Thoughts from Brooklyn, NY

by Nicholas Chirls

Partner at Notation Capital

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Introducing Origins: A New Podcast about LPs

Subscribe HERE! Created by Notation Capital, sponsored by Sapphire Ventures.

Eighteen months ago, we set out to raise our first fund for Notation Capital. We knew bits and pieces about the Limited Partner community (the firms and people that invest in VC funds), but boy did we have a lot to learn. Unlike the VC community, which has been radically transformed in the last decade by people like Fred Wilson and Brad Feld, and is now much more transparent and accessible for founders than it once was, the LP community still feels like it’s stuck in a former era. Precious few resources exist for new VCs like ourselves, other than the generosity of more established investors who have already been through the LP fundraising process. 

Origins is a new podcast about LPs that we made to uncover what is still an opaque corner of the startup ecosystem. We hope it will demystify how LPs make

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The Current State of “Seed” Investing

After sharing a couple quotes about the seed VC ecosystem on twitter, I figured I’d write a longer post so that founders might better understand what they should expect from “seed” investors when raising their first institutional round of capital. I’m highlighting a few quotes below that I’ve overheard recently (just in the last few weeks). They’re indicative of the current environment, as well as the natural cyclical evolution of the venture ecosystem.

“Seed” VC #1: “Could you please send a 12 month cohort analysis?”

Translation: How much do the users / customers that have signed up in the past year engage with your product / service? The assumption is that you’ve had a product in market for at least a year.

“Seed” VC #2: “We’re a [seed] fund that invests behind product market fit.”

Translation: We mainly invest in companies that are already showing significant measurable growth.

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On Negotiating Valuations…

…and the impact of VC portfolio construction on startups.

Since starting Notation Capital earlier this year, we’ve led (or co-led) 8 pre-seed rounds in new companies. Each investment involved at least some amount of negotiation, often regarding valuation. Beating founders down on price is probably the least enjoyable part of any investor’s job, but it’s an inevitable occupational hazard. What follows are some thoughts on valuation, the market, negotiating with founders, and ultimately making investments and forming long-term partnerships.

Let’s start at the beginning: Why does valuation matter to VCs?

Paul Graham wrote several years ago that angel investors shouldn’t pay much attention to early-stage valuations. If the ultimate outcome for the company is potentially billions in value, does it matter if you initially invest at a $7M pre-money rather than a $4M pre-money? The answer

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Notation Capital

Today we’re announcing the launch of Notation Capital, a pre-seed venture capital firm based in Brooklyn, NY.

At the beginning of this current technology cycle in New York City, sometime around ‘07-’08, an emerging group of hackers, artists, and creators started to build some amazing new projects. Some ultimately became successful companies like Tumblr or Makerbot or Venmo, some of them continue to do well as bootstrapped projects like Hype Machine, and some of them failed in both quiet and spectacular ways. These founders and companies formed the core of the NYC technology community today, and they built a talent pool of thousands of brilliant hackers and designers from the ground up.

As these companies have grown larger, so too have the VCs, many of the best angels and seed funds moving farther up the stack, raising much larger funds and deploying significantly larger amounts of

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Startup Warts and Investing

I was speaking recently with a seed investor I respect a great deal about some of the companies I invested in while I was at betaworks. A couple years since I first started, I’m now getting visibility into which companies might be very big. One thing I’ve noticed is that a couple of the companies that are growing quickly now had noticeable issues when I was first introduced. I’ll call these issues “startup warts.” Of course, all startups have warts, but these ones in particular were larger and more transparent than most.

What exactly is a startup wart?

A startup wart is when the founders can’t get visas to build the company here in the U.S. It’s when the founder is building a hardware company with no previous hardware manufacturing experience. It’s when [Sarah] doesn’t have great references from previous jobs or companies. It’s when a big competitor is expected to get to market before

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Saying No v. Hearing No

I haven’t written a new post in quite some time. So this seems as good a forum as any to say that I’m officially going to run Alphaworks full-time as CEO, a product (and company) I recently co-founded with betaworks. I have much more to say about Alphaworks, but for now I’ll let our mission speak for itself.

I’m deeply appreciative of the opportunity I’ve had as an investor and grateful for the people I’ve been fortunate enough to invest in and work with. I can’t imagine learning more about startups, venture capital, building successful products, organizations and brands anywhere else, and playing some small part in their success. I hope to one day play that role again.

But I want to build again. I did once before and the urge got so great I couldn’t sleep at night. So I’m taking another plunge into the exciting and terrifying abyss that is creating something new out of what once did

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Perspective and Environment

When I left my job at Lehman five years ago, I left New York City as well. I grew up in Brooklyn, but had never lived more than a couple hundred miles away. I said goodbye to the people and family that I love, and I bought a ticket across the world with little idea as to what I might do, how I might earn a living, or what value I might create in the world. I traveled the continent of Asia and ultimately I received a scholarship to attend the Hong Kong University of Science and Technology as a graduate student.

In 2008, I would’ve told you I was leaving New York for all sorts of reasons. But looking back, I think it was a simple one - I left to renew a basic connection with humanity; one that wasn’t entirely lost, but gradually worn from decades living on the same streets in Brooklyn and one awful year on Wall Street.

Since I returned to NYC four years ago to build my first startup

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The Investor Trough of Sorrow

The startup trough of sorrow has been well documented in recent years, so I won’t repeat the concept in great length. As a generalization, it’s the difficult period at every startup when the novelty of the initial idea and maybe a bit of traction have worn off, and the founders must find the will to build a company with long-term sustainable growth and value. Many companies do not make it through the trough of sorrow. Some special ones do.

I’ve experienced the trough of sorrow myself at two previous startups. One was my own and it didn’t work out. It’s still painful to this day, many years later. I was employee #1 at the second, and after several years it seems to be emerging on the other side.

I realized recently that I’ve experienced a similar sensation as a seed investor at betaworks. We seed invest in companies and people that we’re obsessed with, products that we think are solving

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Native Money

Native advertising is all the rage these days as an emerging form of startup monetization. If you can marry advertising with content, the thought goes, then the user experience won’t suffer much and the ad is just as (or more) effective. As native advertising matures, the web will get better for users. But an ad is still an ad.

Instead, what If you could monetize in such a way that the user experience doesn’t simply avoid harm, but in many cases is improved? What if you could truly align the business model with the product and its users?

I’m beginning to see nascent signs of what I’m calling Native Money everywhere. This is a movement away from the traditional checkout experience on the web. Near invisible purchasing experiences, like one-click buying on Fab or Uber are a step in the right direction, but native money is something even deeper than that. You can feel native money when

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Conviction Investing

Conviction, n., a strong persuasion or belief.

Many early-stage seed investors and venture capitalists invest alongside one another as part of investment syndicates.

Investment syndicates exist for good reason. Most investors at this stage don’t control large amounts of capital, many of them are individuals or angel investors, and so they’re unable to fund the capital needs of a company on their own. By pooling capital with other investors, companies are seed funded with $500k or more. Syndicates also increase access to information. Many investors will tell one another about the amazing companies and entrepreneurs they find. On the balance, access to larger pools of capital and more transparent information exchange are positives for entrepreneurs. AngelList is the best example right now of the benefits of investment syndicates at scale.

But investment syndicates can also have

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