6 September 2023 | Link to podcast
Enjoyed this wide-ranging chat between Nikhil (NBT) and Harry Stebbings. Having enjoyed Nikhil’s writing previously, this was a concentrated dose of NBT that I was happy to have. What stood out for me from the convo – his perspectives on how he prioritises traction (or early signs of PMF) over the market when it comes to picking, how he tries to avoid getting misled by the sheer narrative / storytelling powers of an otherwise weak founder, decision-making at Footwork Ventures, and why he and his Partner, Mike Smith go to all board meetings of portfolio in the first year together, the story of how they raised their first fund, the advantages that a small fund has (over a larger fund), how they use calendar audits to ensure over 50% of their time is focused on sourcing, his biggest miss (Figma) and more.
I organised a transcript (you are welcome!) as the podcast publisher didn’t publish one. I edited the transcript for the most interesting sections from a venture craft perspective. See below for the transcript. In the podcast there is a wonderful section on his parenthood, and how it has changed him, which I left out of the transcript given I was trying to select the sections most relevant from a venture craft perspective.
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The 5 components of a VC’s job: Find, Decide, Win, Help and Exit
Harry: And if you were able to call yourself the night before your first day investing, what would you advise yourself on?
Nikhil: Two things. One is actually a piece of advice one of my partners at Shasta gave me pretty early on, like probably in the first couple months, which is don’t look at the title on your business card, which at the time was associate at Shasta Ventures. Just think about yourself as a venture capitalist and do as venture capitalists do, which is find, decide, win, help and exit. Sort of the five components of our day to day job in venture. And that advice, I think, was really profound. It sort of unleashed me and it’s the advice I give young people in Venture today, which is, again, don’t look at your title. Don’t think about exactly what the role is. Just think about yourself as a VC and I think you’ll be better off for that.
Why founders shouldn’t mind talking to analysts and associates
Nikhil: …there are so many folks who’ve grown up in the industry to become incredible investors who started off at the bottom of the ladder at a firm, and so you just don’t know who those people will be. I think that you’re better off as a founder, judging based on the actual conversation you have, which sometimes may be a lot better with the youngest person on the team versus the managing partner of the firm. I do think that there are people who are really young in our business who are really thoughtful, and that a conversation with them might actually lead to some learning for you as a founder, and it may even lead to an investment, as it’s done for me several times in my career on the venture side.
Exceptional companies deserve exceptions
Nikhil: And then the second one (advice for a younger NBT) that came to mind is exceptional companies deserve exceptions. And it’s a mantra that I’ve tried to always have in my venture career, which is, yes, you have this model of how you want to invest, this dream idea of portfolio construction and the profile of company that you’re looking for. But it’s so often the ones that you consider an exception for, the ones that just blow you away that feel like outliers, that end up being the ones. And so I’ve always tried to have that in the back of my head, which is at the end of the day, all of what we’re doing in our job is searching for the outliers and the truly exceptional companies.
The Canva story
Nikhil: Yeah, I mean, look, I think the Canva investment for us at Shasta Ventures was an exception on so many different dimensions, and so it’s obviously the one that stands out for me personally. The company was based in Sydney, Australia. It was raising a convertible note at a $25 million valuation cap. It had no revenue yet. It had a bunch of early signs of product market fit, actually, like several hundred thousand monthly active users of Canva who were using the product really aggressively. It was growing 30% to 40% every month. It broke a lot of the traditional rules. We thankfully decided to make that investment, but there were all sorts of reasons to let it be.
When you dug beneath the surface on what was actually happening and people using the product, you could see what I just described, which is, wow, there’s 100,000 people using this every month who are creating three to 400,000 designs on Canva every month. Those folks it was about six months in after the product had launched. And you could see that those folks sort of their cohort retention in the first six cohorts looked very strong.
It looked like it was flatlining of creators who just were using canva on a very regular basis to design things. It was also fragmented usage. It wasn’t just Facebook posts and infographics and social media content. It was also pitch decks. It was a lot of different types of media and it was growing completely organically. The SEO thing hadn’t yet been figured out, but it was still just growing through word of mouth from people using Canva, posting canvas out in the wild and other people discovering Canva as a result. And so all of those characteristics gave it some early signs of product market fit. If you only stared at that, you could see that there was something really special here. And if you sort of put away the noise of everything you just described, I think what you would have seen is a really interesting product that has strong signs of product market fit.
