Lee Jacobs is an entrepreneur, investor, and cofounder of Edelweiss. Based out of San Francisco, his personal mission is to help entrepreneurs be the best versions of themselves and believes that fully self expressed entrepreneurs can have a tremendous positive impact on the world. Lee provides capital and coaching to entrepreneurs through his venture capital fund Edelweiss, where he is responsible for business development, recruiting, and sales. The fund is focused on investing in early-stage tech companies with a history of resilience. Lee founded Edelweiss with a group of other angel investors Brian Balfour, Elaine Wherry, and Todd Masonis. Together, they have supported great companies like Blue Bottle, Whistle, Kettle and Fire, Gametime, Pipefy, Dandelion Chocolate, among others. For a view of their portfolio go here.
Work With Edelweiss
To Lee Jacobs, Edelweiss is unique because of its emphasis on empathy. Lee and Edelweiss want to see founders with a deep understanding of the challenges consumers face and a willingness to help solve them. Founders should not just be motivated by money, but by their mission—the desire to do business while doing good in the world. Many of the startups that Lee Jacobs takes an interest in are helmed by driven individuals who have experimented in the startup sphere for several years and have persisted. Even if these founders have faced challenges, Edelweiss looks for passionate people who are scrappy and willing to do anything to reach their goals. Many of the fund’s investments have been in people who they have been watching and working with for several years; entrepreneurs that have proven themselves as sharp and determined. Edelweiss looks forward to more future investments over the next few years, including in itself.
Lee Jacobs also places a heavy emphasis on supporting immigrant founders. A large proportion of successful companies have originated from foreign entrepreneurs with the drive to succeed in the American startup ecology. Getting out of one’s comfort zone is the spirit of entrepreneurship, and these determined individuals have worked hard to make their mark in a new country.
Before coming to Silicon Valley, Lee Jacobs attended the University of Pennsylvania, where he studied sociology. Ultimately, when building businesses, it is important to understand how those businesses fit together, and sociology is the key to knowing how people function in such a space. Consumer trends are fueled by the nuances of human behavior, and Lee keeps an eye out for new innovation opportunities based on the cultural ebb and flow.
As our seed companies have matured and gone on to raising Series A, without question a key issue that comes up is pro-rata right in the companies next financing round. As Fred Wilson recently covered, these pro-rata rights are a source of much much dissension.
Pro-rata rights are the rights to maintain your ownership after the next round of financing. Let’s say you own 5% of a company after having invested in the seed round— the new investors dilute the existing shares of the existing shareholders— pro-rata rights allow you to participate in this subsequent round of funding to maintain your level of ownership in the company.
An investor’s ability to continue to invest in a company can have a major impact on the return profile of their fund and thus greatly impacts the returns of the LP capital. It is the manager’s job to be an effective steward of that capital. In almost all of our investments, I pre-negotiate the term so that we will have the right to continue to support the company.
With that said, I understand an entrepreneurs point of view when a new investor comes in and offers the company a significant amount of capital and implies they need to meet a certain ownership target to be able to invest. Since there is only so much equity to go around each financing round, this puts the entrepreneur is a tough spot— on the one hand there is an agreement they negotiated with their early supporters, and on the other hand they are being offered the precious jet-fuel they need to keep the company going.
There are two important issues here:
#1: Clear expectations and clear results pre-negotiated at the time of financing.
I have seen some of the savviest entrepreneurs I know pre-negotiate with investors what they want out of the relationship. Recently I saw a founder get a lead investor to commit to a number of customer introductions, and another founder that got all of his investors to commit to blogging about the company.
I think my friend Casey Winter’s point about the spirit of the agreement between and investor and a founder at an early stage is often not held up by the investor. While a founder may promise an investor the right to invest in the follow on round, an investor may also promise particular “value add” that often isn’t delivered. If the exchange between the investor and the company is more clearly defined up front, I think we will see less disagreement about these issues moving forward.
#2: VC Collusion and the ‘Need to Own Baloney’
Typically a new investor coming into a company will have an ownership threshold and they loudly communicate that to an entrepreneur. For Series A funds it is usually 20%.
I have seen founders come back to existing investors, asking them to cut back their ownership, because new investors have an ownership threshold they need to make their fund economics work, and they jam it down the founder’s throats. This is a classic case of the needs of a venture investor clashing with that of the company (and its existing shareholders and agreements with them).
I understand that some VCs need 20% of a company to make their fund economic models work, but this is effectively a problem of their own making and not one that the founder/entrepreneur signed up for. Just because a VC tells founders they need to own 20% of company doesn’t mean it should justify going back on previous agreements.
The typical Series A VCs say they need to own 20% of a company. If founders do have lots of different offers though, they have the ability to negotiate and change the 20% ask.
