You may be able to hear a little bit of harp music in the background. She's doing her harp lesson via zoom in the other room. When she was seven, when they were seven, we told them they were going to learn instruments and we said, what instrument do you want to play? And one of them said, drums. And we're like, cool. And the other one said, harp. And I said, What's your second choice?
OK, great. So we're recording. I'm going to go ahead and read an introduction. Oh, my God, we're recording.
OK, Jim Andelman is a pillar of the Southern California venture ecosystem, along with Mark Mullen. He is one of the founding partners of one of our favorite B2B funds, Bonfire Ventures. Before that, Jim was managing partner at Rincón Ventures. He has guided many startups through their early stages and a few early stage VC firms as well. My sometimes co-host, David, is here as well, and I know he would also express appreciation, Jim, for your pillar-like support of this ecosystem.
Thanks so much for having me.
You know what I would add to your pillar of support for me? I told many earlier that you were my VC whisperer because when I was just starting out, you had already been doing it for over 10 years. It's great to see it's great to see you evolve and your funds evolve. And I'm really excited about your new fund. Can you tell us about it?
Sure. Like the latest fund we just recently announced a Bonfire II, our second core fund under that brand. It is a hundred million dollar fund doing the same thing we've been always doing, which is leading seed rounds and B2B software startups. We do have an expanded team bonfire started with just Mark and me. As many mentioned, we added a venture partner who is now a full time equal partner named Brett Queener, who has wonderful operating experience. And we now have two additional members of the investment team, Tyler Churchill, who's been with us over a year, as well as Jennifer Richard, who just joined us last week.
Mazel tov. Thank you very much. It is where we're Empire Building. I never expected it.
Do you think you really are empire building? I really like our. Stage and investment style, I like our playbook, I like our resume, whatever, whatever analogy you want to use, and there can be a tendency as you raise larger funds, right. To experience what's called style drift.
Right. You either need to write larger checks or you need to do a lot more and follow on at later stages, or you need to do a lot more companies. Right. And and all of those things present challenges to to your way of doing it. So so, you know, while 60 to 100 seems like a big jump, we've also went from an investment team of two to five in that time frame.
So if you just think of the three partners, a good way to sort of evaluate a a fund and what it needs to deploy is capital per partner per fund, and Bonfire, even though it's on Fund II it's really a merger of the two predecessor funds I founded and ran Rincón Venture Partners, Mark founded and ran DoubleM we were two of the very small number of to B2B specialists at seed in Southern California.
We do lead most of the rounds and which in which when we are entering the company, when we are making our initial investment.
Let me ask about that for a second, because we just had Mark Terbeek on the podcast and he actually used the word indifferent when describing whether they lead or don't lead. Why?
And I think that Mark Mullen, when he was on our podcast, said that you guys lead 80 percent of the time, our pitch is sort of expertise, attentiveness, responsiveness, right, you can't be a really high volume investor and have enough time to to deliver on that brand promise. And so relative to the universe of seed firms, we are a lower pace, lower volume, higher conviction, higher involvement investor
I had been told my back of the envelope was something like take the fund size and divide by 50 and that's what size check the fund wants to write. This is when I was entrepreneur. It wasn't very sophisticated formula. Does that apply for you guys?
It's not far off the with think about one hundred million dollar fund. That means if we're targeting twenty five companies, that means the average is four million per company. And our model for this fund is 40 percent initial check, 60 percent reserved for follow on. So that's you know, for every dollar we invest initially we reserve a dollar fifty for for follow on. And so that suggests something like a one point seventy five million dollar initial check on average.
So you're pretty darn close for the reserves, how much of that reserve do you think about is to just pour into your companies that are cranking versus to sort of help companies that need your support in the next round?
It's a great question and there are different philosophies. it's never automatic. It's it's pretty automatic. If you get a new outside lead, right. Then then we're then we're it's very rare that we don't do our pro rata, the the challenging parts. And the hardest part about this business, right. Is to is when you make the tough call to not provide more money to an existing portfolio company. And that's in my opinion, that's the hardest part of this job, and if no one else shows up with any money and the company needs money, and then it's sort of life or death is in our hands, that's a that's a situation we hate to be in. But it is our job to deploy every dollar to its highest and best use.
Let's talk about the other side of it, because I'm curious for a company that's that's sort of obviously on a good trajectory and the rounds, their rounds are getting quite expensive and your your million dollars is a lot less. And, you know, as a percentage of what you hold or maybe not hanging onto that much, when do you decide that it's better to take a new shot on goal versus continuing to fund a company that's doing great?