The small fund versus big fund for early stage venture
Nikhil: I’m very biased here because at Footwork we’re still investing our first fund. It’s a $175m fund. And my firm belief in my bones is that small funds outperform bigger funds. It is incredibly difficult to have a five x net return on a billion dollar plus fund. I think there’s incredibly few of those funds in the history of venture. And there’s so few companies that get to that stage (Sajith: to generate a 5x on a $1b fund, you need to have at least a few unicorns, or one Canva sized return) and so when you do that math, it just makes sense to me that small funds are going to outperform big funds on average.
Harry: Well, it’s a misalignment between GPs and LPs though, which is like actually if you have a $400m fund and you 3x it which I’m not saying is easy by any means, that’s hard to do, but it’s much better than 5xing or 6xing, a $50 million fund.
Nikhil: I think a handful will downsize to a smaller fund, and I think there’ll be a very smart handful that will but it’s a really difficult and painful decision to do that….it’s something I think all of us have faced against the big multistage firms with billion dollar plus funds. What I’ll say about that, and what I try to explain to founders is I think that that’s actually a misalignment between founders and these types of investors, which is oftentimes in the founders best interest, is actually taking less money, being more constrained in the early days to find product market fit…in a strange way, I really like the constraint of our fund size. I actually think it forces us to make better decisions. And I think there’s a laziness and a lack of great decision making that can come from having a bigger fund in the same way that it can come from having too much capital in the early days as a company.
Harry: Do you think it’s possible for stage specialists like us, the seed specialists, to operate and invest in the hot startups at seed anymore, which are traditionally five on 25, six on 30, whatever that is? Do you think it’s possible for us to build a business around those deals?
Nikhil: I think it’s very hard, and I think that’s why, more often than not, the companies that we invest in are not the star-studded team with that type of round. It’s a team that looks a bit more like a Mel & Cliff at Canva, but that has a product that’s already out in the market, that already has some early signs that it’s working, something that’s resonating with customers. And so it’s typically not in a really hot area like AI at the moment, and it’s typically not from a really hot star studded team.
Companies with very long runways but no product market fit
Nikhil: Those companies have to find some product market fit somewhere to deserve to exist for a longer period of time. I think there’s a lot of companies that are just having really honest, hard conversations around this right now, or at least there should be. The runway doesn’t matter unless it leads to a takeoff or a landing. Ideally a takeoff in startup land. The other thing is momentum and winning for companies, as I’m sure you’ve seen, is everything. If you do not have that, it is really hard to have a great culture at a company. It’s really hard to hire the best people. It’s hard to do your best work yourself as a founder. And so you just have to have that at some level.
Traction > Team > TAM
Harry: When you think about kind of those early days and actually making the investment decision, I thought of this when we were talking about canva, but I wanted to kind of let the conversation run. You have people, you have market, you have traction. Say, how do you rank them in terms of importance?
Nikhil: I’ve always been sort of traction. Early signs of product market fit first investor, then people, and then market.
Harry: That’s really interesting. That’s not what people that’s often the opposite. Like an Elad Gil will be like, market first, and then, I think, people, and then traction.
Nikhil: Yeah. I remember having a chat with Keith Rabois about this, where he was just like, look, I just look for sort of founder plus keynote. That’s my stage founder plus presentation plus idea. And I was like, Keith, I could never do that. I’ve made very few of any investments like that because I like to see the early sparks of something working, and I’m willing to take more risk on the market than I think other investors. And so I’m happy to unpack that.
Harry: If that’s yeah, I’d love to understand that and how that most commonly shows itself. Is it word of mouth? Is it revenue? Talk to me.
Nikhil: So it’s certainly not necessarily revenue. Right. As I mentioned with Canva, there was no monetization. Those early signals that you’ve built something that people love using, and so that can come in the form of high frequency of usage or high repeat usage, or high retention, even on a really small base of users. It can come from word of mouth growth. Even on a small base, it can come from just anecdotes, like, I could not possibly live without this now that I’ve tried it from customers.
Harry: I find so much in the comments on YouTube videos, on App Store reviews. I find that a real goldmine of untapped.
Nikhil: Absolutely. Product reviews too…you can literally Google and learn a ton about what’s happening to a product in the wild without ever speaking to the company. And we always try to do that.
Footwork, and how they work
Nikhil: Should be clear about this, which is at Footwork, we only lead rounds. We only do early stage. We lead seeds and A’s. So we’ve made 11 investments so far. We’ve done 5 Series As and 6 seeds. I think our average initial check is about $4.5m, and the range has been $2m to $9m.
