Current Trends in Valuations for Seed and Series A Rounds

Follow me @samirkaji for my thoughts on the venture market, with a focus on the continued evolution of the VC landscape.

My guest today is Heather Hartnett, CEO and founder of Human Ventures, an NYC-based venture firm founded in 2015 that leverages a very unique model that combines traditional fund investing with business creation and startup studio model in order to back and assist exceptional founders. Human Ventures has over $50M AUM, and has four exits including Reserve, Girlboss, and Clark.

Prior to founding Human Ventures, Heather’s career spanned across roles at firms including CityLight Capital, and Claremont Creek Venture, and the David Lynch Foundation, where she worked with some of the country's largest family offices and investment institutions. Heather is a member of the Kauffman Fellows program and a frequent contributor to Forbes on the topic of venture capital. 

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In this episode we discuss:

01:31 The hypothesis behind Human Ventures

04:20 Why it was so important for Heather to build a larger platform to provide value to founders

06:35 The challenge of raising capital with an unconventional fund

09:22 How did they narrate the vision to LPs to be able to close a $50M fund in 2019?

12:42 The power of conviction when fundraising

14:33 How Human Venture uses a venture studio model in unique ways to fund and create companies

18:21 The process of co-creating companies in their incubator and why it’s been successful

24:25 How their three pillars—the venture studio, “humans in the wild”, and the fund franchise—work together

26:46 The KPIs Human Ventures uses to measure success

28:22 How the pandemic validated their human needs economy investment thesis

31:26 The advice she would give to emerging managers

33:51 How Heather views the Seed Market currently

38:02 Heather’s most counterintuitive lesson as an investor

39:08 The lesson she took from her biggest investment miss

41:05 The Investors that inspire her

Mentioned in this episode:Human VenturesGive and Take by Adam Grant

I’d love to know what you took away from this conversation with Heather. Follow me @SamirKaji and give me your insights and questions with the hashtag #ventureunlocked. If you’d like to be considered as a guest or have someone you’d like to hear from (GP or LP), drop me a direct message on Twitter.

Transcript:

Samir Kaji:

Hi, I'm Samir Kaji and welcome back to another episode of Venture Unlocked, the podcast that takes behind the scenes of the business of venture capital. On this week's show I'm excited to bring you my conversation with Heather Hartnett, CEO and Founder of Human Ventures, a New York based venture firm that leverages a really unique startup model that combines traditional fund investing, any business creation platform in order to back exceptional founders. Before starting Human Ventures in 2015 Heather's career spanned across roles and firms including City Light Capital, Claremont Creek Ventures and time at the David Lynch Foundation where she worked with some of the country's largest family offices and institutions. Heather was also a member of the prestigious Kauffman Fellows program in class of 21 and is a frequent writer about VC on Forbes.

Samir Kaji:

We had a really fun conversation covering topics like creating a successful studio model, navigating in today's early stage of market where capital is a commodity and her experience in raising for a firm that has so many non-conventional parts. Now, let's get into the episode to hear all of that in more. Heather, it's so great to have you on the show. Thanks for joining us.

Heather Hartnett:

Thanks for having me.

Samir Kaji:

Usually, when I start these conversations, it's going back into history of what catalyzed somebody's journey into investing, but your model is so unique. I actually want to jump ahead to 2015 when you started Human Ventures, what was the hypothesis that you had and what exactly does Human Ventures do?

Heather Hartnett:

Human Ventures is an early stage venture firm, and we are focusing on pre-seed to Series A investing in primarily consumer tech and product in areas that we call the human needs economy. And we can unpack that a little bit too, but largely in the areas of health and wellness, future of work and innovating technology that supports those human needs. Large part of what makes a successful startup ecosystem is the concentration of founders building together and helping one another and I met my partner who I founded Human Ventures with, Joe Marchese, about 12 years ago. And he's just a consummate entrepreneur. We very much connected on the fact that entrepreneurs see the world 10 years in the future and a lot of times they feel misunderstood. Having a community and a support system is so crucial, especially at the earliest stages of building your company.

Heather Hartnett:

And there wasn't really a lot of fundamental resources for founders in New York City. New York is a massive economy. So many different industries. Tech was not the center of that by any means, but now all of the industries are becoming tech enabled and founders are the lifeblood of innovation. And so, we're starting to see more and more founders start their businesses in New York. And so, in 2015, my background, just quickly, I actually started venture in 2005. I was out in the Bay Area. My father was an entrepreneur. I was exposed to entrepreneurship at a very early age. Kind of got thrown into venture at a time where there was not a lot of upward mobility there, there was not a lot of proliferation of venture firms. And so, but I did get exposed to it and I got bit by the bug early.

