20VC: Homebrew's Satya Patel on The Key Components of Being A Great VC & The 3 Main Reasons Startups Fail At Seed

Satya Patel is a Partner @ Homebrew alongside Hunter Walk. Prior to Homebrew, Satya was VP Product at Twitter, building and leading the Product Management and User Services teams. Before Twitter, Satya was a Partner at Battery Ventures, where he co-led the seed and early stage investing practices. In 2003, Satya joined Google and was responsible for AdSense product management and partnerships. Before heading to Silicon Valley for Google, I worked for DoubleClick, in venture capital and as a strategy consultant. In Today’s Episode You Will Learn: 1.) How Satya made his way into the world of tech and came to Partner with Hunter @ Homebrew? 2.) Is hustle the key component of a great VC? What does Satya believes makes a great investor? 4.) How can startups present emotion and depict their narrative to the VC? What are the benefits of doing so? What founder is most 5.) From Satya's experience, what are the most common reasons startups fail at the seed stage? What can they do to maximise their chances of survival? 6.) We always hear that products should focus on a niche but how then do you attract VC money that is looking for a broad opportunity that can return the fund? Items Mentioned In Today’s Show: Satya’s Fave Blog or Newsletter: CB Insights, Fred Wilson, Brad Feld Satya’s Fave Book: A Fine Balance As always you can follow The Twenty Minute VC, Harry and Satya on Twitter here! If you would like to see a more colourful side to Harry with many a mojito session, you can follow him on Instagram here!

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  Welcome back to another week on the 20 Minute VC with your host Harry Stebbings and I have to say I'm immensely excited to introduce our guest today. So joining me today is Satya Patel, Partner at Homebrew alongside Hunter Walk. And we often hear about the broken nature of the VC model with new entrants coming into the market. And I have to say, there's no new entrant to me that's as exciting or has built as a phenomenal portfolio as Homebrew has. Satya and Hunter truly are some of the smartest guys in the business. And a little history on Satya now. So prior to Homebrew, Satya was VP of Product at Twitter, building and leading the product management and user services teams. Before Twitter, Satya was a partner at Battery Ventures, where he co-led the seed and early-stage investing practices.

• 0:45Harry Stebbings?

  And in 2003, Satya joined Google and was responsible for AdSense product management and partnerships. But before we dive into the show with Satya today, if you have not signed up for the Mattermark Daily, for goodness sake, please sign up already. It's simply the best and most highly curated list of startup and VC articles made by my good friend Nick Frost, who you can find at @thinker on Twitter. It really is a must. Likewise, I would love to hear what you think of our new podcast, the official SASTR podcast brought to you by Jason Lemkin and I, which dives into the world of all things SaaS and MRR, ARR, all that good stuff. So find that on iTunes by searching for SASTR, S-A-A-S-T-R. However, I'm sure you've heard enough from me.

• 1:28Harry Stebbings?

  So without further ado, I'm delighted to welcome Satya Patel, Partner at Homebrew.

• 1:39Speaker 01

  You have now arrived at your destination.

• 1:42Harry Stebbings?

  Satya, welcome to the 20 Minute VC. It's an absolute pleasure to have you on the show. Thanks so much for joining us today.

• 1:48Speaker 02

  Thanks, I'm excited to be here.

• 1:50Harry Stebbings?

  Now, I'd love to get the ball rolling by hearing how you made your way into the wonderful world of venture.

• 1:55Speaker 02

  I think you've heard this before, but it's more accident than plan.

• 2:01Speaker 02

  And for me, it's very similar. I've I've always been of the opinion that you can't architect your career. You can have to do what feels right in the moment. I started my career in consulting, and since then, I've been equal parts operating and investing. And my first investing job happened because I literally sent fifty-plus snail-mail letters to venture firms looking for a job. Even back then, lots of venture firms didn't have email, that they published certainly, and many didn't use email. And I knew that I wanted to work with technology companies. I knew I wanted to work with smaller technology companies than I'd been consulting for. I just hustled to get a job. And that was my first introduction to venture capital investing. And I worked at a couple of firms before moving to the operating side, starting at DoubleClick. And then, well,

• 2:46Speaker 02

  before the acquisition by Google, I moved over to Google, and then was fortunate to be a partner at Battery Ventures. And then I ran product as VP of Product at Twitter, before starting Homebrew with my partner, Hunter Walk. Each of those transitions was unique and was made based on what felt right at the moment. And like I said, I can't say that there was a grand master plan that led me into investing, or into any particular investing role.