We’ve done sort of later seeds and earlier A’s precisely because we love this stage that I’m talking about, where there is a little something that’s working, where the founders can articulate why and have a bunch of unique insights and where the why now is strong and where they have a big vision for what it can become. But there may be some level of market risk. It may not be clear how big it can become. We, of course, try to assess that and ask that question over and over again. I wrote recently, this is the question that keeps me up the most. Like, how big can this company be? Can it be one of the ones.
TAM or the market is the hardest to assess
Harry: We do a show called The Memo where we review the investment decision of multi billion dollar companies. And we’ve know Jeremy from Snap. Jeremy on Snap. Alfred on Instacart. Byron Dieter on Twilio. The best of the best on the best companies. Every single one said we massively underestimated how big the market would be. And so I kind of lead back from that, thinking it’s just a way to come to a wrong decision trying to do market scenario planning well.
22:20 Nikhil: So a couple of things. One, this is precisely why I underweight market. Does that make sense? Like I weight market third on the three that you asked me about because I just think it’s the hardest one to assess and predict for myself. And I think when you look at the investments you just described and some of the very great ones, that was true for those investors as well. You can imagine and dream the dream that the product market fit that this company has, that the team that’s building it can expand the market beyond your wildest dreams, can actually create a whole new market. Those are oftentimes the most special companies. And so again, if you think about my thinking around this, it comes back to, well, this is exactly why I underweight market in the analysis.
Fundraising vs Building
Nikhil: There’s this difference between the ability to fundraise and the ability to build a business. And so I have been sucked in and seduced by founders that can tell a great story, that are great in a handful of 1 hour sessions and in person for the first time, who feel like they’re magnets for talent, who know their business inside and out, it seems, and who are great at fundraising and so attract multiple term sheets. And what I’ve seen happen a handful of times is that they are not good at the fundamentals of building the product and building the team, of actually finding product market fit or growing the product market fit that we thought that they had, and that there’s that huge difference between fundraising and business building. And I think that’s showing up all over the place right now. Right? Like there were so many companies that were able to fundraise in 2021 that now don’t have P&Ls and fundamentals to show for the vision that they told, I get you.
Harry: And I agree that I’ve definitely fallen victim to that myself, but I’m not sure. And the reason I’m not sure is because you think about founders ability to sell to investors, to sell to customers, and sell to hires. If you can do those three things, you should have a great founder.
Nikhil: It’s not like that is a necessary precondition to failure by any means, but I think it’s been a failure moat for me. There’s a bunch of questions that I try to ask to suss these things out.
Harry: What sort of questions do you ask?
Nikhil: Oftentimes, if I’m really digging in and really excited about something, I’ll say something like, hey, let’s just pretend that this is our first board meeting right now, that we just invested in the company. What’s the main challenge topic or discussion topic that you want to have in our first board meeting right now? And the spirit of that question is just assessing, are they clear eyed in their thinking right now about what’s happening in the business? And can they articulate that? Usually you want what they say to be the most important thing that’s also on your mind to prioritize and figure out in this phase, and you want some level of sort of just transparency and vulnerability around the answer. But I find that that question and the answer you get tells you quite a bit.
Harry: Do you know what I find a commonality of the best founders? Often I find the not so great ones actually will kind of shield themselves, but the really great founders will say, oh, Nikhil, there are so many challenges. Where do we start? We’ve got 1,2,3,4.
Nikhil: oh, yes, it’s very consistent with what I’ve seen as well. Again, that ability to be confident in what is actually working. But also confident in what’s not working yet and vulnerable about it and clear eyed and self-aware about it is, I think, a characteristic of many of the great ones.
Decision-making at Footwork, and why both the Partners go to all board meetings in Year 1
Harry: Do you and Mike have to agree to get a deal?
Nikhil: Don’t. One of us has to absolutely love the company. The other can like it, not love it or dislike it. The other can’t hate it. And so if you think about the one through four voting scale where one is strongly unsupportive and four is strongly supportive, three is supportive and two is unsupportive, one of us has to be a four. One of us has to be strongly supportive to make an investment. And the other cannot be a one strongly unsupportive. So, for example, I’ve rarely been a one on anything in my venture career, but where I have been, I felt like there’s actual downside risk to the firm, potentially, with making this investment. There’s just something really off about it. And therefore I feel very strongly we shouldn’t do it. But I’ve disliked a lot of companies. I’ve been a two on a lot of stuff where others have been fours, where I’m really glad that we did it. And conversely, I’ve been very glad for myself that I’ve been a four and strongly supportive and other folks have been a two because they didn’t think it made sense, but they didn’t hate it so much they wanted to block it or say there’s no way we should do it. So that’s the way I think about it. I think you have to be intellectually honest, obviously, about in the ones that.
