Originally published on Substack — March 1st, 2022
The world of venture capital is changing dramatically. Over the last few months I've spent a lot of time thinking and writing about the forces driving that change. The two most significant I've seen are the unbundling and productization of venture.
The world continues to change more and more quickly. We're on internet time now. Venture capital is an industry that has been fairly stable for the last 50+ years. Now every year we see any number of forces that could dramatically change how capital is allocated to startups.
I've dubbed the people driving those changing forces as "renegades." These aren't just solo capitalists or startup funds. Any fund doing something new and disrupting the status quo in venture can be a renegade. One of my favorite things is to reflect on the impact these people are having. I'm young enough in my career that I welcome radical change. It shakes up the way startups get funded and how companies get built.
As part of exploring these changes I'm excited to start a new series. Renegade Spotlights. When I see investors executing on new ways of disrupting venture I want to think publicly about what this means for venture capital.
The Renegade: Homebrew
Hunter Walk and Satya Patel met while they were both working at Google pre-IPO before raising the first Homebrew fund in 2013. One of the founding insights for Homebrew came from their early experience as angel investors. “Even as one of the smallest parts of the cap table, we were often the first call when it came to product or fundraising advice for founders."
Fun fact; the name Homebrew isn't a homage to the team's love for coffee. The firm is named after a Menlo Park computer club that was popular in the late 70's described as "the crucible for the entire [personal computing] industry." Steve Wozniak even credits the first Homebrew meeting as the inspiration to design the Apple I.
At Homebrew the core value prop of the firm has stayed pretty similar for almost 10 years. A hands-on seed fund writing a small number of checks to enable their close involvement with the companies they invest in. Some venture funds sometimes do mental gymnastics around who they really serve, talking publicly about the importance of founders while also recognizing the need to continue building AUM and keeping LPs happy. But Homebrew has been clear since day one: “We look at entrepreneurs as our customers." That became even more relevant with their recent announcement (more below).
Since starting out Homebrew has gone on to raise three core funds, adding up to ~$200M all of which have had significant LP interest. They've invested in early stage rounds for companies like Plaid, Gusto, and Cruise.
The Innovation: Homebrew IV(Ever)
Yesterday Hunter and Satya announced a new model for their fourth fund. They touched on the changing landscape of venture and how the connection between counsel and capital has been been decoupled. How the types of funds backing startups has gotten broader and more competitive.
"Instead of staying the course and raising an even larger, traditional venture fund, we’re zigging while the market zags: Homebrew IV(ever) is an evergreen investment vehicle composed, for now, of only our own capital. Going forward, when we commit to a company it gets our sweat, our reputation, and literally, our dollars, behind it."
An evergreen fund isn't new; lots of investment firms across a variety of industries operate this way. What is unique about Homebrew's new model is that it strips away anything like investment constraints and time horizons. This frees the team up to invest in whatever stage / company type / industry they want to and be free to stay invested indefinitely if they choose to. They don't have to keep LPs happy with mark-ups or provide liquidity after a fund's typical 10-year lifecycle.
Homebrew has historically offered one product SKU. "Being the seed ‘investor of record,’ which meant we were working with a small number of founders, beginning at a very specific stage." With their new model they've clearly defined their new SKU:
- Building relationships with founders regardless of the company's stage
- No check size limitations
- No ownership targets
- No fundraising stage requirements (whether it's seed or pre-IPO or arguably even whether its even equity or tokens or anything)
"Just a mutual desire to work together to increase the probability, velocity or scale of success of your startup. Whether it’s the first check you raise paired with our ability to then coalesce a seed round around our participation, or the last allocation in a later round that’s closing (or has already closed!), we just want to wire the money and get working on your behalf."
Within this new approach there are several common threads I've seen other renegades pull on as they reshape the way capital gets allocated in the startup world.
Venture capital is a constant balance between a company's completely unpredictable lifecycle and a fund’s very strictly contractual ~10-year lifecycle. By removing the typical LP relationship Homebrew has more directly aligned incentives between themselves and the companies they support.
Management fees also push funds towards an AUM accumulation game. If you're a venture fund the difference between managing $100M fund and a $1B fund is the budget in management fees going from $2M to $20M. So even if your "product offering" doesn't get better as you scale AUM the investors are better off financially if they increase their fund size. With Satya and Hunter as the sole LPs they just have their own money and the returns their effort generates to incentivize them.
"Homebrew began almost a decade ago as the answer to a very specific question, “How can we spend the rest of our careers together, working closely with a small number of founders during the earliest stages of their startups’ development to help increase the probability they create a result they are proud of?”"
I've written before about the ultimate summary of what founders want from investors as clearly articulated by Bryce Roberts: "Improved odds." Homebrew clearly encapsulates that shared desire. Their core focus is on increasing "the probability, velocity or scale of success of your startup."
When you look at Homebrew's unique value proposition you see over and over again this guiding principle of more effectively improving the odds of their portfolio company's success. They've defined their service offering around what can most effectively serve up those insights to their companies.
"The way we define our value-add is how can we get founders to the right answer faster. For things that are urgent, can we take 2 weeks of swirl and turn it into a half hour conversation with us or with a subject matter expert at the right company. We select our group of advisors based on their experiences and the problems that our founders are likely to encounter." (The “craft” of Venture Capital with Homebrew)
Burning the Boats
One of the biggest weaknesses that plague a lot of venture funds today is the inability to say no. A venture fund? A talent arm? A growth fund? An NFT drop? A seed fund? A scout program? A business development team? A TikTok? Yes. Yes to all of it.
The number of $1B+ funds have exploded recently. Homebrew, on the other hand, stands in a unique part of the landscape. Funds that recognize their strengths lie in a sweet spot that actively requires them to say no to more capital. When your unique value proposition is hands-on involvement in a small set of companies that becomes basically impossible when you're deploying larger and larger funds.
"We anticipated that raising too large a fund would introduce conditions that actually work against our goals and values, as opposed to supporting them. If we took stewardship of hundreds of millions more of our LPs’ capital for Homebrew’s fourth fund, we believed we could be successful, but we weren’t 100% sure we could be happy."
What Does This Mean For Venture?
Satya and Hunter are self-effacing, acknowledging their "small-fish" qualities in a big ocean of massive funds. They're not the biggest or most powerful venture fund in the world. But they're demonstrating a core shifting force in venture capital. The world is changing to become more dictated by what unique value proposition a fund can offer because it reframes the relationship between VCs and founders to focus on what founders want.
While firms like Homebrew are changing the game it doesn't mean they're going to overwhelm the entire established venture community. The "kingdoms" of folks like Sequoia or a16z are still powerhouses that aren’t going anywhere. But renegades shape the ecosystem to more effectively serve founders.
"Our version of net promoter score with our founders is if they are able to identify something within the last 30 days that we did for them that helped move the business forward and made a real difference."
And larger firms will be forced to respond to the changing dynamics in the ecosystem as founders become more informed in terms of what a "good investor" looks like. And Homebrew is helping shape that definition.