Heather Hartnett:

Fast forward, I was at tech companies. I was in philanthropy for quite some time and it built up my network of family offices quite a lot. And in New York, when I moved to New York, we really saw that the next generation philanthropists was an entrepreneur. They were people who were wanting to make a change, but they were doing it earlier. It wasn't that you have to make your money for the first 70 years of your life and then you gave back. Founders were starting to see where there were challenges and see where there were opportunities and they were building around that. And so, we decided in 2015 to start of a business creation platform, we called it a startup studio. And that was really to be able to help founders build together and create an opportunity for them to have shared resources, operational expertise and just build a community around that.

Samir Kaji:

Looking retrospectively, it definitely seems really pressing to actually create platform versus just a traditional fund. But it does introduce a different degree of difficulty when so many firms when they first start, they keep it really simple. They just raise a traditional fund, invest in companies and maybe there's some aspect of value add that they incorporate. You had all these different moving pieces. Why was this so important to you?

Heather Hartnett:

Yeah. I mean, even then it felt like capital was a commodity. It was, how are you actually giving back to the founders? Why are they choosing you as a source of capital? Why are you seeing the best companies? And for me, the funding gap was the very earliest idea stage from zero to one. And it wasn't necessarily that there weren't first check investors because San Francisco had made that become a thing with angel investing. But I think founders were more, it's easier than ever to start a company, it's harder than ever to win. So how are you really building in those first 100, 150, 200 days with people who know how to cut the corners or the hard stuff, you always have to go through it. So can you give founders some more resources to be able to do that faster?

Heather Hartnett:

And so, I think I said, "What would Andreessen Horowitz be if it started today?" You start with the platform first, should you start with the funding first? There were a lot of funds out there. I had a background in building. My partner, Joe, was a founder in building. Our third partner, Michael, led us, corporate, M&A and finance and operational expertise. So together we created the system to be able to create businesses. We felt like that was going to be more of a value add to founders. And then as our company started to grow, the ones that we were building together with founders, then the funding source made sense and then kind of evolved from there.

Samir Kaji:

Can I maybe go back to that time when you're creating this? And I think there's so many things here that, today, it's very clear that capital is even more commodity and how you differentiate isn't necessarily around what your brand is. But it's really, what are you providing? How quickly can you move on opportunities? And are you building certain relationships with these founders that allow you to, to get into the companies you want? The counterbalance with a lot of people listening to this podcast is, "Well, that sounds great, but I don't have the capital." If I raise a $10 million fund, I have $200,000 in management fees that barely puts food on the table for me. As you thought about the model in the early days, how did you think about capitalizing it? Because you did need to bring on team members, you needed space. Tell us a little bit about that raise, and were there other ways you had to be creative in capitalizing the actual platform?

Heather Hartnett:

Yeah. Definitely. I mean, Joe and I were both founders in our own DNA. And so, you really do have to think about creating a sustainable model. It's not the scarcity mindset of just operating on management fees. And building an ecosystem of connected individuals is truly the biggest differentiator. And it takes time and effort to be able to create that engaged and connected community. So we knew that you couldn't just start that from day one, but what did we have? We had our trusted networks. And that forced me to say, "What do you want to start with?" We went out to our trusted sources of people that we knew would believe in us. And we raised capital as a parent company structure to be able to hire people, to be able to help add value to founders from day one.

Heather Hartnett:

And that was very much a part of our DNA. Can we be founders as well first? And I think to be able to create a firm, not just a fund, where you have multiple funds and you have multiple product serving founders, you really have to think about building a firm, not building just a fund. So we started with the platform first and we aggregated Titans of industries who cared about where founders were building. Because if you are in a Fortune 100 company right now, what's keeping you up at night is not necessarily your shareholder earnings call. It's who are the disruptors that are coming around the corner? So some visionaries like David Solomon from Goldman Sachs and Beth Comstock from GE and Shari Redstone from Viacom, they all we, had trusted personal relationships with them and they backed Human from day one. And that set us up, right? That connected network of individuals who cared about innovation in New York, set us up then to be able to start adding value to founders that they wouldn't get from small fund.