• 3:12Speaker 03

  And you mentioned hustle there. Do you think that's the key component of a great VC?

• 3:17Speaker 02

  I think the key component of a great VC is an insatiable desire to learn. That can play itself out in the form of hustle in many ways, because you're hustling in order to get exposed to things that are going to educate you. And in today's world, in the hyper-competitive world of VC in which we operate, I think hustle gets you a long ways.

• 3:36Speaker 03

  And obviously, you mentioned starting the fund with Homebrew and with Hunter. So how was that origin day, and starting from scratch, a new fund in a sea of other funds in San Francisco? How was that for you?

• 3:49Speaker 02

  It's interesting, because we didn't start with the idea of starting a fund. Hunter and I were both leaving our respective jobs, mine at Twitter and his at YouTube. And we had breakfast, like we do on occasion, having known each other for a long time, since we worked together at Google. We decided that, at that moment, if we didn't try to work together, which we had wanted to do, then it would probably never happen, because we'd consumed with the next thing that each of us was doing for ten-plus years. And so, the first decision was actually that we wanted to work together. The second decision, after spending a lot of time thinking about our past experiences, what we care about, all those kinds of things, was that we wanted to focus on this idea that we now refer to as the bottom-up economy. But this idea that technology is a great democratizer and that it's impacting individuals,

• 4:32Speaker 02

  groups and industries now in a way that it hasn't historically because it's gotten more flexible, more accessible, less expensive. So we knew as a second decision that that was the idea we wanted to focus on. And then the third decision was actually to start a fund. And we decided to do that because our belief was that at that time, there were many, many sources of capital, even more sources of capital now. But there were very few investors at the seed stage in particular, who were willing to raise their hand and say that I'm the investor of record. I'm going to be accountable for this company and for these founders. And that for us meant writing a large check at the seed round, taking a board seat, and then rolling up our sleeves and helping those founders build the company

• 5:13Speaker 02

  that they envisioned. And that was the simple idea behind Homebrew was to, you know, a lot of people say it, but create the kind of fund that we would have wanted to take money from. And in many ways revert back to what venture capital started as, you know, in the 60s and 70s with the very first venture capitalists, which was almost this artisanal industry, right, handcrafted approach to building companies. So that was the idea behind Homebrew.

• 5:37Speaker 03

  And I have to ask then, starting out in those early days, what was your first investment? And then how have you refined your investment decision making since then?

• 5:45Speaker 02

  Yeah, first investment for Homebrew?

• 5:47Speaker 03

  Yeah.

• 5:48Speaker 02

  Our first investment for Homebrew was a company called Clementine. And it was kind of a joint effort between us and the founders in terms of spending time in a particular problem area, and then coming up with a product idea. So it was almost an incubation of sorts. But that was our first, and we sold it last year to Dropbox. So that was our first investment. And in terms of how our investment criteria has changed, I think it's continually changing in the spirit of always learning. You know, we have strong beliefs weakly held. And so we've got principles around that are kind of immutable that we stick by in terms of our investing. But in terms of what the criteria that we think about, those are always changing and morphing and hopefully improving so that we continue

• 6:30Speaker 02

  to get better at our jobs. Probably the number one change that we've made in terms of our investment criteria, we originally started with the idea that we needed to have a specific ownership percentage. In order to drive meaningful returns and that's become more flexible where we think about the potential outcome and less about ownership out of the gate. Those things tend to be tied together a little bit, but we've refined it so it's not a hard and fast rule that we have to have 10% ownership.

• 6:57Speaker 03

  So valuation doesn't become a key component for you when deciding whether to invest?

• 7:01Speaker 02

  Valuation's an important component, but it's not the only consideration.

• 7:05Speaker 03

  Absolutely. And you've written before about kind of the emotional element of the VC decision-making process. So how can startups kind of emote this emotion from the VC and really depict their narrative and their vision for the startup effectively?