Harry: You put as twos that turned out that you were really pleased to have done. What did you not see?
Nikhil: Because of my bias towards companies that have some signs that they’re working, some early signs of product market fit the ones that most stand out. There are ones that didn’t have that where at Shasta, for example, we made a decision to invest in something that was pre product but that actually turned out to work. Probably the other ones sort of that I can think of off the top of my head is we stretched on price to do it and where I liked it, didn’t love it, but then I didn’t like the price and so I was netted out as a two.
Harry: Do you find it hard that like, okay, so you vote two, you’re unsupportive, but you’re not like there’s nothing super, super unsupportive. But then given the size of our teams, you will probably have to work on it quite extensively if you do. Dude, ten years working on a deal, a lot of freaking time on a company you were unsupportive on.
Nikhil: Well, I think for Mike and me, this comes down to just alignment in principles and values that we have and respect and trust in one another that we have. And so it is very easy for us to disagree, but very seriously commit because we have a tremendous amount of respect for one another. I think where that would be difficult is if you did not have that type of alignment and trust within a partnership. And so that’s what I most think about in decisions like that for me. And know every investment that we make at Footwork is so obviously a Footwork investment. We actually don’t even do attribution at the firm we’ve never talked about which are Mike’s investments versus my investments. We’ve done some kind of crazy and wacky things.
Harry: I mean this in the nicest way. Is that not a bit BS in the way that one person sits on the board and so everyone’s like, well, that’s Nikhil’s, or that’s Mike.
Nikhil: Well, look, we actually, for the first year after we invest, both go to all the board meetings together.
Harry: Wow.
Nikhil: We both do the work.
Harry:….a bit weird. Sorry, that’s why I was about to.
Nikhil: Say it is weird and wacky and nontraditional and of course it doesn’t scale. But it’s been really important for us in the first couple of years of building the firm to operate in this way because we think that’s the purest form of teamwork. Like every venture firm talks about, we work as a team, but very few, I think, actually show up as a team. And we’ve tried to do that from the earliest days. Both of us being on the text threads with all of our founders and both of us showing up to those board meetings in year one is reflective of that commitment to actually work together, because we think we have complementary skills, that founders can benefit from that. And we really don’t want to think about any of the decisions we make as individual decisions.
Raising the first Footwork fund
Harry: How did you select the LPs that you work with for footwork?
Nikhil: We had three things that we thought about when we raised our first fund and we actually ranked LPs based on these three dimensions. And they were one, what’s just the quality of the relationship with the people we really tried to prioritize people who we’d built relationships with, who we really liked as humans, who we wanted around our proverbial dining table as a firm in this first fund. Second, we thought a lot about just are these people who’ve seen what world class looks like and will they push us to be world class, which is what we want in our firm? And third, we thought about the mission values of the institutions themselves and whether they were institutions that we are really excited to make money for and be partners with. And so those were the three dimensions that we prioritize. We assigned like a one through five rank on each of those. And then at a macro level, we were really lucky. In our first fund, we had about $450m of commitments for a $150m fund, and we ended up raising $175m and realized that’s incredibly fortunate for a first time fund. But what we thought about as we were constructing the full LP base was just having a little bit of diversity across both check size and type of LP. And so we wanted a nice mix of LPs where there were a few at the $20 to $30 million level out of 175, a bunch at sort of the ten to $20 million level, a bunch at the five to $10 million level, 20 to 30 high concentration.
Harry: How do you think about concentration limits that you were comfortable with?
Nikhil: We don’t have a single LP who’s more than 20% of our fund. And I think in general, we thought we don’t want one, two, three LPs having the majority of our fund and having therefore outsized control in our thinking or our decision making in some way.
Harry: …in terms of types of LPs, we have obviously there’s corporates, there’s pension funds, there’s founder funds, there’s high net worth, family offices, all of the different types. How did you think about that? And do you agree with the common wisdom of our endowment funds? They’re so stable.
Nikhil: Is that true? Yeah. So we wanted some diversity, and I think we have about 15 institutional LPs. We have six university endowments, I think three other foundations. So we’re a little bit weighted towards endowments and foundations, but we have a bunch of founder funds and we have a couple of family offices as well. And so we like that mix because while the endowments are great names and they are long term oriented, there’s still some level of risk of having an entire endowment-based LP base because they may all sort of have the same denominator effect issues at the same time. They also perhaps tend to be more aligned in what they care about. And so we, in general, like the diversity and that’s what we prioritized.