Samir Kaji:

And then when you go out and raise a fund and you have the platform that you've set up, which does have this very unique platform, that's really actually hard to replicate. This is not an easy thing to do. Did investors, traditional LPs as you're raising their fund, how did they view the platform? And tell us a little bit about the story itself? Because I always find from at least my perspective in talking to a lot of limited partners, is that they want comparative advantages and they want differentiation. But when I talk to managers that have a lot of differentiation and a lot of pieces of the story, it's hard for those people to really get to a decision point because they get paralyzed by the analysis of so many different parts. How did you become successful? Because I know you closed that $50 million fund in, I believe it was 2019 based on the public clippings. Tell us a little bit about how you brought all that story together and how did the LPs really understand what you were doing?

Heather Hartnett:

You really have to sell a vision. And we were talking about this, I think the risk appetite of limited partners is not all the same. There's a continuum. And I say, that founders are 10 years in the future, traditional LPs by nature have to be 10 years in the past. Emerging managers are kind of the gap. They're bridging the gap between the two of them. So how are you finding and picking people who are seeing the world as it should be, but then also selling to your investors that you know how to bridge that gap? And that is a big task to do. And so, it's not easy. You have to find people who bet on you as builders, so that we were company builders and we could do this. You have to find people who were building on you as money manager or betting on you as money managers.

Heather Hartnett:

You have to find founders who are betting on you as trusted partners. And so, it's a lot of trust building. A lot of trust building and then execution. So in the beginning, yes, we were not like any other fund. We didn't check the boxes of a traditional fund. And we also weren't checking the boxes of a traditional studio necessarily. So you have to find visionary capital sources. And we found our niche with family offices. James Murdoch is a Partner, him and Catherine they have Lupa Systems, which is their big investment shop. They themselves were very visionary in how they wanted to build that and human fit and align with that thesis as well. So you start to know who your buyer is, right? Who are people who see the world the way that you want it to be and how they're going to back that.

Heather Hartnett:

Then as you start to gain proof points and you gain track record, then the people who you know are incentivized, and it's their job to be more risk averse, right? If you're managing a pension fund and an endowment, you're not wanting to take these huge bets on a young gun like me. But if you start to see that you have the ability to rinse and repeat starting a company and getting that unicorn and seeing some of the metrics that you are more useful, then you start to come on. So I think it's really finding those people who are along the same risk continuum you are on.

Samir Kaji:

You're hitting on some really interesting points that I do want to even unpack further as we get into this conversation. But talking about the continuum between fund managers, entrepreneurs and LPs, and I love the description of our GPs that's kind of sitting in the middle, where entrepreneurs are looking 10 years in the future. LPs are really looking at what happened in the past to assess and make decisions, I would say that the emerging manager community probably is closer to the continuum of where the entrepreneurs are, then the LPs and it creates a little bit of a misalignment. The thing that I always think about though, is as you're going, and you're talking about finding their true believers, people that really understand, are willing to take a little bit of risk because they understand the vision and the upside of investing in emerging manager.

Samir Kaji:

It's usually not the big institutions because of that risk element. And finding early believers is really hard in that, how do you find these people? Because it's such an opaque and fragmented universe of people that are entrepreneurs or people that are institutional or family offices. Did you learn anything specifically during that first fundraise that now you take away and say, "Hey, if I were to start from scratch, this is how I would go get my early believers."

Heather Hartnett:

I don't think that I ever stop fundraising. Because you just, like I said, you gain more conviction in what you're building the more you see the results and you learn what the market needs to understand about what you're building versus, sometimes my biggest problem a lot of times is that I am too far in the future. I am thinking about what I already know is going to come, and this isn't trying to be, I'm not trying to brag here, you just have to operate where the puck is going, not where you are right now. And so, that's just what I learned the most is just what you said, don't differentiate too much that you can differentiate yourself out of somebody to be able to believe what you already know to be true.

Samir Kaji:

It's a tough thing to sort of reconcile at times because you do see where the world is going. And back in 2015, for example, there wasn't a lot of smaller firms that were employing a platform first approach, and then raising a fund on top of it. Or if they were, it was more traditional in the sense that it was an incubator and the incubator took X percent ownership and then invested very small amounts to get the ownership in some cases. Or there was new era of startups, and startup studios rather. And a lot of the startup studios that I've looked at have been working with a few companies per year or starting a few companies per year where the startup studio gets massive ownership, 30, 40, 50% or even sometimes higher. You don't fit into either of those buckets in terms of how you approach your own cohort building. Tell us a little bit about where you fit in, and just for those that aren't as initiated, what is the continuum between incubator to traditional studio and where does Human then fit in within that?