Yeah, it is a it is a great question. And there are powerful examples that are in direct conflict with one another. One of our greatest successes, Mark, invested in a company called The TradeDesk at Seed and now it is the last I checked. It was an 18 billion dollar public company. The the initial valuation, I think, was around twelve million. In retrospect, if every single dollar in that fund had we just used it for follow ons at TradeDesk, like that would have been a better deployment of every single one of those dollars.
But there's no way, you know, that at the time. And that's one of the things that I think that the idea of sort of lean into your winners is. You know, in my opinion, a little bit of revisionist history or false narrative, because every deal when it happens is a market deal.
And you can almost only tell in in retrospect because you're absolutely right that incremental million dollars can get us an extra quarter of a percent in some company or it can get us another 10 percent in a new company.
Ventures, as we all know, ventures hard to scale because it's much easier to add portfolio companies than it is to exit them. So you tend to accumulate them. And just because companies are pretty far along doesn't mean they don't need your time and attention. Right. And there is a model as well with seed funds to sort of pass the baton. Right. So you're active until series A and then you drop off the board and then it's like, call me when you need me.
That does happen with us usually around Series B, right.
Because there's a logical limit to the number of VC that are helpful on a board and people can debate whether that number is greater than minus one, in this whole retrospect, it's all twenty, twenty what have been some big surprises or sort of, as David would call them, the wild roller coasters that you've had?
Let's see. Archer is a good example, so Archer started as a campus explorer. It was consumer destination for, you know, discovery around post-secondary education and really capable team business did really well. They I led, I think, a million and a half dollars seed round in 2007, and the company got profitable with that and and then did a series they wanted to continue to invest and then did a Series B, and early on, 90 percent of their business was was was at their owned and operated websites.
And they had a small little sort of powered by business where they would help other publishers monetize and, you know, sort of Google kind of declared jihad on that whole lead gen category, all the comparison shopping engines and businesses like this one. So this business managed to with no new capital.
Last time they raised capital was twenty thirteen, managed to continue to grow, despite the fact that 95 percent of their consumer facing business went away, so they they managed to very successfully transition to an entirely B2B business. And I give the team tremendous credit for foreseeing what was happening and and and putting themselves in the position to to make it happen and sticking with it when it was hard and and when there were you know, when there were a lot of other sort of ways they could have decided to spend the next five or 10 years of their careers.
And now it's going to be a great outcome for everyone. So that's one example I feel like we see sometimes in pitches.
And David, I feel like you particularly don't like this where someone says, well, we're doing X, but it's going to let us build up our data moat or it's going to let us build this other thing, this and and I think we're always very skeptical when that's part of the pitch. But I think you see it in the wild a lot more.
To be clear, this was not part of the pitch. But I agree with you there. If we if we all had a dollar for every startup that pitch us what we're doing, but we're going to make money on the data. Right. This is going to that's going to be the main event that we wouldn't actually have to invest.
We could just harvest those dollars.
One thing you said to me about your portfolio and how you're sort of thinking of constructing this.
You talked something about like diamonds in the rough versus sort of your fairway investments. How do you how do you think about, you know, what's in the is it fairway?
I don't golf. I just made that up. But how do you think about what's in the fairway versus what are the what are the more diamonds in the rough, whatever the the correct analogy is? You know, there is a.
You know, there's there's a typical founder profile in VC, right. There's a whole universe of other founders, right, that don't have that kind of background and the challenges that founder may be less good at raising money because they don't know what the VC wants to hear.
But it doesn't mean they aren't building a venture scale business. I'm we are we get very involved in helping our companies raise series A. We have we have kind of productize that that form of value add and for founders who let us who want us to and it is most of them we kind of co project manage the series, a fundraise with them. We deliver to them a Google doc that is tailored to them, that has all of the the the B2B software series a lead investors and with named partners and responsibility from the bonfire team of who's going to make that introduction.
And and and we use that as sort of the CRM through the process with those factors. Long winded way of saying, like, we're on that, we're on the fundraising side more often we're onto we're on the sell side of more often than we're on the buy side, if you will, because our entry point into a company happens once and that company typically goes on to raise multiple follow on rounds. And so one of the things we hear about maybe these sort of less typical founders is, gosh, I'm not sure they're building a venture scale business, which drives me nuts sometimes because it's like, well, maybe they are building a venture scale business, but they just don't talk about it the way that you want them to talk about it.
And some part of that is our job to help train that founder to top VC speak. Right. And avoid the the the negative triggers, if you will.
Can you go back a little bit to talk about this product position of financing? What do you how early does that start like know a lot of honestly goes into.
