Building a Firm v. Investing Money

Alex and I are about six months into operating Notation Capital. Although we’re focused on finding, investing, and partnering with what we hope will ultimately be very large companies, I spend a lot of my time these days thinking about lots of things that have nothing to do with the merits of a particular investment, founder, company or market trend. What follows is some of the lessons I’ve learned as a new venture manager and some things that are top of mind for us as a firm. Many of these items speak to the difference between operating as a venture firm rather than an angel investor or startup studio.

1) Short-Term v Long-Term Incentives - There is a near constant battle between short-term and long-term incentives as a new VC manager. Long-term we’re trying to maximize cash on cash returns and build a meaningful brand that resonates with early-stage founders. Short-term we’re trying to show enough progress so that we’ll be able to raise another fund in a couple years. This tension exists at operating companies too - a founder needs to properly lay out the long-term vision while making sure there’s a clear short-term roadmap that can be realistically executed.

2) Institutional Process - Alex and I spend a lot of time thinking about our process as a partnership and a firm. How do we make decisions and allocate capital? How do we message those decisions to founders? How do we work through transparency and the occasional conflict as partners? How do we think about adding people to the partnership over time? How do we build institutional process into the fabric of the firm so that eventually we can scale it?

3) Data - This is in many ways related to institutional process and documentation. We track data on potential and existing portfolio companies, but also data on ourselves and our decisions (investment memos, etc.). Why is this important? Initially, the goal is to keep ourselves honest and to learn and improve over time. Eventually, we can use this data to demonstrate to existing LPs (as well as future investors in Notation Capital) the specific way that we work and how we do what we do.

4) Portfolio Construction - We spend a lot of time thinking about portfolio construction. What should our portfolio concentration look like (ie. how many companies in the fund)? Should we save meaningful capital for follow-on investments out of the core fund or structure SPVs with our existing LPs given the small size of Fund I? What do we need to optimize for in terms of average ownership?

5) Valuation and Price Discipline - Well, it turns out these matter a lot. Average initial entry price has huge implications for what the enterprise value of the portfolio must achieve. As an institutional fund, there’s much more pressure to achieve certain ownership targets compared to an angel or corporate investor. This is the subject of a much longer post coming soon…!

6) Pacing / Timing / Macro - Although I try my best not to, because it’s well out of our control, I spend time thinking about the larger macro environment and how we fit into it. Technically, we have 3 years to deploy this first fund, but should we do that faster? When is the optimal time to raise Fund II? It’s obviously before the market cools (if/when that happens), but how should we think about timing and pacing our investments within that context?

7) LP Relationship Development - We learned a lot though our fundraising process for Notation Capital Fund I, and we’ll do it differently next time. Although at times it feels like a distraction, we’re building strong relationships now with people and institutions that we might partner with in the future. It feels much more natural (and it’s really important) to build these relationships over time when they’re not rushed.

As a whole, one of my key learnings as a new manager is that there’s a world of difference between building a portfolio of investments and building a long-term venture capital firm from the ground up. My hope is that we’re well on our way towards the latter.


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