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The True Story of True Ventures

San Francisco-based True Ventures emerged on the venture scene in 2005 and its way of doing business — focusing on seed-stage startups that it can afford to back for the long haul — quickly resonated with LPs. Not only did they give True $155 million back in 2006 but they came back for a second, $195 million, offering last fall.

That True had already enjoyed two quick exits helped: In late 2006, it participated in the $850,000 seed round of Maya’s Mom, a social networking site for mothers that BabyCenter bought for an undisclosed amount less than a year later. True was also the first institutional money into blog search engine Sphere, which sold in April 2008 to America Online for $25 million after raising just $4.3 million.
True’s reputation among entrepreneurs is more notable, though. Whatever it’s doing — be it treating entrepreneurs like customers, as it likes to say, or operating out of a startup-like space (its open, sunny offices at the base of a pier feature little aside from cheap gray carpeting and an array of modest desks) — has resonated with the digital media community, which seemingly now holds the firm in the same high regard as Union Square Ventures in New York, First Round Capital outside Philadelphia and prominent angel investors like Ron Conway.

Yesterday, I visited the firm to find out what all the fuss is about; there, I talked with co-founder Jon Callaghan over the sound of squawking seagulls.

You’re an institutional investor that acts like a angel. Why raise so much money for your newest fund?

The upside to our model is that when you [make bets] you haven’t invested your whole fund. On the other hand, you have the firepower to participate in B and C and D rounds. [Mobile entertainment startup] SendMe, for example, we gave $1.5 million at its formation, but they’ve since been through four rounds, and we still own 20 percent of the business. When you see a winner, you want to have the muscle to stay in the game.

The failure of classic seed-stage investors is that they raise a little money and take all the risk upfront, but as a company succeeds, [seed funds] can’t afford to play. Ron Conway had Google and it worked out, but generally speaking, you want to own [more] of the winners.

How much do you typically give a startup over the life of an investment?

Our median is $4.4 million.

How much do you give a company at the outset?

A median round is $1.5 million. Our median check is $1.25 million and our target, for that amount, is 22 to 25 percent ownership of the company.

We have three products. The first we call our “real deal product,” which is one where we write you a check for $1.25 million for 25 percent of your company. We have the “seed deal product,” which is a check for $500,000 for 20 percent of your company. And we have our “super seed product,” which is $250,000, for 10 percent of your company. There, the entrepreneur has an idea but he’s not really sure if it’ll turn into something. We’ll still write him that check, though, because you know what? That’s one-tenth of one percent of our fund, and because our LPs want us to take risks. It also means that if a company sells for $10 million or $20 million, that still makes us a lot of money.

That sounds a little rigid. What if I don’t want to give you 10 percent of my company for $250,000?

The numbers are averages, we’re definitely flexible. We recently invested $75,000 in a startup that we can’t disclose; we invested $150,000 in a $350,000 round for GoodReads [a social network site for book readers]. What we’re more focused on is having our first check last an entrepreneur for a year or two and ultimately, owning 22 to 25 percent of the company.

How important is it to you to work with proven entrepreneurs?

We work with repeat entrepreneurs about 60 to 70 percent of the time, though 90 percent of the time, we back people in our network, meaning either entrepreneurs we’ve worked with over the years or know, or people introduced to us by entrepreneurs we know. For example, when Seth Sternberg [founder of the True-backed instant messaging startup Meebo] told us he was about to write his first check to a startup and asked if we’d be interested in meeting with the company, I was like, if you like this company so much, I’ll meet with them tomorrow.

It’s the same with [Maya’s Mom founder] Ann Crady. The best way to get to her billion-dollar outcome is to fund her every time. It’s frankly the only way to establish a sustainable advantage in what’s otherwise a commodity business — making our entrepreneurs happy so that they’ll come back.

How many startups do you expect to back with your current fund?

Well, we backed about 30 companies in our last fund, reserving half of it for follow-on investments, and we expect to back between 40 and 50 with this fund.

That will make for a lot of board involvements with some very young companies. Is that a concern or should it be?

