A Memo About My Firm, The Family
Today: A hint at how The Family is repositioning itself in the post-pandemic world.
The Agenda 👇
The market for early stage investing and The Family’s positioning
What we’ve done in the past, what we’re reflecting on re: the future
Gradually switching to an accelerator model, how to make it remote & global
Taking the unusual approach: this edition shares thoughts about my own firm, The Family, following the memo format I introduced some time ago in A Memo About Writing Investment Memos. I find it virtuous to practice what is known in the tech world as ‘dogfooding’ (that is, using your own product). I also like the spirit of “working in public” that’s been inherited from the world of open source software and that is increasingly making its way into the startup world in general, and into venture capital in particular. Just a few disclaimers before we begin:
This memo mixes information about what we’ve done in the past and what we’re reflecting on for the future. The pandemic has been an inflection point for us, as it has been for many others.
It provides a very partial and incomplete view of our business, since I obviously can’t share proprietary information, especially about our portfolio and its valuation.
All of the information here has already been shared in public or with our stakeholders.
MARKET. Tech entrepreneurship is on the rise, and it’s becoming more diverse from both geographical and industry perspectives. Tech startups in need of capital and support is a market that’s fragmented but growing steadily in every region of the world. The Family has been active on the pre-seed segment of this market (as well as at later stages) since 2013, first in Paris, then across Europe:
For a long time, demand for venture capital was concentrated in the US, especially Silicon Valley, with just a few satellite ecosystems such as New York and Israel trying to keep pace. But the aftermath of the financial crisis and the flow of cheap money in a low-interest-rate world has made venture capital more accessible across the globe. Since 2014 (Alibaba’s IPO) China has been catching up fast, while Europe has seen tech investment rise with the global tide. Tech investing has become a global market, albeit one that’s fragmented from many perspectives.
There are many trends that contribute to the rise of tech startups all around the world. One is access to information about how to build startups, as well as to the resources that make it easier and cheaper. Another factor is what global investor Christopher M. Schroeder calls the “great technology shift”: with computing having become so ubiquitous, it reveals untapped potential in regions far beyond the developed world. Finally, there’s the emergence of a plurality of entrepreneurial ecosystems, which contributes to multiplying role models for entrepreneurs and diversifying the playbook for building successful companies.
So now ambitious founding teams are popping up everywhere, all potentially accessing sound advice and best-of-class infrastructures when it comes to incorporation, cloud computing, banking, logistics, and payments. However, the investing world is struggling to address this rising global demand for support and capital, since its model has always relied on geographic proximity. To date, only a few pioneers, such as 500 startups, have tried to serve that global market. The current acceleration is an opportunity for investors to expand their horizons.
(Source: The Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital—Richard Florida & Ian Hathaway, Center for American Entrepreneurship, 2019.)
INDUSTRY. Funding tech startups, especially at the early stage, has historically been the realm of the cottage industry known as venture capital 😉
The traditional approach to deploying VC has been refined over the course of several decades, generally thriving throughout the booms and busts of the digital revolution. Because of the asset class’s characteristically skewed returns, the legacy industry is dominated by prominent players that continue to attract the best deals at the early stage, with lower-profile providers of growth capital usually following on. Due to the importance of the underlying entrepreneurial ecosystem, VC as an industry is heavily concentrated from a geographic perspective.
The recent years, however, have seen a constant stream of new entrants willing to explore new geographies and new approaches to deploying capital. Some firms have embraced an approach focused on services, operations and talent management, as is the case with Andreessen Horowitz. Corporates and traditional buyout funds have joined the party. At the early stage, we’re seeing scout programs through which large firms form alliances with angel investors, emerging teams that raise through rolling funds (as part of a trend known as ‘Micro VC’), and accelerators.
The accelerator model was pioneered by Y Combinator. It’s about providing advice, connections and in some cases financial support to a batch of founding teams over a fixed period of time, usually leading to a ‘Demo Day’ after which more traditional investors take over at the seed or Series A stages. There are two prerequisites to succeeding as an accelerator: having a deep network of high-quality investors and being part of an ecosystem where companies’ later stage successes can be reverse-engineered and translated into lessons for the early stage.
STRATEGIC POSITIONING. The market for early stage investment is best analyzed using two axes: geography and the approach to deploying capital.
Established players tend to be concentrated in the most dynamic entrepreneurial ecosystems, that is, Silicon Valley, New York, China, Israel, and London. Because they benefit from their local ecosystem and its careful selection of good practices, these investors have been able to stick to traditional approaches to investing: equity investing spread across several rounds from seed stage onward, acceleration before that. Interestingly, it’s also in these mature ecosystems that innovative approaches, such as revenue-based debt financing, are explored first.
