The Empathic VC: Supporting Founders & Giving Startups Time To Develop w/ Josh Stein of Threshold

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April 7, 2021

VCs invest in startups and founders, but that doesn’t necessarily mean they always provide the support and patience that the founders need. On this week’s episode I chat with Josh Stein - Managing Partner of Threshold Ventures - about Threshold’s emphasis on how they champion their founders by supplying them with that support and giving them time to develop.

Josh is acutely aware of this need in VC because he was a founder himself before becoming a VC, so his experience has helped shape this empathic perspective!

During our chat we cover a lot… we discuss the impact of covid on operations, global fund strategies, pros/cons of blending growth & early-stage funds, dynasty funds, and advice for up & coming VCs. Enjoy!

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Transcript‍

MPD: So welcome Josh. Thank you, right. Good to be here. Uh, so I'm going to start with doing your interview for you or your intro for you. I feel like I don't want to leave you with too much time to burn telling your story so we can get into some more complicated conversation. Um, so, and also I can brag about you a little bit and why you probably will.

Uh, so for those who don't know, Josh Stein is the co-founder and co managing partner of threshold ventures, which is the institution in Silicon Valley. He's had a traditional VC career path when it goes super well. That's the right way to describe it. I think so Dartmouth, undergrad, Stanford business school, BCG, Microsoft, numerous startups.

And then he landed at GE DFJ too many moons ago. Uh, and that's where our cross, our paths actually crossed. Uh, when we were at DFJ, I was a young VC and Josh would swoop into New York for a board meeting and he would inevitably lend some wisdom to me on every visit, which I was very grateful for, uh, DFJ transformed in a threshold ventures.

And Josh has been very successful for those who don't know Josh. Aren't familiar with him. Uh, he's on the board of a bunch of major companies, investor in a bunch of major companies with the board of box investor in companies you've heard of like Charpie Len key Twilio Yammer, and the list goes on. He's just, he's an absolute veteran.

And I would say at this point, Oh gee, Silicon Valley VC with a lot of wisdom to share Josh, what did I miss?

Josh Stein: [00:03:38] That's a really nice way to say I'm old.

MPD: [00:03:42] Well, as we were just talking about him, I'm catching up to you unfortunately too quickly. Uh, So here we go. Uh, so I want to jump in, um, and start on the VC side of the house, where I didn't want to spend a lot of time today with you, because particularly given your background before we kind of go into some VC topics, I would love to get your version of thresholds, just a baseline level set for folks, mind telling us about the firm.

Josh Stein: [00:04:05] Yeah, absolutely. So, um, so threshold, we're a early stage venture firm, um, sort of notionally based out here in California, although, you know, these days, I'm not sure location matters quite so much. Um, you know, we, uh, we try to get involved as the first institutional investor with companies. So, uh, what that means is we're typically, uh, joining as like the first board member, a lot of companies post seed funding.

Um, but you know, before, uh, before the funding becomes more sort of transactional, so we're typically leading a series, a rounds. You know, five to $15 million. Um, we'll write a check of anywhere between five and $10 million, uh, typically, initially, and then, um, we, we tend to be very active, engaged investors throughout.

So, um, you know, one of our, um, beliefs is that, uh, particularly at the early stage, when things can be, uh, influx, it really helps a lot to have at least one investor that's really kind of engaged, paying attention, kind of really, you know, immersed in the details of the company. Um, and, uh, you know, then as the company scales over time, we continue to support them over time.

So as other board members, other firms, um, come in as, as company to raise additional capital, we don't kind of step back. We tend to stay on through, you know, to IPO and, and in some cases beyond, uh, you mentioned box, I actually just stepped off, um, uh, late last year, after 14 years on that board, it's a lot of time.

So, you know, we have these kind of, yeah, these really long kind of engagements and we, you know, invested in every round. Um, all the way up to the IPO. So, you know, from, uh, when it was just, um, you know, three people, you know, all the way up through, you know, in the valuations were in the billions

MPD: [00:05:48] folks listening, that's a little bit unusual.

I've been most VCs who are coming in, they write a check and around, maybe they have some reserves to follow it on the next, but very few funds are lifecycle funds where they're deploying capital as a primary investor all the way through. So that is that the core strategy. Do you do that for every company or is it something you do in some occasions?

Josh Stein: [00:06:10] Yeah. Uh, you know, so, so the, uh, thresholds, uh, spin out, as you mentioned, uh, of DFJ. So it was founded by a team from DFJ and we worked together for a long time. Um, I actually was a DFJ entrepreneur, so I started a company. DFJ led my series a round back in, in 99. And threshold was really formed out of kind of all of those experiences.