• 7:21Speaker 02

  Yeah, I use this term called emotional resonance. And I think the key to successful fundraising at the seed stage is really establishing that emotional resonance with the investor. And there's really only two means by which to do that. One is the personal story of the founders, why it is their focus on the problem that they're focused on, what makes them uniquely suited to attack it, what's the belief that they have about their solution to the problem that is unique to them and to and maybe different than what the rest of the world sees. You know, hopefully some common ground with the investor that helps the investor relate to them or the problem that they're solving. So that's the first. And then secondly is the mission itself.

• 8:03Speaker 02

  And is it a problem area again that the investor can relate to, or is it an opportunity of such massive scope and potential scale that the investor has to be involved in it? You know, is it something where we like to say the founders have a very narrow near-term focus, but a broad long-term vision around what the world should look like? And I think those two things, kind of the founder and the mission are the only things that can help establish that emotional resonance early on.

• 8:28Speaker 03

  And you often get the feel for that in the very earliest stages of your interactions with founders?

• 8:33Speaker 02

  Yeah, we focus a lot on the why behind companies. Why are the founders doing what they're doing?

• 8:38Speaker 03

  It's the founder-product fit.

• 8:39Speaker 02

  It's the founder-market fit, yeah. And even more than just the founder-market fit, it's what led them to choose the market that they're attacking. So it's not just the fit at that moment in time, but what built to that. And so we spend a lot of our initial interactions with companies, obviously talking about the product in the market, but we spend a lot of time understanding the founders and what drives them, what motivates them, why they're doing what they're doing.

• 9:04Speaker 03

  And what kind of background most, not impresses you, but is most able, is it an undying passion for the space? Like, like I have for VC? Or is it just a real desire to solve a pain point that you may not have? So, I don't know, credit in developing world countries is difficult to secure.

• 9:21Speaker 02

  Yeah, for us, it's less about a pain point for us and it's more about, is the founder addressing an opportunity that is some, for some reason, personally meaningful to him or her? Right? Is it a pain that he or she has experienced firsthand? Is it a problem that he or she has seen from afar but has a predilection and interest in solving because of the way that they view the world? So it's really this idea that there's a real tangible, almost reason why the founder's pursuing what they're pursuing.

• 9:55Speaker 03

  And when you go in such early stages with these companies, as you and Hunt do with Homebrew,

• 10:01Speaker 03

  you know, often one of, one of the key value adds with early-stage investors is the follow-on funding that you provide and will assist with.

• 10:07Speaker 02

  Yeah.

• 10:08Speaker 03

  So firstly, do you follow on? I mean, we've had guests before who don't agree with the follow-on method. What are your thoughts on this?

• 10:15Speaker 02

  Yeah, we absolutely follow on. We think that, and you know, these are, I think, some of the guests you've had on, like the Micah and Eric from Founder Collective are friends of ours and they have a very different point of view around this. But our, our point of view around it is, follow-on decisions are not about kind of communicating upstream or about a weird relationship between the investor and the founder. Follow-on decisions are only problematic if you have misalignment of expectation. And so we make sure that when we invest that upfront. The founders know and we collectively agree on what that company needs to accomplish in order to get additional money from us. And that's an ongoing dialogue and there's always transparency around that. So there's never a surprise at the end when we say, yes, we'd like to invest more money

• 11:00Speaker 02

  or no, we don't want to invest more money. And so we think if you have that alignment of expectations and an ongoing dialogue and transparency, that it's good business sense as an investor to want to follow on. And it's actually beneficial to the founders to have investors who follow on as well.

• 11:15Speaker 03

  And is it difficult with a growing portfolio to really harness and know and manage all the expectations of your portfolio companies?

• 11:24Speaker 02

  No, I mean, you know, we tend to have a smaller portfolio than most investors. We had 18 companies in our first fund. We will have a similar number and maybe slightly more in our second fund because it's a slightly larger fund. And we only make about eight new investments a year. So our entire model is predicated on the idea of having enough bandwidth, having enough cycles to spend real time with each company. We have formal time with every company just about every week or every other week. And then we're usually on Slack and text and email with them every single day.

• 11:53Speaker 03

  To kind of ensure that that's kept in the diary, on a purely practical, I'm intrigued. Do you kind of block that off as, you know, chime time, the skin time each week?

• 12:02Speaker 02

  Yeah, yeah, we do have formal time with the founders each week and then obviously the informal time that happens all the time.