As for players based in less favorable geographies, those who embrace a traditional approach to investing have no choice but to position themselves at the global level, as is the case for Berlin-based Point Nine or a historically European firm such as Heartcore Capital. The alternative is to adjust one’s way of deploying capital to the local context of a lagging entrepreneurial ecosystem. That is the approach that The Family has historically been pioneering in Paris: acting as a kind of accelerator, but with no batches (which don’t make sense in an immature ecosystem deprived of established practices) or Demo Days (for lack of good investors).
That being said, our view is that we’re now reaching an inflection point whereby The Family can reposition itself as an accelerator. Having practiced remote working for a while and with an expanded portfolio across Europe and beyond, we think we now have what it takes to support batches of founding teams at the global level. That means we don’t have to tailor our approach to the local (European) context from an ecosystem and/or investor perspective anymore. Now that global entrepreneurship is on the rise and we have a wide network of high-quality investors, now might be the time to switch to the more traditional model of an accelerator.
TEAM. The Family was founded in 2013 by Alice Zagury, Oussama Ammar and me. It’s been growing into a pan-European firm from 2015 onward, with successive iterations:
Alice, Oussama and I met through our common (disappointing) experience of the local entrepreneurial ecosystem in Paris. Alice was previously the founding director of a local government-sponsored accelerator; Oussama had gone through the formative experiences of building a startup in Paris and then angel investing in Silicon Valley. My background was in government, with a two-year stint as a tech entrepreneur and a nascent career as an analyst specialized in the shift to the Entrepreneurial Age. The three of us switched to working full time on The Family in 2013, with the firm becoming a shareholder in a dozen startups.
We’ve grown the team from the three of us early in 2013 to a peak of 40+ persons across London, Paris and Berlin in 2018-2019. In 2014 we reincorporated The Family in London so as to reach our pan-European ambition. I moved there the following year, as did Oussama. Later, Hugo Amsellem opened our office in Berlin, while several of our revenue-generating businesses were spun out and became subsidiaries: Pathfinder (consulting), Lion (education for corporate employees), Koudetat (education for freelancers and small business owners).
As of today, The Family functions as a 100%-remote organization, led by a directorship of five (Alice, Oussama, Balthazar de Lavergne, Mathias Pastor, and me) and assisted by a small group of trusted professionals who help with everything regarding finance, legal, content, etc. Alice takes care of our legacy portfolio and online events; I manage finances in the context of repositioning; meanwhile, Oussama, Balthazar, Mathias and I are working hard on designing an upgraded value proposition for the post-COVID-19 world: a global fellowship of founders that we work with over a fixed period of time and, in time, introduce to the best investors.
PRODUCT. The Family’s core business has always been to hold shares in a growing portfolio of tech startups. (This is why we’ve always spun out our revenue-generating businesses over the years, so as to maintain our focus on supporting entrepreneurs.)
Our legacy portfolio consists of 150+ holdings in tech companies across three continents (common shares and/or preferred shares held via SPVs that we manage). Among our most prized assets are holdings in Algolia (a SaaS company headquartered in San Francisco, backed by Point Nine Capital and Accel), PayFit (a Paris-based startup specialized in payroll management, which raised a €70M series B last year), and Stripe (in which Series C we invested through a SPV in 2015). We also hold majority shares in service providers that we started and developed as subsidiaries, including Kymono (clothing), Pathfinder (consulting), and Maria (education).
To adjust our positioning for the post-COVID-19 world, we decided to radically upgrade our value proposition for founding teams. In the past, The Family was about joining the portfolio and accessing our infrastructure (education, leverage, and access to our network of favorite investors) with no time limits. From now on, The Family will become more of an accelerator, with two batches of 50 startups a year, a fixed-term program of 6 weeks, and a ‘Demo Day’ through which we’ll introduce founders to a worldwide network of high-quality investors.
Becoming an accelerator won’t really change how we work with founders. It’s always been mostly remote (we’ve never hosted startups, contrary to a popular belief), and the daily work involves frequent interactions with The Family’s directors as well as access to what we call the infrastructure (a collection of online resources that make most things easier for founders). Both of these things can stay the same while operating globally. What changes, however, are two things:
First, we expect the remote/global value proposition to attract companies that are more in the software space than in building tangible or hybrid businesses. The consequence would be that our portfolio would become more homogeneous in terms of return profiles. It’s a loss in that the portfolio would be less diverse from a risk management perspective. But it’s a net gain if, as we expect, we can tap into the segment characterized by the most rewarding returns—and maximize those by delivering high-quality advice and support.
Another thing that really makes accelerators stand apart is that the ‘Demo Day’ concluding every batch makes it easy to put a valuation on every startup that raises capital. As a result, the portfolio becomes an easy-to-value asset in and of itself, meaning you can more easily sell fractions to investors interested in being exposed to a diversified portfolio of early stage startups, thus generating liquidity. (That doesn’t solve the question of following up throughout later rounds—a discussion that’s recently been nurtured by AngelList’s excellent research team).