Therefore, I have often consulted our entrepreneurs to take the 20% threshold number VCs tells them as a beginning point of the negotiation, and focus more on the value they are getting from that investor and how that value relates to the proposed ownership.
Defining your strategy as a venture investor can be tricky given there are so many potential strategies and approaches. I was one of the first people (if not the first) to use what is called an AngelList Syndicate— a way for angel investors to raise an on-demand single deal venture fund.
Later in my role at AngelList, my role was to find people like me—emerging angel investors— who had great deal flow, but not necessarily the means to compete with larger seed funds. My job was to find these people and help them become the best investors they could be.
A lot of investors, experienced and new, have strong points of view on what the right way to invest is. As I have spent time in the industry, I try to get everyone’s feedback, and I am learning as I go.
One thing I know for sure: there is no one-size fits all approach— there is a range of ways to go about investing in startups, and the strategy one takes is highly personal.
For example, some people are gut-driven, people-centered, and deal focused, and as a consequence don’t get into the weeds of evaluating a business. These people should have a strategy that is volume based and create an operating model that they can work within that will make them successful.
Every strategy must be evaluated based on who it is suited to and what specific context it is suited to. Every investor has to find what works for them and I hope this post gives you the insight to support how you want to invest.
1) The Investing Stage that Suits You
I remember a while ago, well-known and pioneering founder of a seed-stage venture fund, said something to me to the effect of:
“I used to think it was all about the market and the team, but what I think now is it’s all about the team. Because the market changes during the early-stage and the business may end up attacking a totally different market. Fundamentally, when I’m asking the entrepreneur questions about what they are building, I do so to evaluate how they think.”
Some investors view the world purely through a people-centric view, and this is important to know as one defines their strategy.
Now, evaluating people of course matters throughout all stages of investing— but if you are more gut-driven and focused on people, you are likely better suited for seed or series A investing. During the early stage of a company:
- There isn’t much customer data to go off.
- Any data you may have can actually be misleading and hard to generalize from.
- The company will likely pivot, and its market will probably change- you can’t control that.
However, while much may change about the business— the people you invest in are the least likely to change (sure, a co-founder may leave).
Now, there are investors out there that have a very different orientation— they meet a company, they do a ton of research, spend weeks analyzing the numbers, make numerous industry calls. If this is you-you are likely suited to be a later stage investor when there is more to actionable information to dig your teeth into.
The important thing is, if you are more suited to later-stage investing, it’s useful to be very self-aware of what lends you are using to evaluate investment opportunities.
For example, if you are a Series A investor evaluating a seed investment opportunity, you don’t want to make the mistake of using your late stage perspective (focus on numbers and management team inexperience, for example) to evaluate an early stage opportunity.
If you put these later-stage lenses on evaluating a seed investment— you might miss out on the opportunity. I have seen many series A funds really struggle with this and as a result, miss out on the next great company.
My approach is very people-centric; I tend to view the world through relationships with people, not data— so, I have oriented my investing strategy in this way. That’s not to say that you can’t be gut-driven, people-centric and data-driven too— all these things matter and can help. It’s about understanding where you sit on the sliding scale and tailoring your investing strategy to fit.
2) Select Your Broader Investing Strategy
For the more people-driven and gut-driven investors, the diligence process is typically faster than those who are driven by data and extensive research. Either you are investing in someone you have known for a long time from your network, or you are investing based on a gut instinct informed by intuition.
Regardless, once a company is raising you are likely to make a decision relatively quickly. With all that that said, a high volume low valuation entry point is likely the best fit. Furthermore, people-driven investors tend also to be generalists. For example, some of my investments range from education companies (Wonderschool) to workflow tools (Pipefy).
Iconic funds such as Foundry and Union Square— spend a lot of time doing deep thinking around market trends to build their thesis-driven approach. This strategy can obviously be hugely successful— see the track records of USV and Foundry— it just isn’t how I have invested to date.
That said, I also have a point of view on where things are going in a given market— I simply tend to approach opportunities with an open mind and let the founders-piece by piece- show me the opportunity they see in a given market.
For example, when I invested in Justin and Nick, founders of Kettle & Fire (one of our portfolio companies), I had to ask Justin what Bone broth was. When I met Justin, it was clear to me that they were extremely talented, and believed in the opportunity in the growing Paleo segment for grass-fed shelf table bone broth.
I decided to follow my rule to invest in people and not ideas; today, Kettle & Fire’s bone broth has spread nationwide and is one of our fastest growing portfolio companies.
3) Adding Ongoing Support and Value to Founders
As I covered in a previous post, if I don’t know something, I’ll go and find and collaborate with people who are experts in areas I am not, and ask them for their input.