Harry: To what extent are LP sheep? And what I mean by that, I mean, you have some blue chip, blue chip endowment names that I’m sure we both know and people generally follow when they do it.
Nikhil: Yeah. Look, I think that there’s especially in a first fund, there’s a handful of LPs around the world, at least that I know of and have met, who are truly independent thinking, who will truly raise their hand and say, we’re willing to do a first time fund and we’re willing to be the first commitment or the first big commitment. That group of LPs is very small. It’s probably ten LPs, 15? And our biggest LPs are not LPs. In my prior firm, they took a chance without having known Mike and me for a very long period of time. We have a bunch that are LPs from my private firm, but not interestingly, the very largest ones.
Harry: Can I ask you, a lot of people get the advice of get your anchor first and really solidify the base around that. Do you agree with that?
Nikhil: Well, what we tried to do was we had a bunch of our friends who’ve proactively said to us, we want to commit to invest in the firm. And we went out to a broad group of LPs at the beginning in a first wave, a sort of set of friendly conversations to get feedback on our story, to practice. And we had one institution that we’ve known for a long time who said we’d love to do it. They didn’t actually say what the check size would be and it ended up being a small check. But it’s really impactful to have one institution that’s known you for a while that’s a well-known institution say yes.And then we did try to prioritize the larger institutions, the sort of group of ten to 15 that I referenced that would do a larger check in a first time fund because that’s a small N. We just thought that’s the right group to see if we can get anyone to do it out of. And we were really lucky that we got a couple of those groups to invest in our first fund.
Harry: Yeah, I always think that I find some they’re so focused on getting the anchor and it’s like I always say, get the GPs who they most respect as your LPs and hopefully they’re your friends already. So get them in as friendlies and then leverage them for the intro, and then you can also leverage their check. And so it’s like, not only did Nikhil make the intro, he’s also investing. It’s like, oh wow.
Nikhil: We had two slides in our fund, one fundraising deck, which actually, sadly, we barely got to present. We only had it properly designed in February of 2021 and by then we already had the whole fund committed. But in that deck, the last two slides are one board members that we’ve served alongside both Mike and me, people who we’ve literally been in the boardroom with. And that was a subtle way to say like, here’s all the people you can call as references, and you probably know a bunch of these people. And then the next slide after that was, here are all the people who’ve inbound said that they want to invest in the fund. And that was a bunch of founders that we’ve worked with, a bunch of GPs that we’ve worked with at other firms. And honestly, we never asked any of those folks or any individuals if they wanted to invest in Footwork. We just let them say that they wanted to invest and when they did, we put them on that slide again as a way to just have a very easy way to reference us for LPs. And I actually haven’t asked our LPs who ended up seeing that deck if those two pages resonated, but I suspect that they did and that they were helpful.
How LPs see the venture landscape
Harry: What do you think we see that LPs do not see in the venture landscape about how VCs operate?
Nikhil: I think that there’s a difference in hunger and energy and drive that some managers have that others don’t. It’s sort of what we look for in the companies that we invest in. Right. Of course, if it’s a manager like you, for example, that really has a unique spin and a unique story and is an N of one on different dimensions, it’s sort of easy to see that because you can put it on.
Harry: A page, it’s tangible, you can touch it as well.
Nikhil: Yeah, exactly. It’s like, oh, it’s sector focused in this area and I believe in that area great. It’s like super easy to check the boxes on some funds like that. And don’t get me wrong, there’s incredible funds that are like that. Right. But I think a lot of this business is the human side and I don’t think that that’s going to change. Assessing a person, an individual GP’s, real commitment to doing this, their level of drive and hunger, their ability, of course, to improve themselves and learn, their ability to source and to make investment decisions and to win and help companies. It’s actually hard to get to the bottom of that, just as it is hard to get to the bottom of how great a founder is for us in our jobs as VCs.
Harry: And so you think LPs don’t do that?
Nikhil: Well, I don’t think that they spend enough cycles on it, but I actually think some of the great ones do. And of course I’m biased here. We had LPs who did 30, 40 references that we heard about on us each. We were heavily scrutinized on us as people because so much of our strategy is really just about the two of us, Mike and me, and our ability to make decisions in the partnership that we have. That’s where we found LP-GP fit with our LPs is the folks who really dug in on us as people and how we make decisions and who ended up fortunately, supporting us.