There are plenty of us at True [to share the workload]. But I also don’t think the number of board seats someone has is as relevant as we’ve always been made to believe. Om Malik [founder of True-backed GigaOm and now a venture partner at True] didn’t need four-hour meetings. He needed to grab coffee to talk about a possible hire or a pricing plan.

Also, our founders work very collaboratively. We have dinners throughout the year and have a founders’ email list that they’re on all the time to help each other. A lot of founders feel like, I’m working on a product, get out of my way, VC, and I understand that. Also, why should I answer questions when an entrepreneur can sometimes do a better job?

I’m still friendly with a lot of folks on Sand Hill Road but in many ways, I think the venture industry is being held back by approaches honed in the ‘80s and ‘90s.

Including putting too much money to work, or trying to?

Absolutely. The Sand Hill Road model is basically that you invest between $5 million and $8 million for 25 to 33 percent of a company — to start — and a lot of founders don’t want that kind of structure or the expectation of a big exit that comes with those amounts.

But the companies you’re funding, digital media startups mostly, also tend to have far lower capital requirements than many other startups. Don’t you worry that you’re overindexing on that universe?

Not at all. Yahoo and eBay are crumbling; Google is trying to figure out where to go next. We see all kinds of seams opening and all kinds of  opportunities emerging from them. We’ve actually doubled-down in 2009; we’ve already backed 15 new startups.

What about the very early-stage deals that you target? New seed-stage funds seem to be popping up everywhere. How is that impacting your deals?

It’s a very vibrant area, there’s no question. But valuations have remained pretty constant, and there’s a really collaborative ecosystem in seed-stage investing.

Yet you want to be the first institutional money in. That has to present conflicts.

It really hasn’t so far. We usually invest with angels or no one. We only invest with another venture firm about 10 percent of the time. Our newest investment, in Small Batch, was pretty typical. Our coinvestors were [Twitter co-founder] Evan Williams, [Flickr and Hunch cofounder] Caterina Fake, Ron Conway, [Ex-Googler turned angel] Chris Sacca, Josh Felser and Dave Samuel, and [Automattic founder] Matt Mullenweg.

And we only do our own follow-on rounds, meaning in companies we’ve already backed. We wouldn’t do Benchmark’s B round, for example. That’s just not our model. There are already many, many resources to do B rounds.

A lot of the seed investor groups I’m starting to see center on successful entrepreneurs with no formal VC training. You and [partner] Phil [Black] met at Summit Partners; you were a managing director at Globespan before starting True. How important was that training, and was it really necessary?

Phil and I had collectively done 75 deals before starting True. We’ve lost a ton of money, though we’re up overall. But we’ve both been through the pre-bubble and the bubble and the post bubble through now and  having made every mistake possible, you know how things are going to play out.

I think your primary DNA as an investor has to be as an investor. Being an entrepreneur is also critical — I cofounded three companies earlier in my career — but as an investor, you sort of know thy place. You know you’re an investor, not the CEO.

I think the hardest thing for entrepreneurs [becoming investors] is figuring out how not to say, “I’ve done this before, I’ll just tell you how to do it.” As an investor you also come to understand how to look at a whole portfolio, that success doesn’t happen in a straight line, and that you always lose the ones you think will be the biggest winners.

Speaking of which, how do you decide to pull the plug on an investment?

Signs of failure are a consistent inability to launch, or major changes in product direction. Iterating is one thing but you don’t like to see a team hop around. And team turmoil is probably the number one reason [to stop funding a company].

Do you give much notice or does the ax come down quickly?

We might say hey, you’ve missed six deadlines. Here are three or five things we need to see.

Sometimes companies do pull out of their tailspins. Max [Skibinsky, the CEO of social gaming startup Hive7] worked on a virtual world concept for a year and we said, “this isn’t working,” and Max offered to give us our money back. But we really like Max, so we said, “Can you figure out something new? Maybe hang on to some of the money and brainstorm for a month?” And his team did, and the end result was Hive7. It’s not as big as Zynga but it’s doing really well.