Andy Tang shares what he learned as a venture capitalist, covering portfolio concentration, fund returns, board dynamics, and why founders often sell winning companies too early. He discusses the challenges of first board meetings and when to replace founders.
Chapters
So what I learned as an investor. Your funds are carried mainly by a few portfolio companies. Just a few key companies. Not a handful. So we invested in 70-some companies. We identified 9 that are decent. Not to say all the others are failures, right? So we still target a—
10%.
2.5 to 3x fund return as an aggregate. But basically these 7 companies or 9 companies will return at least the fund. And the rest, the profit will come from the rest of the portfolio.
Right.
We discussed the law of large numbers. This is interesting. Information asymmetry, anyone who's familiar with that concept? Yeah, okay. So the first board meeting is always the most challenging for new investors. You go to the board meeting, all the information you get before the investment is sort of fundraising documents, right? But when you go to the first meeting, that's when the reality hits. Okay, so that to me is always the most stressful meeting to go to. I always find out some bad news. Very rarely I find out some good news. And I have some advice regarding that first board meeting in later slides. This is also important. In our first fund, We had offers from strategics wanting to buy our companies. Oftentimes we'd get very excited, we'd sell them. And later what I learned is that when people want to buy, that's exactly when you don't want to sell, especially when it's early. Because in your portfolio of 10, the 1 or 2 that will carry the fund may actually be the one you accidentally sell. And then the ones that you keep, no one wanted to buy, Those are the ones that actually don't generate a whole lot of value. So you have this adverse selection process where at the end of your portfolio, if you're not disciplined, you end up with all the undesirable assets. So the saying that I have is people sell their winners too early and hang on to their losers too long. So you actually want to reverse that. I mean, it's very logical you should reverse that, but emotionally you often, especially as new investors, do the exact opposite thing. How is that interesting for you guys? It will happen to you. If you are in Series A, suddenly a strategic offers you to buy it out for $5 million, $10 million, and that's a decent outcome for an individual, right, you'd keep half of that, that's $2.5 million, $2 to $3 million. Completely okay to take that, right? You have student loans, you have mortgage, completely okay to do that. Just be aware you won't be disappointed and hit yourself if you somehow found out 5 years later, I could have made $50 million or $100 million.
Just like, you know, business school, they just say, just like this famous guy about the one who established Victoria's Secret. They sold it for $30 billion.
What's the name of the company?
Victoria's Secret.
Victoria's Secret. Yeah.
And on the other hand, you have this digital watch company which had an offering to be bought for something crazy like 2 years ago, it's now Chapter 11, they're done.
Yeah. The key— there is no right or wrong answer, the key is to be aware. So when you think about the $10 million and the $2 million distribution check to you, Don't forget the big outcome. You may still— I mean, I encourage people to think, it's okay to take that exit. For us as venture investors, we don't take that exit.
How long are your funds running, 10 years or 8?
Our funds? 10-year funds.
10-year funds. And what do you wish your companies would do? An IPO, an exit, like you have 5 more years with the company. Usually, what would you prefer?
Oh, there's no canned answer. I mean, if it's— it depends on the growth curve where you are, right? If you're on accelerating growth, don't sell. But if you're approaching the natural point of inflection point, you're done, then you should sell, right? So it depends on where you are on the growth curve.
That's on the company side, but as a VC, a board member investor, you have your own perspective.
No, no, no, I— no, no, so that's actually a very important point we'll address later on in the slides is you're a board member, right? You have the fiduciary duty to the company, right? So I actually stay very disciplined just because our fund needs to exit, you can't force the company to exit. That is actually the wrong thing to do and you have to be very careful not to do that.
You're maybe the most honest board member.
No, no, I actually— I'm very disciplined when it comes to that because I think— and I run into other board members like that, oh, our fund is about to expire, let's exit. No, the company is not ready to exit, you can't exit. You can sell your shares. It's important you have a personal reputation. You have to maintain your personal reputation because next time people remember you are the board member who imposed your fund investment horizon on the company.
As you know, when I'm trying to raise money in Israel, certain VCs have certain reputations.
Yeah, yeah.
We know that this VC will replace every co-founder within one year if he's not technological and this This is interesting, right?
Again, going back to dating, okay? Let's say someone invites you to a dance, right? It's a girl or a boy invites you to a dance. And you see a more attractive candidate. Do you go and dance with the other candidate? Most of the time people don't. But sometimes you have some people who will, right? So my— our philosophy is, And this is very common in Draper funds. Founders leave, companies die. And it's not— it's sort of empirical observation, right? If you go back to that slide, maybe I didn't put it on there, but basically these 9 companies, all founder CEOs. We didn't replace any of them. So you're not replacing the CEO? Any one of them. Not to say we don't replace them, but just empirically, when you don't replace them, they work better. Or I guess the other way around is oftentimes when you replace them, things probably don't work anyways.