Calendar audits at Footwork
Harry: You mentioned picking. It was seeing, picking, winning, helping and exiting. If you were to say your best and your worst, what would you say.
Nikhil: My worst right now that I feel is on the sourcing side? I think when you’re a duo investing as a generalist firm, it’s impossible to see everything you want to see. I think it’s hard too, when you have started a firm and you have other responsibilities to be able to purely focus on sourcing companies. We do calendar audits, and Catherine and Rachel, who are our operations folks at Footwork, actually send both Mike and me every week. What does our calendar audit look like for this week that’s just passed, and what does it look like for the upcoming week? And the single metric that we’re focused on there is, are we spending more than 50% of our time on meeting new companies and sourcing new investments? I firmly believe you have to spend the majority of your time on those things to be able to find the next great one. And the beauty of our business is the next one can be the one right. The next one can be the one that changes everything and the trajectory of the firm.
Harry: So are you going to peel off Boards because you’re not going to be able to keep that ratio?
Nikhil: Yeah. And so that’s certainly something we’re going to have to figure out, and there’s lots of things we’re going to have to do to figure out how to scale this firm. But again, I would say sourcing is where I feel weakest at the moment. I think, conversely, on the helping side, I feel like while we don’t talk about the great platform that we have, and we don’t have a bunch of people that support our companies, mike and I really do the work and we try to really be there for the founders that we work with. I do think it’s at a different level from others, and I think when you only make a handful of investments every year, when each one really matters to you because you’re leading those rounds, you can deliver that type of really personalized support. And that’s so much of why we’ve built this firm. And I do feel really great about that dimension, and I think you would find it in the references you do with our founders, which to me is one of the most important metrics.
Platform services at VC funds
Harry: Do you buy the platform value add services generation that we saw?
Nikhil: Look, I think there’s a handful of firms that have done it well…and that have platform offerings that have moved the needle, but most of those platform offerings are about scaling the firm themselves versus about actually scaling companies and really helping companies get to the next level. That’s certainly my firm belief.
The Farmer’s Dog, his biggest win
48:55 Harry: Can I ask you one before we do a quick fire? I think you learn a lot from your biggest hits and your biggest misses. When you think about that, what would you say is your biggest hit other than Canva? What would you say is your biggest hit and how did that change your mindset on what good investing is?
Nikhil: I actually think my biggest hit right now, at least as I can best predict it, is not Canva on a dollar gains perspective and on an IRR basis as well. It’s a company called The Farmer’s Dog, which is in the pet food space, and it’s a subscription service for fresh pet food. It’s doing fabulously well. I love it because not many people know about it. I do.
Harry: I invested in a UK alternative. It was a tough business.
Nikhil: And so it’s two things. First, that some of the best businesses are incredibly simple, and they’re simple to understand, they’re actually simple to build, but they’re based on unique insights. And I think that that’s going to be the story of The Farmer’s Dog once the story fully fully gets out. And the second is the pet category is a fabulous category. And there are some markets where the tailwinds are just so strong in multiple different ways that there’s a lot of opportunity for incredible enterprise value. And I think that that’s the case for the farmer’s dog.
Figma, his biggest miss
Harry: Okay, that’s the winner. What about a miss and what did you learn from that?
Nikhil: The first one that comes to mind that I’ve reflected on a few times over the last year is Figma. I spent time with Dylan Field in the very early days. I was actually one of the early interviewers for the Thiel Fellowship program, which he was in. And I remember going on walks with him in Palo Alto. And a little bit like you, actually. He was mature for his age. Now I’m trying to think back to our first meetings in San Francisco and London. You were mature in certain ways, you were immature in other ways. But Dylan was really mature in a bunch of different ways. Like the way he was thinking about the need for perfecting the product before getting it out there, the opportunity to go after Sketch and others that were in that market already, but also just on life related stuff. Like, I remember him asking me about my relationship with my then girlfriend, now wife, how we make decisions together and how we communicate and what’s good about our communication, what’s poor in our communication, all sorts of stuff like that, where I think he was about 20 years old at the time, maybe even younger than that. I don’t think I’ve still seen anyone at that age be able to think about those things in sort of work and personal life at the level that he was thinking about. I’ve reflected on that a bunch of times because I wish I could have been in both Canva and Figma.
Harry: Why did you not?
