One could probably argue that Gate, the Bay Area-based startup venture, punches above its weight. The roughly 15-year-old firm has only about $500 million in assets under management, including a $150 million fund that quietly closed in January, and makes only a handful of new investments each year. However, with investments in Okta, Lyft and Starkware, valued at $8 billion in May, among others, his focused focus appears to be paying off.
Writing so few checks, especially in a booming market, can be frustrating for some investors. But over the years, it has forced Floodgate small team to rank thousands of releases and identify those you think have the most potential. Now co-founding partner Ann Miura-Ko and Tyler Whittle, a senior associate at the firm, have developed a new program to help student teams similarly develop an understanding of what great ideas look like and why most of concepts are not great ideas.
For more details on the show, and also to hear Miura-Ko’s current perspective on the early-stage opening scene right now, we spoke with her earlier this week. Our chat has been slightly edited for length.
TC: This summer, you invited a lot of students to work with you on startup ideas here in the Bay Area. Were you incubating companies together? How did it all work?
AM: We went to a community of builders that we had built the previous year already [Stanford’s] ingeniery school [where I teach], and to the CS department at various universities and said, ‘Hey, if you’re interested in being a future founder and you’re a big builder, then we’re interested in talking to you.’ The main message was: ‘We don’t need you to have an idea you’re working on. We just want you to be an amazing builder with an incredible amount of curiosity.’ Partially, [that’s because] you need to be able to build fast and actually throw the product away [sometimes] but you also have to be curious about the history of the industry you are working in. . .
The goal is to help them identify great ideas. What is your definition of a great idea and how do you know when you see it?
I’ve come to realize that there are two types of companies that can actually become really big. One is: you have an idea, and most people actually already understand this idea, but you are better operationally, so you execute everyone else. I realized that as a seed investor, we don’t really have an advantage investing in those companies because we don’t see enough deals to know who is best at running that type of startup. So when the founders hear, ‘[You] we need a little more traction before we make a decision’, chances are you’re running a business that’s more focused on operations, as opposed to the second type, which I think is focused on insights.
A knowledge-based business is really about identifying what we call an inflection point, which has a few components. First, there is some kind of change event that has occurred. It could be technical (CRISPR was invented) or a regulatory change event, like telemedicine being allowed across state lines, or it could be social. The most common one that people point to now is simply working from home.
The change event makes a new feature possible, or it makes it possible for a product to be built cheaper or faster, or it could also have a completely different business model possible. [For example] you license it instead of having to pay for it monthly, or vice versa. Or the business ecosystem changes fundamentally.
When that happens, if you can tie it [that inflection point and change event to]’So this will create fundamental momentum and adoption of my product in the next two to three years’ now you have an idea that seed investors should be [funding]. [And] that’s the kind of stuff we’re really looking for our students to really figure out.
Are you funding these students?
Yeah. We write $50,000 checks to all the companies, and then a bunch of them will say at the end, ‘We’re not doing this anymore,’ and in that case, they’ll close shop. [But] we had two companies that are [going concerns] with an investment on our part, and then one that could actually take on additional investment and another that [already] took an external investment. And so we have four companies that continue to operate out of 10.
How much of a share does that $50,000 buy you?
We’re still reviewing that for next year, so I don’t want to put a pin on what we’re going to do. But it is a SAFE note. And then for follow-on financing, it varies in terms of what the person needs and also [it’s tied to] when we invest in that company, so it also varies in valuation.
Four out of 10 is a pretty good success rate. Were these students primarily from Stanford?
The really wonderful thing about this is that we had students from Stanford, but we had students from the University of Texas, with other students from Yale and Penn and the University of Texas, so it actually spanned a number of different universities. . . and we are very excited to try to expand to as many universities as possible. One interesting piece we learned is that Stanford students are very well educated when it comes to startups. The beauty of having Stanford students within this network was that our Stanford students brought other students into the networks that Stanford students are so lucky to have.
I remember talking to a 19-year-old Stanford student, probably 10 years ago, who said he felt pressured to become a founder because of the school’s culture. Does that worry you?
Yes. That’s why I really consciously designed it for you to have a way out. I think it’s very important to recognize that not everyone needs to be a founder. And, in fact, in the relationships that I have with my students, I say to certain students that I know very well: ‘You have these incredible abilities that are so unique and that you don’t find in many people, so you should go to a great business. ; You’ll have a lot of impact there.’ In fact, I will directly advise students not to become founders. [because] is such a specific wish or [requires] such a specific skill set at a specific time that, from my personal perspective, it shouldn’t be for everyone.
I agree with you. I think to some extent there is a big push for people who are technical. [and] so that people who have good ideas go in that direction. But my hope is that really by giving them this kind of exposure, they can find out if there’s a founder inside.
Out of curiosity, does Floodgate use scanners?
We don’t have a Scout program. I guess our network of friends, family, and founders are technically our scouts. But we don’t have a financial program like many people. I have this kind of network of ‘non-partners’ that I meet with on a regular basis (these are angel investors and small fund investors) and what we do is literally share three or four interesting companies that we’ve seen. in the last two weeks. And then we’re sharing with each other how we would do it. And if the other people are interested in seeing the company, we invite them to come in.
Somewhat related, Y Combinator just wrapped up its last demo day. As a seed investor, do you follow YC closely? What do you think of the organization as it exists today?
I think they provide a tremendous service to founders, and I think people who want to get exposure get [it]. I have a lot of respect for the product that they offer, and the community that they offer, and the way that fundraising is enabled as a result of that.
For me, it’s just a more difficult platform to use. If I’m only doing two to five investments a year, they ask me to write a check with a mobile SAFE note that if I sign tonight, you know, it’s one valuation and if I sign tomorrow, it’s another, and [the founders] They don’t even really know me, but they’re willing to sign me, like none of that feels quite right. So those that I’ve been relating to are actually founders that I met even before they came into YC.
But I see why the founders love it and I think there is tremendous work that they put into the product and I wouldn’t write YC off. I know that every year, some people say that the classes are too big and everything is too watered down and too expensive. But you know that in each group there will be one or two runaway hits.