Navigating New Ventures: Our Shift to Self-Funding in 2022
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Chapter 1: The Shift to Self-Funding
In recent years, venture capital firms have approached fundraising like an all-you-can-eat buffet: rapid, abundant, and often without consideration for the long-term consequences. As they amassed more limited partners (LPs) into numerous fund vehicles, and deployed that capital at unprecedented speeds, it’s no wonder that the industry is now grappling with the repercussions of a decade-long spending spree.
Homebrew was established at the start of 2013 and experienced steady growth during the bullish market that lasted until 2022. However, as we anticipated a market correction, we decided to bring forward a long-held aspiration: to become self-funded. This shift meant that instead of primarily investing others' money into startups, we would channel our own resources. While we maintained our identity as Homebrew and kept our existing team, we altered our investment strategy to align with this new focus.
Rather than targeting an ownership stake of 10–15% in startups, we chose to prioritize collaborative relationships above all else. Instead of an average investment of around $2 million, we decided to concentrate on smaller amounts, typically between $100,000 and $500,000, with about 20% of our investments being larger. This approach not only made it easier for us to integrate into any funding round but also reflected the realities of our financial situation. For my partner Satya and me, this was about developing a sustainable model that allowed us to engage with any company at any stage, though we still aimed to invest as early as possible. We reached this decision in Fall 2021, began implementing it in January, and started discussing it publicly in March—just as the markets began to falter. Coincidence or causation? :)
The volume of reactions from our peers in the industry was unexpected—emails, discussions, and informal communications flooded in. Honestly, I was surprised that our small fund could elicit such interest. Homebrew became either a reflection of others' frustrations with the traditional venture model or a guiding example for those contemplating similar changes but feeling hindered.
Section 1.1: Reflections on Our Decision
- “Oh, it must be so nice to not [x]”
Many comments directed at us seemed to mirror the priorities of the commentators rather than our own experiences.
“Oh, it must be nice to avoid LPs now!” Not really. We maintain strong relationships with a small group of institutional LPs, which we value, and we continue to explore opportunities for collaboration with them through Homebrew I, II, III (and Screendoor).
“Oh, it must be nice to retire!” In reality, our workload remains the same, albeit with some changes in focus and methodology—details of which will come in Part 2.
“Oh, it must be nice to have that kind of wealth!” While some financial backing is necessary, this comment often came from individuals who, at least superficially, lead more luxurious lives than I do. Our choice involved forgoing future management fees and investing our own capital for a few years, all while banking on the carry from prior Homebrew funds to support our new model. This could be seen as a more risk-seeking approach.
- “I want to do this but…”
Some of the most meaningful discussions were with fellow VCs who expressed a desire to pursue a similar path but felt isolated, saying, “I want to do this but I don’t have a Satya” (indicating that it’s challenging to venture out alone) or “My partner and I want to try this, but leaving our firm would break our commitments to the other GPs and harm the fund.” It appears there are many who feel conflicted about their firm’s growth and yearn for more personal, smaller-scale investing, yet are hesitant to jeopardize their existing relationships (with some planning to step down after the next fund cycle, while others were more vague about their timelines).
Reflecting on this, I’m grateful that our decision resonated with others. It wasn’t so much about our position in the industry but highlighted a shared desire among peers to escape the self-perpetuating cycle of commoditized venture capital and carve out their own paths.
In Part Two, I’ll delve into what we’ve accomplished and what challenges still lie ahead.
Chapter 2: Insights from the Industry
The first video, "Most Venture Capital Funds Lose Money!" discusses the challenges that many venture capital firms face, including metrics and fundraising strategies that often lead to losses.
The second video, "2024 Predictions State of Venture Capital and Startups," provides insights into the future landscape of venture capital and startup investment trends.