GO-TO-MARKET. Switching to 100%-remote in the context of the pandemic has been a blessing but it also confronts us with more challenging competition:
In the past, most of our marketing has relied on a mix of online content and in-person events. For years we’ve hosted events for various groups (founders, investors, operators, corporates, government) in our three offices (Paris, London, Berlin), while also publishing a constant stream of content under various formats and through different channels (since 2015, mostly in English): our YouTube channel counts 77.5k subscribers; our Medium account scores 8k followers. This newsletter, which I launched in early 2017, now counts 10k+ readers.
With the switch to 100%-remote, we have to rethink our approach to marketing The Family. Not having a physical office anymore is liberating because it enables us to reach out to founding teams well beyond Europe: we can now operate globally, without being constantly brought back to our base. On the other hand, the competition is tougher, with most existing accelerators, starting with Y Combinator itself, having switched to remote as well. It requires doubling down on online content and providing ambitious founders with a compelling value proposition.
As for content itself, the best approach is known as the “Avengers strategy”. It makes it possible to cover a broad range of topics with a plurality of perspectives, using the various nodes in the network to amplify content distribution, notably across social media. It’s similar to the strategy that was implemented successfully by Andreessen Horowitz in Silicon Valley, with the firm itself operating its media arm and every single general partner having their personal content platform. Since 2015, we’ve been doing the same in Europe and we now intend to double down with live video, podcasts, various newsletters for both founders and investors, a strong presence on Twitter, LinkedIn, Instagram, as well as an annual report to be introduced next year.
ECONOMICS & FINANCIALS. Ok, that part’s proprietary information. However, let me share the following elements with you:
We first drew a version of The Family’s flywheel in 2016 (found in my 11 Notes on Berkshire Hathaway). The new approach of being more like a traditional accelerator means that the flywheel has become much simpler. Basically, it’s a two-sided market, with founders on one side and investors on the other. Again, content is a very important positive feedback loop in the whole system: it’s how we reach out to new interlocutors on both sides and also how we maintain an ongoing relationship with them, working with founders and investors that in turn provide us with more inspiration and material to produce even more interesting content.
With the flywheel going, our goal is to select 50 exceptional founding teams twice a year, ensure they make the most of their time with us, and introduce them to the best investors possible. Our reward is to become part of the cap table (our model so far has been to acquire 5% of the founders’ shares, a price point we’ve been able to practice for quite some time). By the way, an overlooked issue with a more global portfolio is the country of incorporation and the legal issues that can rise along the way if the work is not done right from the beginning. This is one thing that aligns us both with the founders and investors that follow at later stages.
At this point, there are really two options for sustaining a financial model that brings together high returns and enough liquidity to get going. One approach is to get shares at the very beginning and then sell a fraction of a well-managed portfolio at a steady frequency so as to pay for the infrastructure along the way. Another is to raise funds and have them under management in exchange for a fee, then deploy them using pro-rata rights as has been the model of Y Combinator for a very long time (although they’ve announced they would stop following up in every deal from now on—a decision that was commented upon here).
RISKS. No good memo without mentioning potential risks! Let’s keep it short though:
One risk is that The Family can’t withstand the competition at a global level and gets crushed by other players. In my view, however, we really have no choice but to compete at this level. Imagine being focused on the very early stage like us and relying on a purely local dealflow. We believe being dependent on how startups are doing in a place like Paris is an even more critical risk than trying to compete at a global level. (This, by the way, is precisely the trend that pushed us to expand across Europe in 2015. And the polarization of the market has only increased, forcing the most ambitious to go global or go home.)
Another risk is that what we have to offer is not compelling enough for the ambitious founders we’re targeting. This is one we’ve got mostly covered: our core skill is helping founders in entrepreneurial ecosystems that aren’t as mature and healthy as Silicon Valley. What we’ve learned in Paris since 2013 and across Europe in the following years has a lot of value for every ambitious founder that doesn’t have access to the best ecosystems in the world—including, maybe, founders that are in the US but outside Silicon Valley!
Finally, will it still be possible to operate at a global level in a world that is fragmenting at an accelerated pace? This is where my Rothschild thesis comes in handy. There was never a more fragmented world than during most of the 19th century. Yet it’s also when cross-border operators like the Rothschild family thrived, making a very important contribution to tying the world together even as countries were seemingly drifting away from each other. This is a role I think entities like The Family are destined to play in today’s fragmented world. We’ll see! 🌐
Obviously there’s more to say on all this, even if there is significant material that I’m not able to share here with you. In any case, I’m most happy to continue the conversation on The Family, what we do and the direction we’re headed in. What do you think?
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From Normandy, France 🇫🇷
Nicolas