Heather Hartnett:

So Human Ventures for me, we call it our business creation form and right now the three big pillars are a true venture studio, where we're co-building companies. And Joe is mostly running that. He is the founder who has these ideas. He brings other founders and they build together. So those are true cohorts. Then we have a pre-seed incubator, which is bringing founders in at very early stages, but still six to 10 months before the market has conviction in them. And that's, I love that stage. It's called Humans in the Wild. We do a call for Humans in the Wild because that's the time that humans who are thinking about the future, they feel the least understood. And they should be. If they had that idea right now that everybody thought was commercial, it would be already done or be funded. So humans in the wild, and that's our edge there.

Heather Hartnett:

And then we have the fund franchise. And those three pillars are what we think the business creation platform really needs to have to be able to go from concept phase to billion dollar plus exits right and do that over and over again. So those three components are what we've landed on, but the studio structure has kind of gone two different ways. One way is, the landscape. One way is what you were talking about. Studios will bake a concept internally, pretty far they will raise a lot of capital for it or put in their own money. And then they'll hire in a management team and kind of off to the races. Start on third base. Or the other way is start building products and services to support founders, surround them earlier, bring in the founders really early and have them dictate where, be the vision driver of where that company is. We had a fork in the road where we said, let's go to the ladder, right?

Heather Hartnett:

That our programs and services are there to support founders in a way that then brings out their vision and makes them go faster versus us saying that we have all of the ideas. And everybody wants a cookie cutter approach to this, but I think the biggest differentiator that we've built is just the internal functionality that allows us to adapt to our core customer, which is the founder. And that might take different lenses. We've had corporate innovation programs that we've worked with and given Entrepreneur In Residents training to some of the people they've brought in. I think the studio has the ability to be much more multifaceted, and that ultimately is what's going to create the most value. Do LPs like to hear that? We do have a systematic approach of investing in how we're doing, and how we're going to consistently have returns. But I think you also want to maintain this agility of every six months, what's working? What's not? Where are the founders? How can you meet them? What do they need, and how can you add value?

Samir Kaji:

It seems interesting that you bring up these three legs of the stool, and two of them being the incubator and then the startup studio. In both cases, you get to spend a lot of time with the founders before ultimately investing a lot of capital into the cap tables. They're also very difficult things I think to operate because they do have operational complexity, you need people. I've always been curious in terms of the startup studio model which, by the way, I've seen many do fantastic in terms of performance. The type of companies that come out of it. Sutter Hill, for example, has had some amazing, amazing outcomes as we all know. But what does it take to build a successful studio, if someone was just starting off?

Samir Kaji:

And I know a lot of people that I've talked to in the market are thinking about starting at their studios, because they really enjoy that model. They think the co-creation makes a ton of sense, but don't really know what goes into it. And what are the pros and cons? Maybe you can just give us a little bit of a sense of your decision making process in the early days of what you've learned.

Heather Hartnett:

I think you have to know how to hire really well. It's just like, now you're a founder as well. Hiring is everything. It's all about the people. Michael Letta, like I said, operational guru. We have Evan Cohen who was Dennis Crowley's right hand operational business hire at Foursquare for so many years, and was at Lyft. And they know how to operationalize kind of the primordial ooze that founders know how to work within. And so, that, I think, combination of knowing people who have to break the boundaries, think about visionary ideas, then people who know how to operationalize that without killing it and then also people know how to manage money in this ecosystem, have to be all respected and have to have weigh in.

Heather Hartnett:

So those are the three archetypes that I would say. We also like to hire people who are multifunctional, who understand they're mini CEOs and then they actually end up going into the companies that we build or that we back early. And I think you have to be okay with going outside of the traditional titles and the more you make a studio, I think, a consulting agency or an agency at all, the faster you will kind of put yourself out of business

Samir Kaji:

And maybe even taking us even more in inside baseball of how it works. So let's go into the co-creation, because there's so many people that are interested in these co-creation models. How does it actually work in practice in terms of conceiving an idea, building a team around it, having the Human Ventures' operational team helping, at what point does it then become a traditional standalone company?