I’m not an expert on the bottom’s up SaaS models and customer-acquisition strategy— my investing partner Brian Balfouris. I tend to help our founders with fundraising and general coaching, guiding them to find their own solutions to all sorts of problems and opportunities.
With Pipefy, for example, I attend board meetings, advocate for the founders, and help facilitate conversations among the group in a way that helps founders succeed. What I don’t do is give tactical advice on product branding and positioning, for example. I am self-aware about where I am helpful and where I am not.
In summary, finding the investing strategy that fits is first an exercise in self-awareness— there are no one-size fits all. Answer these questions:
- Are you more people-focus, data-driven, or a combination of both?
- What are do you enjoy doing and what are you naturally good at?
- For the things you aren’t great at, create a strategy where this doesn’t matter.
Then, reverse engineer the investing strategy that fits fit you and how you want to operate.
When I first got into investing, I had capital, and a clear mission— help founders be the best versions of themselves because fully self-expressed entrepreneurs can have a tremendous positive impact on the world.
I have long known that I wanted to invest in early-stage companies, but one of the things I realized quickly was that I had no competitive advantage over other investors from a sourcing perspective. I hadn’t built a brand yet, so it was hard to convince people to take my money. I needed to find a unique value proposition.
In a previous post Investor-Strategy Fit With Lee Jacobs, we talked about investor-strategy fit, how there is no one-size fits all approach to investing and the importance of customizing your strategy based on who you are and how you want to operate in the world. In this post, we go one step further and talk about sourcing strategy and how one can stand out in the crowd.
1) Choose Your Approach
I tend to be very outbound focused for many reasons:
- I’m extroverted, I love in-person interaction and connecting to people. Thus:
- I have developed an extensive network of people to help me gather information and diligence and send it my way.
So, when I started going down to Brazil in 2011 on behalf of my startup, Colingo, I got introduced to the startup ecosystem by my very close friend Bedy Yang. Years later, when I started actively investing, I realized I could deliver value to the Brazilian startup ecosystem in a unique way:
- I had access to networks and expertise in Silicon Valley.
- I could make investment decisions quickly because I was more familiar than most Brazilian investors at the time with what early stage companies looked like.
As a consequence of my work in Brazil, I was able to invest in a company like Descomplica, which is now one of the largest Edtech companies in Latin America; millions of students in Brazil have watched their classes.
I have built up my reputation in early-stage investing; international sourcing opportunities is just one point of difference I have. However, from a sourcing perspective, investors need to figure out their unique strategy. Many people try different things, and you should design your sourcing strategy based on what makes sense for you.
If you are a hardcore technologist, and you have a strong point of view where AI is headed, your sourcing strategy is going to be different from mine. Your focus may be spending a ton of time reading academic papers and doing research, creating a clear thesis, and then either looking explicitly for those companies that fit your view.
In comparison, while I have a point of view on various spaces, I am more reactive. I try to keep a completely open mind to what’s possible. In my opinion, it is up to the founder to describe to me where the opportunity lies. I am not spending hours talking to customers and deeply living the problem that the entrepreneurs are trying to solve— it’s hard for me to have a particular opinion on the problem. However, I can have an opinion about the person describing the problem.
2) Stand Out in a Crowd
The way a founder describes an opportunity to me is the lense in which I evaluate their thinking, for example. In effect, the strategy that works well for me is akin to that of a talent scout— I find talented and passionate people and let them thrive. From a sourcing perspective, you have to figure out your unique angle and focus on that— that’s how you stand out in a crowd.
As I mentioned earlier in this post, I found a unique market opportunity in Brazil at the time (2010/2011); I had a network in Silicon Valley to help companies abroad. These ingredients led me to a strategy where I was able to meet the best entrepreneurs from Brazil.
Fast forward to 2015, I met Alessio, founder of Pipefy— word got around that I was a good person to meet in Silicon Valley if you are an entrepreneur coming from Brazil. As such, I was one of the first people Alessio met in the valley, and I was equipped with knowledge that other investors in the valley didn’t have (whom to trust, for example) and could make more informed decisions than most.
I often think how impressive it is that Alessio just showed up in Silicon Valley from Brazil’s 8th largest city without knowing anyone in SF (and few people in the U.S!), and is now on his path to building a multi-billion dollar company. I am lucky to have been a tiny part of Alessio transitioning the business to a global Silicon Valley company and helping him recruit great partners like Dan Scholnick (Trinity) and Dan Deemer (Openview Venture Partners).
Similar to how your investment strategy should be unique and tied to who you are as an individual, and how you want to operate in the world— your sourcing strategy should be unique and tied to your uniqueness. There is no one size fits all.