• 12:08Speaker 03

  Absolutely.

• 12:08Speaker 02

  Yeah.

• 12:09Speaker 03

  What would you say is your key value add then? What do you most like to add to a startup?

• 12:14Speaker 02

  I think our point of view is, you know, we're investors who come from an operating background. We think like we can help companies in primarily three areas. And then we've got our advisors and our broader network who can help in many other areas. But we think we can help around establishing product market fit. We think we can help around organizational design, hiring and process and culture and values and all this kind of stuff. And then we think we can help around go to market, pricing, distribution, partnerships, all those kinds of things. But ultimately, we don't go to a company and say, hey, here's how we want to help. We let the companies dictate and our founders tell us what they want us to assist with. And so in that formal time that we have every week or every other week, we kind of treat

• 12:56Speaker 02

  those as our version of a stand-up, where we talk about, you know, what has a company accomplished in the last week, what's coming up in the next week, and where are they stuck? And out of those conversations, we want the companies to assign us homework. So we leave every one of those conversations with, all right, here are the things that we have to deliver for the company. And we find that that is amazing from a relationship standpoint, right? But more importantly, it gives us a real sense of what the company's focused on, and also importantly, what the company's not focused on. So hopefully, we can help them see around some corners based on our experience and head off some things that they may not be paying attention to that we can see.

• 13:33Speaker 03

  And how do you, you mentioned that product market fit. How do you assess the elements of product market fit at such an early stage? I mean, is it kind of A/B testing and just trying not to have the leaking bucket?

• 13:42Speaker 02

  Yeah. Every company and every product is different in terms of the definition of product market fit, but effectively, it comes down to active usage of the product, right? And sustainable active usage of the product. And to get there, we like to say that people have to be narrowly focused, they have to be hypothesis-driven, and they need to be experimental in validating or invalidating that hypothesis. And so we spend a lot of time just helping people think about, how are you going to, what question do you want to ask? What do you think the answer might be? And how do you figure out if that's the right answer or not as quickly as possible?

• 14:18Speaker 03

  And on the topic of kind of startups at the seed stage, you've seen a plethora, you've worked with many. What are the main reasons then that things maybe don't go so well and they don't achieve follow-on funding? Maybe even in today's market, which we can talk about too?

• 14:33Speaker 02

  Yeah, I think it boils down to probably one of three primary problems. One is that, and this is more common than people might suspect, is that the founders disagree. And they decide they don't want to be co-founders anymore. So that happens quite often. Number two is the product that's been developed doesn't resonate with the market. And that tends to be because the product isn't narrowly focused enough in terms of the use case it addresses, or isn't narrowly focused enough in terms of the audience it addresses. And the third thing is they just run out of time, or i.e. run out of money. But those are the three main reasons.

• 15:06Speaker 03

  I'm really intrigued by narrow focus because it's such a hard dichotomy to bridge in VC with narrow focus, but then big enough market to return the fund.

• 15:14Speaker 02

  Yeah.

• 15:14Speaker 03

  So how do you approach that?

• 15:16Speaker 02

  Yeah, so we like to see, as I referenced earlier, kind of very narrow, near-term focus, but in the founder's mind, a path to a broad, long-term vision. So start with something small, start with something meaningful, start with something that people will love. And then how do you expand that relationship? How do you grow that market?

• 15:35Speaker 03

  By Facebook starting at Harvard only.

• 15:37Speaker 02

  It's a good example. Yeah, or Uber starting with black cars only.

• 15:40Speaker 03

  Yeah, absolutely. And then say the startup does get through the hurdles of financing and funding. Is raising a Series B tougher in this environment today? How have you seen the kind of funding stages different in terms of difficulty?

• 15:53Speaker 02

  Yeah, raising any money is tough in this environment.

• 15:56Speaker 03

  Is one stage more tough than the other?

• 15:58Speaker 02

  I'd say A and B are particularly tough because at the seed stage, you're investing, and you're usually investing on the promise. At the A and B, you're trying to invest on more of the reality. And the reality has to stand out from everything else that those investors are seeing. So the bar is very high. A lot of upstream investors, people who invest at A, B, C, D stages, are sitting on a portfolio of assets that are, in some cases, overpriced, and there's not much liquidity in the market. So if they're going to add something else to the portfolio, they have to feel like it's an obvious winner. Meeting that bar in terms of the data that suggests to them that it's an obvious winner is really hard. So for a whole host of reasons, that being one, it's really difficult to raise A and B rounds in today's market.

