True Ventures on Spotting Winning Teams

true-ventures_fullSince its 2005 founding, San Francisco-based True Ventures has been making seed-stage bets on startups, with an eye toward plugging up to $10 million into those that break out. 

The firm’s strategy has worked with aplomb. True was the first investor in WordPress parent Automattic — one of the tech industry’s hottest private companies. True also wrote early, small checks to the video ad network Brightroll and the wearable device maker Fitbit, companies that have gone on to raise tens of millions of dollars from eager follow-on investors. I recently caught up with cofounder Jon Callaghan to discuss True’s model, how to know when a startup is souring, and what kinds of companies the firm is backing right now. Our conversation has been lightly edited for length.

True typically gets 20 percent of a company in return for a fairly small first check of $1 million to $2 million. How do you do it?

We’re investing a $200 million fund, so $1 million checks are half of one percent of the fund. If you think about that allocation, it lets us take on an incredible amount of risk. When things work, we have a large enough fund that we can support [the best investments] with $5 million or $10 million – and we do have $10 million in lots of companies. [With] our best companies, we’re the largest shareholder on the lowest cost basis because we were in there on day one.

Some of your founders have enjoyed success before and could presumably sell 20 percent of their company for a bigger check. Why don’t they?

We wouldn’t be doing them any favors by putting too much money in too soon. We’re actually much more aligned by saying, “Here’s $1 million to $2 million to take you through the next 18 to 24 months [to see if your idea works]. Is that worth 20 percent to you?” And it is. It’s a pretty good trade.

When you write a bigger check, you also start bumping into loss aversion. You really don’t want to lose that first check. If you’re in too heavy in the beginning, it’s really scary for any investor. And the last thing that any creative founder needs is a nervous investor.

True has now backed 120 companies. When do you know that you have a great team on your hands, and when do you know a startup is going south?

We like to see a constant thread through [founders’] experiences, meaning that when we hear their story, it’s really clear why they’re doing a particular company. We backed [former Wired editor] Chris Anderson [who founded the unmanned aerial vehicle company 3D Robotics last year] knowing there were a number of threads that led him to his company: his fascination with innovation; his kids’ curiosity in hacking Legos with remote control airplanes; and finally, just knowing that there’s nothing else in the world he’d rather be doing – and this is someone who could be doing anything.

When it comes to the downside, there are a lot of easy tells. Communication gets weird between a founder and the rest of the team. Things just don’t add up. When teams are in flow, you can see it and feel it. Their offices are alive with energy. Those are the good ones. If you spend time at a company and there’s not that energy, then you kind of have to say, “What’s going on here?” It’s usually because some basic stuff is missing. People aren’t on board the mission, or the founder or someone else took the product in a direction that isn’t really resonating with the rest of the team, or the team kind of didn’t have the trust required to get together in the beginning.

True first went after consumer Web companies, then SaaS companies, then infrastructure companies. What does your newest crop of portfolio companies look like?

We think this wave of software and mobile innovation will disrupt very large existing businesses. Hair color is one of two consumer packaged goods companies that we’ve done. In robotics, we’ve funded many interesting and wearable robotics companies that haven’t yet been announced. We now have one of the largest device and wearable portfolios that no one knows about. We also think the car industry, where there’s clearly a huge software opportunity, is really interesting.

It’s a big, scary market, and traditionally you might say, “What? You want to sell to automakers?” But we think there’s a really brilliant team doing something very bold and audacious, and we can and want to take a ton of risk with that first check.

(To read a previously published segment of our chat with Callaghan, on the “Series B Crunch,” click here.) 

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