Heather Hartnett:

So every company is different, when you build it. There are systems that we keep true and that's how we evaluate founders, how we think about their strengths and weaknesses, how we bring in teams to support them. Every founder is going to have strength, right? And then they're going to need to be able to hire in for all the weaknesses. So that process and systematic approach is what we're really good at. Identifying talent is what we're really good at. Motivating people, understanding community. We have a term operationalizing our network, so we're only as good as our quickest response back for a founder. So putting in a lot of Goodwill into the community and offering events and creating value for operators so that when we do ask for something for a founder, they can get that response very fast.

Heather Hartnett:

And that is a true value that we've brought up. So operationalizing the network, operationalizing some of those early systems and procedures. A lot of what we've baked into our humans in the wild programming, that 100-day sprint is what we learned from the business design process of working with founder from day one. And that's talking to 200 customers and it's knowing what the real MVP is and it's knowing when to lean into your gut versus going on the data and all of that. Self discovery is a big part of that 100-day sprint as well, that I think you'll start to see more people employ. And that's great. Using founder coach in residence and having a founder be an ambitious founder growing very fast without the company breaking them is key.

Samir Kaji:

I love the Humans in the Wild title and concept. It makes so much sense and it's really interesting to think about how that actually translates in terms of how you run these cohorts, which is very community based. And there are firms like First Round Capital, that was the first to really embrace founder communities. And of course, that firm is a legendary firm at this point with Josh and team. But going to the operationalization of the networks, this is always something that people are challenged to do because you have the network, they have full-time jobs. I had a recent guest on the show, Ben Casnocha from Village. And we talked about that. And what they do is they create certain incentives for the network to be responsive, to add value to the founders. Are there things that you found to be effective and incentivizing people to say, getting back who a founder within 24 hours are helping and really being proactive and leaning in on the type of value that can be provided?

Heather Hartnett:

It goes to the type of qualities that we look for in founders. So founders of the future don't look like the founders of 15 years ago and I think one attribute that we look for is reciprocity. It is this idea of the giving without thinking about taking in return will ultimately net in a positive way. And so, if you invest in a portfolio of founders who have that network mindset then you're, the whole is greater than the sum of the parts. And so, that might be a little bit too esoteric for you. Yes, we do have some, we've tested out a lot of different programs and incentivizing some of the founder to own bits of each other's companies so that they feel more incentivized.

Heather Hartnett:

But at the end of the day if you give them the platform to be able to give and people know what other founders need, people are inherently wanting to give if you're investing in the right types of people. Adam Grant has his book Give and Take. And it's one of my favorites. And we have taken that to another degree, which is how are you giving people the opportunity to ask, make their asks and then, people the opportunity to give in an effortless way. And people who have that personality will tend to do it naturally.

Samir Kaji:

Yeah. And it's a great book that I would just suggest that anyone that hasn't read it should read it. It's definitely a staple of how to think about managing networks. And I commend you for building such a strong group of people in your network that truly fundamentally help each other. Now going to the fund itself for a second, I want to understand little bit more about the portfolio construction and the deployment of capital, given that there's these three unique distinct business models being the studio, the accelerator and then just the traditional fund investing in companies that are outside of the first two. Can you just walk us through how that all works together?

Heather Hartnett:

The debut fund really was a proof of concept to say that these three types of investments investing in true co-builds, investing pre-seed and following on, and then doing some external investing as well to round out our diversity in our portfolio. Which one's better? What is more effort for the biggest outcome? I would double down on the strategy where we do about a third first check-in, we do a third external and then we save the rest for follow on because the follow-ons now are a lot of where you see that value and you want to make sure that you have that. So coming into my next fundraiser will definitely be thinking about, how am I setting that up for an opportunity fund as well? Early learnings, we left a lot on the table, because our companies have raised more than we were able to syndicate. So now we've syndicated. And syndicates are all the rage but it's still very inefficient, that process too, which hopefully allocate will be touching on that as well.

Heather Hartnett:

But it's getting to be more efficient. It's only going to be better be able to size up your capital in that way too. So I say we pick stock in people, right? Our goal is to find founders six to 10 months ahead of the market, not too far ahead of the market, right. Which we've done that too, where people didn't understand the value of that founder until too far later. But that's what we can gain conviction because working with them in a really hands on capacity, right? We're not meeting the founder two, three times then doing a diligence memo and then figuring out whether or not we're investing. We're actually seeing the work. We have a term called build velocity internally. It's how fast is that founder building? Because the idea will not be the same from when it starts to when you read about it at the IPO, it's going to take so many different turns. So you just want to make sure that that founder understands that internal build velocity.

