry specialist) and a generalist. Any of us can be the board member, but we work as a team to service the founder/company as if we were a consulting team serving a client. I generally provide guidance on strategy, governance, fund raising and executive relationships, while our product owners focus on customer development and industry dynamics and our generalist on startup best practices. At our off-sites, we literally allocate hours to companies based on their stages to ensure that bandwidth is appropriately split across the team. To be candid, I love this approach and feedback from our founders is that they do too. I’m currently on 14 boards and likely have more bandwidth than I ever had before, while achieving a quality of service to our founders that is far beyond what I ever delivered previously. Perhaps most importantly in times like this (where it feels like check writers are jumping from firm to firm with the frequency of frogs jumping from lily pad to lily pad), this provides certainty and continuity to our founders (even if myself or one of our team members gets hit by a bus, you still have 2 deal sponsors supporting you). Very few firms can offer that.
Step 5: Lastly, our efforts in the community drive this entire process full circle. We think of community very holistically.
We are deeply embedded in the industry communities we operate within. We work with industry insiders to research pathways to digital transformation and work with them closely to unlock those doors once we invest. We will frequently bring these folks (again, referred to as Bridgers) into the rounds of our companies or partner with them in the earliest days of our companies. These folks know that we aren’t tourists and share an authentic passion for those markets.
In the venture community, we focus on our branding/marketing efforts related to our industry exposure. We’re not trying to be the most visible firm, but rather the most impactful (at the very least for seed stage companies in our industries). We could definitely be more active/visible in more general VC formats, but given our scarce resources, our focus is largely in helping to demonstrate the enormity of opportunity in these markets, explaining how these markets operate (occasionally I’ll get a nice bottle of wine for explaining opaque industry topics…I don’t mind it 😊) or connecting folks to those in the industry that can help them.
Lastly, we view our portfolio community as a compounding asset. We’ve implemented a strategy of Keiretsu to unlock shared opportunities across each of our industry segments. These founders share intel, customers, business development partnerships and investor intros – in many cases, they are doing OUR work for US. It’s extremely powerful to see in action and really fun to see our founders spending so much time together (sometimes as business partners and other times as friends). You could see this at our annual Founder Summit (scary to have 20 CEOs down in Cancun together…), but I think that our founder community is one of our most valuable compounding assets.
This all comes together with our industry summits where we bring these groups together. We had over 5k apply for our last Climate Capital Summit, have an incredible lineup for this year’s Insurance Capital Summit and will shortly announce our 1st Commerce Capital Summit. The goal of these events is to bring together the very best from these stakeholder groups with folks that we can personally vouch for. There aren’t armies of vendors and you can’t buy a ticket. We do these events for free, but the connections made at these events are invaluable. You’d be incredibly surprised at how little connection there is between the startup/VC world and those in our Bridger networks (industry incumbent CEOs, thought leaders and PE investors focused on those spaces) and see these as the physical manifestation of our mission “Bridging the Digital Divide.
The steps don’t stop there. The networks that we develop via our community efforts further extend our Bridger networks, catalyze new research threads and deepen our prepared mind – thus further perpetuating the cycle. Those who know me best, know I’m obsessed with flywheels. We preach the merits of compounding value to our companies and it’s something we try to practice internally. For the first 5 years of Equal, much of this felt like turning a manual crank, but as we see as our Bridger networks, founder community, research assets and industry followings deepen, I can comfortably say that the crank is getting a bit easier to turn.
As an emerging manager, I’m always fascinated by the best practices of others and I’m hopeful that sharing (as transparently as my LPs/team would ever allow!) on how we operate is helpful to others. I can’t say this will work for everyone, but I deeply believe that it works for us. All of this requires a tremendous amount of effort and I’d wager that we are one of the most labor intensive per dollar of capital invested models in the country. For those who doubt that, my grey hair is pretty damn good proof. Is it worth it? Only time will tell, but I think operating like everyone else isn’t enough in today’s venture environment. Being a median venture investor is a recipe for mediocrity and frankly, sounds pretty boring. We may be right, we may be wrong, but if nothing else, we’re hoping to be distinctive.
As Jeff Bezos once said, “The world wants you to be typical—in a thousand ways, it pulls at you. Don't let it happen. You have to pay a price for your distinctiveness, and it's worth it.” There are plenty of founders and VCs who won’t want our product and we’re fine with that, but I’m hopeful that we can be a distinctive product to a small set of folks who do.
Hope this is helpful to all those considering working with us or looking to build their own firms.