• 16:40Speaker 03

  And any kind of A and B rounds, often it's a tough case of startups. Oh, we're going for growth and revenue will come later. What's your take on the growth versus revenue relationship?

• 16:51Speaker 02

  Yeah, I think we probably have a nuanced view of it, which is in some cases, growth at all costs or at great cost is the right strategy. At others, having revenue out of the gate is the right strategy. But more often than not, there needs to be a balance. You know, we tend not to invest in businesses where the unit economics are not clear out of the gate, or the path to viable unit economics is not clear out of the gate. We also, because of our focus on kind of these bottom-up economy companies, tend to invest in companies that generate revenue from day one. We don't invest in pure consumer social businesses. If we wanted to do that, we'd take a very different investment approach. We wouldn't have such a concentrated portfolio, because those things are hard to predict, and they

• 17:33Speaker 02

  consume lots of capital over the course of time. So we have a probably different-sized fund. But for us, we really balance kind of growth and revenue, and we tend not to invest in companies that are extreme on either side.

• 17:46Speaker 03

  And do you think the focus of VCs on, in particular, unit economics, has changed a lot with the tightening up of the funding environment as we keep hearing about it?

• 17:56Speaker 02

  Yeah, I think people probably don't give VCs enough credit in terms of thinking about unit economics.

• 18:01Speaker 03

  I agree.

• 18:02Speaker 02

  So VCs are always thinking about unit economics, but the change in the funding environment means that one, you need to achieve certain types of economics, has to happen in a different timeframe than it has historically, because funding may not come in the way that it has. So investors don't go into a company thinking that this business is never going to be profitable. They have a point of view and a hypothesis around how a business will be unit economically profitable. That doesn't always tend to turn out to be true. I don't think that investors go into a business without paying attention to unit economics.

• 18:32Speaker 03

  And then before we dive into a quickfire round,

• 18:34Speaker 02

  Yeah.

• 18:35Speaker 03

  What are your views on the entire VC market is collapsing, you know, funding is tightening up, razor war chest? What do you think of this whole skepticism and pessimism now towards the funding environment that's pervading SF?

• 18:48Speaker 02

  I think it's a great time to be an investor and a great time to start a company. Uh, we will probably make more investments this year than we did last year. Already, the quality of companies that we're seeing this year is greater than we're uh than we saw last year. Uh, in terms of, you know, signal in the noise. There's plenty of capital out there and that capital is looking for a home. So if you uh are a credible founder, you have a big idea. Um, you have traction, uh, you can find capital because there's plenty of capital out there. And I'd say that it'll be easier for you in many ways to build a company in this environment because you'll have fewer funded competitors. They'll probably be easier to attract talent and you'll be able to kind of focus on

• 19:30Speaker 02

  just building the business as opposed to kind of the noise in the market overall. So we're excited about the opportunities that technology uh offers in today's world. Um, Chris Dixon wrote a great blog post a few days ago uh that talks about the opportunity.

• 19:44Speaker 03

  Easy.

• 19:44Speaker 02

  And and for us, that's just emblematic of uh why it's such an incredible time to be a founder or an investor.

• 19:51Speaker 03

  Absolutely. Well, I'd love to dive into a quick fire round now.

• 19:54Speaker 02

  Sure.

• 19:54Speaker 03

  Okay, so on the theme of Chris Dixon's uh brilliant post. Favorite blog or newsletter other than the skim, obviously.

• 20:02Speaker 02

  Yeah, the skim. Um.

• 20:03Speaker 03

  Good plug there.

• 20:04Speaker 02

  Yeah, favorite blogger newsletter. Uh, I'm a big fan of CB Insights.

• 20:08Speaker 03

  Yeah.

• 20:09Speaker 02

  Uh, I think they do a really nice newsletter. Um, in terms of blogs, obviously Fred Wilson and Brad Feld and uh a host of other VCs uh do incredible work uh from a blogging standpoint. So uh I'm an insatiable uh I have an insatiable appetite for content, so I read constantly.