Samir Kaji:

And you talk a lot about the global VC market and where Venture is going and emerging managers, which has been great and I know you've written a few posts recently. Before I get into that, there's one last question I have about the Human Ventures model. And as you think about whether it be incubator or the startup studio or the actual fund, how do you measure things? Are there certain KPIs that you measure internally to really assess the performance of those individual legs of the stool?

Heather Hartnett:

First and foremost it's returns, right. You start to see what ownership you need for what types of different companies. But I'll say, those three different components of use of capital are just along, again, a risk spectrum. We say early stage or we say pre-seed, seed and A, those terms mean nothing. It's where the milestones hit, where the business is. And our valuations are crazy right now, and those are always fluctuating. But when you come back to what value are you being created? And are you being really judicious about how you are placing that valuation? You're always going to get a better outcome if you're producing real value, right. So from build ideas on a paper, so building to then bringing in pre-seed where the founders know a little bit more about where they're going that they still have a lot to prove out, to then investing externally where they have some revenue or product or whatever, that continuum allows us to be able to see what the value really should be on some of these companies that are kind of mispriced a lot of times. So I won't pay up for hype.

Samir Kaji:

That is the world we live in today, which 15 months ago, if you and I were having this conversation, we were all talking about the same thing, which was the triage, the pending economic recession, down rounds, flat rounds being the new up round. And of course, the market has not played out that way. So just taking a step back, where are we looking at today in Venture? You spent a lot of time thinking about the future. Where is your assessment in terms of where Venture is today?

Heather Hartnett:

Pre-COVID, we had the same thesis that we do now. And I talk about the human needs economy because we saw the writing on the wall that technology was outpacing the human condition, that companies were being forced to grow at all costs and not thinking about necessarily, move fast and break things was the trope. Okay. So what are the things that are falling out from that? Because value still has to be created. And we looked at healthcare, we looked at future of your livelihood. The attention economy. Joe's background was in media and advertising, where is the attention economy? And all of these businesses that were at the height of innovation.

Heather Hartnett:

And whenever there's a big paradigm shift like what just happened to us in the last two years, something comes out of that in a much bigger way. Something is reborn. So it's really the industries that we think are going to be unlocked. The next trillion dollar industries are around these human centered businesses. It doesn't mean that technology's not a component of it. That's definitely always there, but it's technology and service of the human need, not the other way around. And so, when you find a white space like that, and you find new who are founding, who are seeing those opportunities and then you see new fund managers who are finding those founders. You understand that there's an entire white space of innovation happening. That's where I get excited. But that's going to be a little mispriced and misunderstood right now.

Heather Hartnett:

So I'm buying low right now, and that's in those areas, and it still is buying low. And that's what we're really excited about the opportunity, because right now FinTech, those are the billion dollar, multi-multi billion dollar companies. What FinTech is today, health tech is going to be tomorrow. We have two unannounced unicorns who are coming in from, especially female healthcare. You just see it in the next, the next before the end of the year, we'll have multiple unicorns in female healthcare. And I think they're just overlooked. These areas are overlooked, but still a ton of innovation. And then the market will price itself. You just create value and then the market will price itself.

Samir Kaji:

Yeah, I agree with that. And ultimately, there's only certain things that you can actually control in terms of how you invest, how you help the underlying companies. The market will set the valuations which today, of course, there's been a big step up in seed and Series A. And seed right now we're seeing valuations range from as low as five in certain cases, but more likely in the 10 to $30 million range. And there was actually a piece of data that came out recently that said, the average seed round is three to 5 million, the average Series A is 15 million. Which if you take 20% ownership at the Series A, it sort of translates to evaluation or post money valuation of 75. And so, it is a interesting market that I think is tough to navigate with when you look at the overall numbers, the difficulty of getting ownership, winning deals, but you've done this now and had the reps. What advice would you give for somebody that's just starting off and investing at the early stage?

Heather Hartnett:

If you're interested in early stage investing, then you have to have a very strong sense of a trend that you're spotting that other people aren't. And you have to gain conviction in that area. And then you have to figure out what networks or founders are building in that area. And you have to convince them to take your money, and you have to wait for six to 10 years to see if you're right. And that is a lot to stomach, but it's also where the greatest reward is if you're an early stage investor. I can't speak to growth stage. I think Jenny Fielding did this great tweet the other day. She's like, people have to realize that as an early stage investor, we're more like therapists, coaches, founders, people pickers, talent agencies.