Nikhil: This comes back to my bias around wanting to see some early signs of product market fit before investing and Figma did not have a launched product before its first couple venture rounds. So I give the folks that did those rounds, I think John Lilly at Greylock and Danny Rimer at Index, if I’m not mistaken, I give them a ton of credit because they saw the specialness, I think, in Dylan. They were willing to do it and then be patient enough. And I think there are multiple rounds. I think I talked to John Lilly at Greylock about this multiple rounds that John was involved in before the product even launched, which is incredible. And so hats off to Dylan and hats off to those early backers.
His views on AI
Harry: What have you changed your mind on in the last twelve months?
Nikhil: AI as being a very, very interesting category. I honestly don’t know if there’s great AI first opportunities for us at Footwork to invest in, and that’s because of just the insane hype cycle around it at the moment.
Harry: That was too good a one for me not to. Do you not think, though, that bluntly people always overestimate adoption cycles and underestimate long term value adoption?
Nikhil: Yeah, I think that’s right for us.
Harry: I think there absolutely will be amazing opportunities, but we don’t have to shoot the fund out in twelve months on it. It could be three, four, five years out.
Nikhil: Yeah. And I just think we overrotated once again, very quickly towards excitement here and again. I’ll admit at the very beginning of playing around with Chat GPT and other products like Midjourney, I was very excited, just like everyone else. But as I’ve thought through the venture investments here, I don’t think that there’s a lot of AI first AI enabled companies that are going to be for us in this phase. And yet I do believe because they’re too expensive. Too expensive, and there’s just so much competitive noise. And there’s also so much that I think, for example, in the large language model world, that the LLMs themselves will serve as a use case versus an application layer on top of those LLMs. So, for example, I’ve heard there are several companies now that have grown rapidly in ARR and have now started declining in ARR as retention actually starts to affect these businesses. Because there’s churn from folks who just try out products built on top of these LLMs because they’re interested in the novelty of them, but then churn away. And there’s also just the reality that as Chat GPT itself gets better in leveraging GPT Four and other models as an example, it serves those use cases that some of the application layers on top of Chat GPT and GPT Four have tried to serve.
Harry: I think people are forgetting novelty enterprise buying, which is like there’s a lot of AI companies who have Walmart, McDonald’s, Porsche, and it’s like two people in their design team testing it out with the ten K. And that is not the same as enterprise wide rollouts. Okay.
AUM is the stupidest metric at a venture firm
Nikhil: I think AUM is the stupidest thing to talk about as a venture firm. Because back to what we were talking about earlier, small funds outperform larger funds, and so you really shouldn’t be talking about how much capital you’ve raised. I’m okay with people talking about how much capital they’ve returned and how much enterprise value they’ve created, but I just think talking about the aggregate size of all the funds that you’ve raised is a complete vanity metric.
Harry: I think the enterprise value of portfolio companies is total bullshit, though, too, because it’s like, I could invest in Figma in the Series E, fair enough. And then it’s like, we’ve created $35 billion, and you’re like, Come on, you put in 500K in D. I’ve seen dumber…Do you know what I mean? Yeah, I totally agree with you.
Nikhil: Dollars returned. That’s the thing that matters the most.
His biggest investing mistake between 2020 and ’22
Nikhil: I think it was doing our pro rata in companies that quickly raised another round at a huge step up from where we first invested. Fundamentally, there was very little derisked, and we saw this happen where a company had raised a Series A from us, and two months later they did a series B, this is a real example. Two months later they did a Series B at a seven x six to seven X markup, and that becomes a very big position for you without that much being derisked from the initial round….Obviously, there’s going to be some cases where an entrepreneur is going to need a little bit of extra support to get to the next round. And of course, some of those may not be the right decision to make, but some of those I do think will be. The other thing is that I think….
Harry: Have you had bridges that lead anywhere?
Nikhil: I’ve had a couple in my career, yeah. Obviously it’s too early to tell at Footwork. I think the other reason is, especially as a newer firm, you want to be able to say that we can support the company in that next round. I do think there’s validity to that, especially today’s market where capital isn’t as free, where folks who are leading the next round may be looking at whether the insiders are going to do their prorata or not as a signal.
And so we like to do our prorata on the next round following ours, and then we sit back. If you think about our total fund, I know I’m answering your quickfire question longer, but our total fund size is about $175m, right? We think we’ll make about 20 investments out of that fund average check of four to $5 million. So call it sort of $80 to $100 million on initial investments, and the rest is for follow ons.
Harry: So you got like $30m to $40m for follow on.
Nikhil: That’s right. Hopefully we have recycling as well. But it’s still weighted towards initial checks. But we do think there’s value in having a little bit reserve.