Yeah. I mean, and I'll give a lot of credit to to my partner, Brett Queener on this one. So Brett is a career SAAS operator. Twenty two years as an executive at software companies, more than a decade at Salesforce, reporting directly to Marc Benioff, really still maintains that operator's lens and and has really helped us and pushed us to operationalize more of what we do. The and so it was a recurring thing where we were developing lists of firms that we wanted to introduce them to.
And it was a recurring thing. We would help a company with their operating plan.
It was a recurring thing that we would help a company with what should be in the data room. And so we just started taking taking ones that we thought were most generalizable and creating templates out of those.
So it's not cookie cutter to every deck doesn't look the same by any means. Part of a deck is not just. Checking all the boxes and including everything that A, that an investor wants to hear, but it's crafting a narrative that highlights the unique strengths of that business and what makes it so compelling and why you should join us with conviction around the odds of this company's success.
David said that you have strong opinions on sort of the governance side of things, but I'm not sure where that comes from, you know, whether that's board governance or rights that investors should have when you're writing term sheets.
There are a bunch of things that go into the broad category of governance and. The sometimes it's it's it's around, you know, how decisions get made, how how certain decisions get made and and sometimes it's just around oversight and making sure that that the company is getting the best guidance that's available around the table. So part of that is what's in financing docs. And part of that is more, more in practice, less, less mandated and more just the manner in which we work together.
What is the what is a board Cadenced? What's with whom? Who attends board meetings? What's what's covered in a board meeting, that type of stuff.
Staying on, being a good v.c, I think you've been a VC for 20 years now, Jim.
I think yes, the seven. Yes, that's what it said. I mean, how is your LinkedIn?
So I started I started I Lietzau for investing for Bay Area VC firm Private Capital Partners in nineteen ninety nine. And I've been pretty much since. Right. That's awesome. So where do you think, you know, you were giving you were talking some about it, but where do you think newer VCs, what do you think people are getting wrong today?
In venture, what advice do you have for people who may be newer in their career and their venture career?
Yeah, it's a great question, right? We are despite the fact that we're in a pandemic and the recession might again as as as context, like I do B2B software. I don't need to be software. I'm not. I'm as every day passes that I get more and more focused on software. I get less and less capable of talking about everything else. So in the world of B2B software, we are seeing all time highs on public market valuations.
Right. And like, oh, there was a five percent correction. Well, that means that these companies are only only trading at 19 times revenue instead of 20 or so most. It seems that most practicing these Ts have only been practicing BK's in a bull market. And it's really instructive. I love that Bessemer released some of their investment memos. You can go to BBB Memmo memo, I think it is. And you look at you look at one of them that's near and dear to my heart is because it's certainly one of my anti portfolio is a company, a mind body, which is a Southern California company, that they made a vertical software for yoga and Pilates studios Bessemer invested, I think in 2010 and their investment memo you can go and read and I think they invested it about four times ARR. Same thing.
Shopify about four times four and a half times ARR and like that is unheard of today. Right. And so we made an investment in the company just in December and they were doing about three hundred K in ARR and our valuation was 10 million pre money valuation. And which is sort of in the range of where things are these days, I worry, right, that there are that there are so many participants at the seed stage that people that don't have historical context, that that is good for founders, I guess maybe bad for founders. If they have valuations that then it's hard for them to support in subsequent rounds. And I've seen that happen certainly as well. But I do it is a it is a I think, an ongoing question for those who have been in this business as long as we have like what is a fair price and what is the right price based and based on today's realities.
I think it's also been easy for.
Seed round participants who are not lead investors to not have to pay attention and have and there have been no negative consequences to it. And again, when there are market corrections, it's much harder to to know what's going on and know what the right decisions to make are when you when you haven't been paying attention all along the way.
So playing that backwards even more or upstream even more so, you know, everyone's raising a seed fund, or everyone in every you know, in undergrad wants to be an entrepreneur, you know, what do you think about that? Like, would you coach your daughters to be entrepreneurs?
So two very different things. Should I coach them? Do I coach someone? Should they be a VC or do I coach someone should they enter the startup ecosystem? On the on the latter question? My answer is hell, yeah. I mean, like, I don't think that the trade off used to be, well, you could go to a more established company, you could be a banker or a consultant or work for a Fortune 500 company, or you can take a lot more risk with your career and get paid less and do a startup.
And like now that's sort of that trade off doesn't really exist. Like those those those traditional more traditional careers aren't necessarily more stable. And those startup careers don't necessarily pay less. And so why wouldn't you want to work in a more dynamic environment? Why wouldn't you want to work in an environment where you have so much more opportunity to learn? Why wouldn't you want to work in an environment where there's that equity component but then shouldn't there be all these new VCs to support those entrepreneurs since this are we just at the start of the flywheel going totally maybe.
