One could argue that Floodgate, a Bay Area-based seed-stage venture firm, punches above its weight. The roughly 15-year-old firm has just under $500 million in assets under management — including a $150 million fund it quietly closed in January — and it makes just a handful of new investments each year. Inka added value with investments in Acta, Lyft and Starkware $8 billion in May, among others, Its centralized approach seems to be paying off.
Writing too few checks, especially in an emerging market, can be frustrating for some investors. But over the years, Floodgate’s small team has been forced to sort through several thousand pitches and identify the ones they think have the most potential. Now, co-founding partner Ann Miura-Ko and Tyler Whittle, a senior associate with the firm, have developed a new program to help student teams understand what similar big ideas look like — and why most concepts aren’t big ideas.
To get more details about the program — as well as hear Miura-Ko’s current perspective on the current seed-stage startup scene — we spoke with her earlier this week. Our chat has been lightly edited for length.
TC: This summer, you invited several students to work on startup ideas with you in the Bay Area. Do you incubate companies together? How did the whole thing work?
AM: We went to the builders community we built the year before [Stanford’s] School of Engineering [where I teach], and to the CS department at several universities and said, ‘Hey, if you’re interested in being a future entrepreneur and you’re a great builder, we’re interested in talking to you.’ The main message there is: ‘We don’t want the idea that you’re working. We want you to be an amazing builder with incredible curiosity.’ partly, [that’s because] You need to be able to build fast and actually throw out a product [sometimes] But you should also be curious about the history of the industry you’re working in. .
The goal is to help them identify big ideas. What is your definition of a big idea and how do you know it when you see one?
I realized that there are two types of businesses that can become really big. One: you have an idea and many people already understand this idea, but you are better at action, so you implement everyone. What I realized is that as a seed investor, we don’t really benefit from investing in those companies because we don’t see enough activity to know who is best at running those types of startups. So when the founders heard, ‘[You] We need a little more traction before we make a decision,’ because you’re running a business with a more operational focus, as opposed to the second type, I believe, where the insights are focused.
Insights-led business is all about identifying what we call an inflection point, which has a few components. First, some sort of transformational event took place. It could be technological – CRISPR was invented – or a regulatory change event allowed within a state, such as telemedicine, or it could be social. The most common thing that people suggest now is working from home.
A change event might make a new feature or product cheaper or faster to build, or you might even have a completely different business model. [For example] You get a license versus paying for it on a monthly basis, or vice versa. Or the business ecosystem will fundamentally change.
When that happens, if you can tie it [that inflection point and change event to]’This is going to create fundamental pull and adoption of my product over the next two to three years,’ now you have the insight that seed investors should have [funding]. [And] This is something we are really looking for our students to really recognize.
Are you funding these students?
Yes. We’re writing $50,000 checks to all the companies, and then some of them say, ‘We’re not going to do this anymore,’ and in that case close up shop. [But] We have two companies [going concerns] With an investment from us, then an additional investment can be taken and one [already] He took outside investment. So there are four companies that we continue to work with out of 10.
How much stock would that $50,000 buy you?
We’re still revising it for next year, so I don’t want to put a pin on what we’re going to do. But this is a safe note. And then for follow-on financing, it’s also in terms of what the individual needs [it’s tied to] when We invest in that company, so it’s also in the valuation.
Four out of 10 is a good hit rate. Are these students primarily from Stanford?
What’s really cool about it is that we have students from Stanford, but we also have students from the University of Texas, Yale and Penn and other students from the University of Texas, so it actually spans many different universities. . . And we’re really excited to try to expand to as many universities as possible. One interesting thing we learned is that Stanford students are well-educated when it comes to startups. The beauty of having Stanford students in this network is that our Stanford students pull other students into networks that Stanford students are very fortunate to have.
I remember talking to a 19-year-old Stanford student, maybe 10 years ago now, who said he felt pressured to become an entrepreneur because of the culture at school. Does that concern you?
Yes. That’s why I designed it really mindfully so you have a way. I think it’s important to recognize that not everyone can be an entrepreneur. In fact, in the relationships I have with my students, I tell some students that I know well, ‘You have these amazing skill sets that are so unique and you should go to a big company. ; You make a lot of impact there. I actually directly advise students not to become entrepreneurs [because] It is a specific desire or not [requires] Such a specific skill is set at a certain moment, which in my own personal point of view, is not for everyone.
I agree with you. I think there is a bigger push for people who are technical to some extent [and] People with good ideas should move in that direction. But my hope is that by really giving them this kind of exposure, they can recognize if there’s an entrepreneur inside.
Out of curiosity, does Floodgate use scouts?
We don’t have a scout program. I guess our network of friends and family and entrepreneurs are technically our scouts. But we don’t have a financial program like most people do. I have this network of ‘unpartners’ that I meet with on a daily basis — who are angel investors and investors in smaller funds — and what we do is we literally share three or four interesting companies that we’ve seen. In the last two weeks. And then we share with each other how to care for it. And if other people are interested in seeing the company, we invite them.
Somewhat related, Y Combinator just wrapped up its latest demo day. As a seed investor, are you following YC closely? What do you think of the company as it stands today?
I think they provide an excellent service to entrepreneurs and I think people who want exposure get it [it]. I have a lot of respect for the product they offer and the community they provide and the way fundraising has been launched as a result.
For me, this is a difficult platform to engage with. If I’m only doing two to five investments a year, and I’m asked to put a check with a rolling safe note, if I sign tonight, you know, one valuation and I sign tomorrow, it’s another, and so on. [the founders] I don’t really know, but they were willing to sign me — which means nothing is right. So the ones I engaged with were entrepreneurs I knew before I got into YC.
But I see why the founders love it and I think they’ve done an amazing job on the product, and I’m not counting YC out. I know every year, some people say the classes are too big and everything is too diluted and expensive. But you know every group has a runaway hit or two.