Harry: I just feel that reserves actually fundamentally are challenging dollars to deploy because you’ll most often do it according to traction. And I look at mine and like some of the fastest spikes are not the sustainable value creating companies. Do you see what I mean? Logically you would concentrate capital towards those. They are absolute bangers in the moment.
Nikhil: Look, it’s where we started this particular conversation, which is the decisions that I regret in that 2020 to ‘22 era were those pro rata decisions and I think we’ve got to be a lot more disciplined on those moving forward.
Venture firms he respects
Nikhil: I’ll name two. I think USV doesn’t get the credit that it deserves. I think it should be in that pantheon of greatness that sort of sequoia and benchmark are typically put in.
Harry: Yeah, it’s just being on the East Coast.
Nikhil: I think so. And I think it’s because I’ll never forget, for example, when Coinbase went public, every investor was on CNBC or wrote a blog post about it, whether they were on the board or just a tiny investor in the company or whatever relationship. Exactly. And yet you heard absolutely nothing from Fred Wilson on that day. Absolutely nothing from USV on that day.
Harry: From the guy who writes a daily blog. It’s great.
Nikhil: From the guy who writes a daily blog, from the person in the firm that led the Series A round. You heard absolutely nothing. And I was just same with Mickey Malka. There you go. Same with Mickey. But I was just so floored by that and I just loved it. And so I just respect the hell out of those guys. And I do think they are one of the most collaborative and team based firms, if not the most out there, which is, as you know, a North Star for Mike and me at Footwork. I’ll say USV, but of course they are well known. I’ll say another that I think is less well known, which is IA Ventures.
Harry: I was going to say IA.
Nikhil: Yeah. Jesse Beyroutey, who’s one of the two GPS now with Brad at IA, was a fellow intern with me at Insight. And so we’ve known each other since we were 20 years old and he’s just incredibly thoughtful. And the thing I love about them is very few people know about them. They do very little on the external brand front, but they have crushed it. And I think they know what they are good at. They know their taste and they have great taste. They’ve kept disciplined on everything and as you know, they have done fabulously well from a return standpoint.
Harry: Roger is now retired.
Nikhil: Exactly. And you can see the data.
Harry: I think from, you know, when a fund’s done well, when the manager then returns with, I’m managing my own money, you’re like, well done.
Best board member he sat on a board with
Nikhil: I’ll put one that I miss right now working with, which is Vas Natarajan at Accel.
Vas and I were also at Insight together in the summer of 2010. He left soon thereafter to join Accel. So he’s been there, I think, for about 12-13 years now. He led the seed round in Frame.io, where we did the Series A with them at Shasta, and so I got to work with Vas and founder Emery and the team there. I picked Vas because I think he’s not that well known, but he’s got a great portfolio. Frame.io was acquired by Adobe for $1.3 billion a couple of years ago. Segment was another one that he did. But as a board member, he just asks really thoughtful questions. He sticks to just what’s most important to prioritize as a company. And in my peer group, in sort of our generation, although you’re younger than me and I’m younger than VAS, I still think of us as sort of the same generation. I think he’s one of the best and probably hasn’t gotten the credit he yet deserves for that. No, I totally agree.
You can have dinner with anyone, dead or alive. Who do you choose?
Nikhil: Two of my heroes wrote a book together, and so they have a ton of chemistry, and that’s Sir Alex Ferguson, the longtime manager of Manchester United, and Sir Michael Moritz, the longtime partner at Sequoia. And I think what would be special about dinner with both of them? I’ve actually had dinner with Sir Michael, but sadly, I’ve never met Sir Alex. I think what would be special about dinner with both of them is the chemistry that they would have in that dinner. The fact that they are my two heroes and two of my favourite subjects would make that so much fun.
What does Footwork look like in the ten year frame?
Nikhil: Yeah, we perhaps add one or two equal general partners to our group who are founders and co-owners of the firm with Mike and me. But most importantly, we’ve been able to already work with a handful of really special founders and companies where we’ve been their lead Series A or seed partner. Again, that probably in five to ten years is not going to show up with distributions and DPI, but hopefully it shows up in just the fundamental nature of a couple of the companies that we work with and their scale and revenue, their business fundamentals, the impact that they’re having on markets and on, hopefully, creating categories. And so Mike got to work with a woman named Katrina Lake, the founder at Stitch Fix. From five people to 10,000 people, and from zero revenue to a couple of billion in revenue. And we hope that we get to work with a handful of Katrinas or Melanie Perkins from Canvas or Jonathan Regev from The Farmer’s Dog. We hope to work with a handful of those folks over the next ten years.