Right. So that's that's one of that's that's the flip side to these increasing valuations.
You look at that, those investment memos for MindBody and Shopify and they had exit scenarios in there. And like the high of the exit value scenario, like the the moon shot over the moon, success, success, case for mind body. It was a four hundred million dollar exit and it exited for one point nine billion. Be over the moon success case for Shopify was one billion and it's currently worth one hundred and thirteen billion.
So if the exit values are one hundred x, what we thought they were going to be, well, gosh, maybe it's OK to pay five x what we what we think is a fair price or three X or two X, what we think is a fair price at seed. So what we're doing today, right from a dollar perspective is simple, is is seed is typically like a three million dollar round.
But from a business progress perspective, not even 10 years ago, the majority of Series A financings were pre revenue. And so that is a that is a fundamental shift, right? There's a firm called Wing VC that is X, mostly ex-Accel and Sequoia Partners that that published are really some really good data around the the shift in the series, a landscape. And they looked at all companies that had ever received money from one of 22 VC firms that they deemed top top tier.
And that's not just three. That's not just, you know, Sequoia, Accel, Benchmark and Andreesen. And they found that, you know. The average series A from firms of companies that have taken money from those types of firms is right now sitting at 15 million raised, not valuation raised, and that's up from five.
And so the average round size gone up from five to 15. The average amount of capital that has gone into one of those companies before series A has gone up from one point eight to four point six. And I may not be getting these numbers exactly right, but they're in the ballpark.
So they've raised four point six before they do their series, before they do their series.
So there's a there's a convertible, there's another convertible, and there's a serious side. And then maybe there's a series seed one, or SIPRI and on average or about four financing events before series. Some of it is nice that in prior era when the venture when the venture community was smaller, you know, you didn't have the luxury of raising a two million dollar runway and or with a new investor that was just didn't exist. Right. If you weren't ready for for Trinity or Mayfield to give you or CRV or any of those firms that are on there, or NEA that are in Roman numeral ten plus, if you weren't ready for their next check, you were like shit out of luck.
The flip the flip side of the very same coin. Right. That you can do more with less and that and that that that startup formation and launch and growth in the early stages has requires less capital is that there are so many more competitors in every market that's worth pursuing and more and more enterprise value is being concentrated as smaller and smaller number of winners in each category.
So the implication there, though, is that you're not looking at it with the lens of is this a good idea?
You're saying, is this going to be the category winner? I mean, you the VC has to think that.
We the VC speak for us. We, the V.C., have to believe that the business that we are choosing to invest in that seed has a credible shot at category leadership.
So you can't be a VC now and you have to go start a new endeavor. What would you go and start?
And if you can't tell me exactly like, where would you focus?
So one of the things I really like about VC is there is like the Benchmark style where you don't have a pyramid, right? You have very you have zero to very few junior members of your investment team and you know, your job. You're the doer. Like, you know, I like the, you know, running the fingers through the dirt and doing my own analysis. And also, I'm a shitty delegator.
I know that about myself, which is why I this is a good fit for me and maybe an operating role. Building a startup wouldn't be as good of it for me. And so back to your earlier question, like around advice, I think if you have the capability to be a startup founder or a startup operator, that might be a more rewarding job than being a VC where you are a coach, not a player. Right. You're not you're not out on the field.
You're you're on the sidelines giving advice and suggesting plays. And I think that, you know, when you're a startup operator, that the lows are lower, but the highs are higher. You live a life more brightly, perhaps burning more brightly to to extend our bonfire analogy here. And that's a little muted as a VC. And you two have both lived that, both sides. laugh at that. And VC fund founders who say, oh, I'm a startup founder just like you because you're not you're never living paycheck to paycheck as a VC.
We're also we're small businesses, right? I may have a few people. Your revenues are measured in small business kind of numbers. Yeah, different things. We're not VC scale. Right. So I didn't answer your question.
I think I have been enticed once or twice by a really phenomenal teams that I've worked with that I just like look forward to seeing their caller ID or like getting an email from them and and with the folks that I have been in the trenches with, if you will, working through specific issues, mostly around M&A and financing. And I have been enticed to think about switching to an operating role.
Well, I'm not trying to talk you out of doing what you're doing. You're doing a great job at Bonfire.
We appreciate having this ecosystem, the and when market, my partner, you know, it was very consciously like, you know, these are these are harder partnerships to disentangle yourself from than a marriage.
Yeah, that's great.
You're married to to Mark and Brett Queener. Congratulations. Congratulations on that.
Was totally my business wives. They are indeed. That's great.
Well, congratulations on that. Congratulations to you all on this new fund. And thanks for coming on the show today.
Thanks so much for having me.