• 20:27Speaker 03

  And then busy or productive? Explain what you mean by this and how can we be productive?

• 20:31Speaker 02

  Yeah, the idea behind busy but not productive is that it's it's easy to fill your day with things that you feel like you need to do, like to go through your to do list, uh if you even have a to do list. I think very people try to, very few companies and founders focus on the two or three things that really matter. Have a hypothesis about those things and then try to, you know, prove or disprove those hypotheses. So the idea behind busy but not productive is how do you stop kind of just filling your time? How do you focus on the things that are essential for figuring out whether uh you're eliminating or reducing a risk for your business um and in, you know, in the effort to build a great company?

• 21:09Speaker 03

  And then let's talk about the investor you most respect or admire. Who is that?

• 21:14Speaker 02

  We are fortunate to have kind of as informal advisors, a couple of investors that I already mentioned. The group at Foundry and Fred Wilson, Mark Andreessen are all, Kevin Compton, are all amazing investors who have given generously of their time to us and we spend a lot of time thinking about their counsel, what they've done well, what we can learn from them. And then I've had the good fortune of working with a number of incredible investors, Tom Crotty and Rick Frisbee at Battery Ventures, Steve Clearmun and Larry Lepard at Geo Capital Ventures. So again, in our quest to always learn, we kind of try to learn from anybody that we encounter and all the different investors out there.

• 21:59Speaker 03

  And then your favorite book and why?

• 22:01Speaker 02

  My favorite book is, not a tech book, it's a book called A Fine Balance. The author's name is Rontin Mystery and I just think it's an incredible story about life and the world and what it means to try to get ahead in life. It's a story of a man and a family in the slums of Bombay and kind of what he goes through to try to escape the slums. And it's incredibly moving story, incredibly well-written and it's probably unusual answer for this podcast.

• 22:37Speaker 02

  But I am a big fan of that book.

• 22:38Speaker 03

  And then most you use apps on your phone?

• 22:40Speaker 02

  Twitter, obviously, having worked on the product. Use Uber every single day.

• 22:46Speaker 03

  What else?

• 22:46Speaker 02

  Yeah, not surprisingly, being investors in it, we use Nuzzle quite a bit as well. So those are some examples, but.

• 22:53Speaker 03

  And talking of apps, sorry, and quick fire rounds, this quick fire round will also be available on Anchor. So everyone can listen on Anchor as well.

• 23:01Speaker 02

  Excellent.

• 23:02Speaker 03

  And then I want to hear about your most recent investment and why you said yes.

• 23:06Speaker 02

  Yeah, our most recent investment, not announced, but we said yes because one of the co-founders is somebody who worked with me at Twitter, who I have a great deal of respect for, and her co-founder is somebody that she has a long established relationship with, and they're working on a problem that is very near and dear to their hearts. So it was easy for us to get excited about the team, their vision based on their personal pain, and the overall scope of the opportunity.

• 23:35Harry Stebbings?

  Well, Satya, such a pleasure to have you on the show. Thanks so much.

• 23:37Speaker 02

  Thanks for having me. Really appreciate it.

• 23:41Harry Stebbings?

  Now, I'm gonna do something very risky and stick my neck on the line today and say that was my favorite ever episode of the 20 Minute VC. I have to give a huge hand to Satya for giving up his time today to appear on the show, and I would love to hear what you thought of the episode. Was it your favorite too? Tweet me at Harry Stebbings at 20minutevc, that's all in letters, or you can tweet Satya at Satya, and let me know what you think of the show. We'd love to hear. And then head over to the20minutevc.com and sign up to the newsletter so you never have to miss an episode or an update from us. Likewise, if you haven't had the chance to check out the official SASTR podcast, brought to you by Jason Lemkin and I, then search for SASTR, that's S-A-A-S-T-R, on iTunes,

• 24:25Harry Stebbings?

  and we would love to hear your feedback. As always, it's been an absolute pleasure bringing you today's show, and always feel free to email me, [email protected], 20 in letters. As Steve O'Hair at TechCrunch says, I'm not amazing at email, so if you really, really want to give me feedback, hit me up on Snapchat by adding H Stebbings, and I will definitely get back to you then. Thanks so much, as always, for tuning in, and I look so forward to bringing you next week's shows.