Heather Hartnett:

Then we are the Series B and growth stage because once it gets to the spreadsheet stuff, once it gets to escape velocity, once the banks are now investing in it, that's a totally different ballgame. And that's not where you should be focusing or chasing those deals. You should be finding the alpha in places that other people are not looking. And you should have conviction in yourself for understanding why there's value there when other people are not seeing value. And that's where LP should be looking for their fund managers too, if they want to go into that space as well.

Samir Kaji:

I've spent a lot of time thinking about this and I do agree. And I've always said that the seed ecosystem really is its own sub-asset class within venture with very different risk return characteristics than even traditional Series A, Series B. And then you get into the growth stage and that's where all the capital comes in. It's the crossover funds. And of course in today's world folks like Tiger and Coatue, even coming more upstream and investing earlier stage, but really putting the dollars at that Series B and later a lot of the funds have gone bigger. So today the venture industry looks like a barbell. A lot of seed funds. If the number of seed funds is in the thousands in the US, the dollars are still around $10 billion, raised by those seed funds.

Samir Kaji:

Although, as we know, there's more capital deployed by those seed managers through things like SPVs and opportunity funds and things like that. And on the other side, you have the bigger managers that are now becoming multi-product, multi-geography, bigger and bigger. So moving away from the seed universe, how do you think about the other side of the barbell, which is the growth stage, funds getting bigger and bigger? What's your take? And if you were an LP, how would you assess that part of the market right now?

Heather Hartnett:

A couple of different things are happening, right. Those larger funds are coming back to the trough faster and faster. So the traditional LPs have to re-up, they're overallocated in cap and VC as an asset class. So I think what's happening is the funding sources are diversifying. We were talking about this before, the insurmountable amount of family office capital that is looking for putting money to work in innovation. So I think the big opportunity there is making family office, and that's a huge term, right? That you meet one family office, you meet one family office. But creating efficiency out of that asset allocator profile is going to unlock a ton of capital and therefore returns in the earlier stages as well. Later stage, look, I mean, that's not my job. If I start a company and we own a significant portion of it, my job's not to write it necessarily to these $80 billion numbers. I will, if that's what's supposed to, but I can also take money off the table earlier and return my fund.

Heather Hartnett:

I think having the discipline of having a small fund in this day and age is fantastic. And I think founders are now, they're being put in a really interesting point to be a decision maker of where they take their capital. And I think they should be very careful of taking capital from really large institutions who have come up market, who have come writing seed checks because the calculus is much different from writing a 500k check if you're a $2 billion fund. Than if you are a $25 million fund writing a 500k check, you've done so much work to make sure that you have conviction in that founder. And so, founders should know who their investors are and the signaling risk of taking capital from something that's too big. And then the large institutions should be looking at the emerging managers to say, who aligns with our thesis? Is there going to be M&A in this space? Maybe. If I was a big, if I was Coatue or Tiger, I would be looking at what fund managers am I acquiring? Is that happening? Where's the consolidation? And I think that's what you'll start to see too, is that consolidation of large institutions thinking about the emerging managers who see that opportunity.

Samir Kaji:

And it's going to be interesting to see how this all plays out. I agree with so many of those points around investing in emerging managers. I do think a lot of the large firms, by the way, they have partners that are active investors in emerging managers because they see the value that the emerging managers, especially at the seed level, can provide in terms of value to those founders. Because as you said, if you put a total of 500,000 into a $20 million fund, that's a significant part of your investable capital versus a fund that's a billion dollars putting that same $500,000 check and really acting as a flyer and probably getting no type of real engagement with them. And so, I do think that we should see more of that. Also, I'm seeing some of the bigger firms invest out of their funds into emerging managers. And of course, even family offices. I mean, the unique sort of alignment is they are returns focused. They don't necessarily have a full investment committee in many cases, and are really looking for co-investment opportunities which often come from the seed environment.

Samir Kaji:

Now, the question that we always try to navigate through is that group is so opaque and fragmented. They don't hold a sign saying, we're open for business, managers come find us. And so, navigating through that universe is hard for the fund managers. But it's also hard, on the other side, those LPs finding the right fund managers given how big the ocean is today. And so, it's going to be interesting to see how this expands, we're working on some of that. And there are groups like Operator and Recast that are also looking to give Lyft, which I think will bring more efficiencies, but also bring a much more diverse set of allocators and fund managers which we're excited to see. So I want to end with our heat check where I ask you three questions, rapid fire, and get your reaction. The first being, now that you've run Human Ventures now for six years, what's the most counterintuitive lesson you've learned as a venture capitalist?

Heather Hartnett:

I think we hit on it, but it's really that people don't want you to think too far in the future if you're a capital allocator. So it's really broadening your range of how you can share your vision. And knowing what points you need to let people in at which different points throughout your journey.

Samir Kaji:

Don't give them the kitchen sink. Just give them little parts at a time so they can digest. So the other question I have, and you've worked with so many different companies, both through the incubator, through your own experience, having been in venture now, I guess, 16 years, everyone misses on deals. And there's this anti-portfolio that's in people's head, Bessemer, of course. Has their public anti-portfolio. Has there been a company that you look back on that you did miss on? And do you look back and say, I missed on it and today I'd probably do things differently. Not because it's hindsight or this was a great company, but there's an ingrained lesson about why you missed that you now learn and say, I would learn so much. I would never make that mistake again.

Heather Hartnett:

Yeah. I think it's when you have this gut feeling on a founder, and my learnings have just been solidifying my conviction on my own intuition. I started in venture as early as I possibly could have. I had a very nontraditional path into venture. We didn't even cover that, but I think my regret is not starting earlier. I came from parents who were very progressive in their thinking. They started meditation in the '70s. I grew up with, I vague in meditation and wellness and sustainable living practices, and all this sort of stuff. And if I knew what I know now, I could have definitely capitalized on these trends that happen they're so mainstream now. But I say taboo today, mainstream tomorrow. I think building that muscle to see where the trends are going and having that conviction in where you think the world is.

Heather Hartnett:

And then on the time continuum when that is going to come to fruition, that's what you have to hone in as an early stage investor. And so, I'm just trying to get better and better at that. I don't feel like I've missed deals that I wish I was in not because, because I'm that good, but because I've fought to be able to become a capital allocator in a way that just gave me now that authority to be able to act on the things that I knew were coming to fruition. So I don't think I could have done it any other way. It's a privileged position to have missed some of those deals because you have the capital to be able to allocate. Now going forward, ask me in a couple of years what I've missed. And then I feel like I'm in a position that now to miss some of the big ones.

Samir Kaji:

It's always going to happen. It happens to the best of us. Speaking of venture, I've always viewed it as very much an apprenticeship game where you continuously learn as you go along. And a part of that is actually learning from other people. Is there somebody out there that particularly inspires you, you really believe in how they think about things and has been a mentor? If so, who is it in? What about them?

Heather Hartnett:

Kirsten Green is absolutely an inspiration to me. She's done what many founding female fund managers have tried to do or wanted to do. She really was a founding firm female fund manager. And so, I appreciate her lens on the consumer behavior, how she's built up her franchise and her team and just her ethos in general. And so, we're very aligned in the way that we're investing. So I would say her. Then I would also say on the mentorship side, Howard Morgan. Howard Morgan is the grandfather of venture, there is nothing that man hasn't seen before. He is constantly reinventing himself and hitting the refresh button, understanding where there's new energy and new talent. And then putting his money where his mouth is. And you see it time and time again. So he's been a constant inspiration for me, both on the investing side and then also on just understanding where the world's going in terms of the people who are allocating capital. So those two people for me have been very fundamental in my growth.

Samir Kaji:

Great people. I don't know Howard personally, I know Kirsten. And believe it or not, it's only been just under 10 years since she started Forerunner Ventures into the giant it is today. And so, those are some great names. Heather, this has been a lot of fun. Thank you so much again for being on the show.

Heather Hartnett:

Thank you so much.

Samir Kaji:

Thanks so much for listening to another episode of Venture Unlocked. We really hope you enjoyed our conversation with Heather. To learn more about her or Human Ventures, be sure to go to ventureunlock.substack.com for detailed notes of the show and my ongoing comments all about the world of venture capital. Venture Unlocked is also available on iTunes or Spotify for download. And while you're there, please leave us a rating and a review as it really helps us out. Finally, hit the subscribe button in order to get each and every Venture Unlocked episode as soon as it's released.

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