And one of the, um, things that we really learned about ourselves, but also about how we thought we could be most helpful to founders was. Um, this concept of not making lots of small bets and kind of spreading ourselves too thin, but really kind of being intentional about where we wanted to place our time and our money.

Right. And so, um, you know, to put it in like some numbers, like we have, uh, we have five partners, um, we will typically make, you know, call a seven, eight investments per year. Um, and we won't typically be working across the whole firm with more than, I don't know, 50 or so companies. Um, those numbers may sound large, but in, in venture terms, those are actually really pretty, pretty small.

Um, particularly these days where firms are not really big. So, um, you know, DFJ had been a much bigger firm, so it had a lot more partners and capital and, uh, strategies. And, you know, one of the things that we found is that, uh, you know, by, we felt that kind of spread us a little too thin. And so we, we really wanted to be able to focus very, very intentionally as you know, that's what we've sort of done with threshold.

You mentioned kind of the life cycle approach. You know, I think that's a benefit both to the Sounders that we work with because we're. You know, we, we want to be a kind of that trusted partner and sort of that, you know, that first call, not just beginning, but also kind of, um, over time, but also from the, you know, from the LP side of our business.

So the investors in our funds, you know, we're typically investing more than half of the capital in our funds, not in the first round, but in subsequent rounds. And so if we're doing our job well as investors, you know, we're building more con you know, conviction in which companies are the best opportunities over time.

So we think our first investment is always a bit of a leap of faith, right. Um, and, but, you know, as you, if you're investing in a company you've been working with for five or six years, you know, you have a pretty differentiated view on that opportunity. And so we find that's also a real driver of performance

MPD: [00:08:16] for us.

Do you have an information advantage? Other, there are firms out there that take this to the extreme and they try to do every dollar into the company. They don't syndicate and yeah, they read a $5 million check in your eight, but they want to do 20 in your C and they want to be the dominant source of capital for the, for the company.

Is that the strategy here or is the strategy to continue to participate, which is very different, which means for folks who are less familiar, um, that other firms will maybe lead or meaningfully participate in future rounds. And so you'll have a diversified, uh, investor base.

Josh Stein: [00:08:52] Yeah. So, um, you know, I think that the there's capital and there's also, you know, kind of, um, effort and time.

And so one of the things we found is, you know, you, you want to have more hands on the oars, particularly as companies scale, you know, different firms have different networks, different, um, expertise that they can bring to the table. And so, um, we think it's in the company's best interest to be able to partner with multiple investors over time.

Right. Uh, and so we sort of built our strategy to, you know, to fit around that. So we, we want to stay engaged and stay relevant all the way through we're we're often, you know, if you, if you look at a company at exit at IPO or MNA, we're, we're often other than the founders going to be the largest investor.

By ownership on the cap table, but typically pretty far down the list by, by dollars, by the time the companies have raised maybe a couple hundred million dollars or something like that. Right. Um, and so, uh, you know, I think the, the, the problem with the strategy, I think of doing, you know, every dollar in his, I think it comes at a cost, which is if you have, if your funds a couple of billion dollars, it's really hard to, you know, invest a couple million dollars and think that's going to, you know, sort of move the needle for the thought.

And so we, we want sort of every dollar to feel like it matters. And, um, it's, it's why we also don't make tiny little investments. Like we don't, um, you know, they used to call it sort of spray and pray and, and, uh, where you'd make, you know, lots of little, like, you know, 200,000 on investment, we found those just didn't, you know, $200,000, you can have a hundred acts and it's still is not that much money in dollars.

And so, um, you know, we've, we've just tried to be more, it's sort of being intentional and focused and everything we do. Interestingly,

MPD: [00:10:23] uh, I had Ian cigarillo on the show last week and we were talking about his stra strategy at Greycroft. Um, they have a similar thing and that they deploy early stage capital and growth capital, which I think is a little different than what you're describing.

You're you're talking about continuing to participate in a meaningful way in rounds. He's talking about coming in with a $30 million check, uh, in the sea. And his comment was they actually divided the firm to two because at the growth stage, the early stage dollars didn't move the needle. So how does, how does it balance out for you guys you're doing about 50% in the first series a check is, and so the follow on dollars they're still meaningful.

Is that the concept? How does it, yeah.

Josh Stein: [00:11:07] Yeah. I mean, I think if we're, if we're doing our job right as investors, again, from the, the investment in the LP side, if you look at the fund at the. Well, yeah, but also if you, if you look at the fund at the end and you, and you stack rank the companies by kind of outcome, in terms of the gains that were generated, you you'd ideally want to see the investment costs also follow a similar pattern, right?

So you had the most money in the best companies over time. Um, I think you also though balance that as, as investors, again, being real committed partners, we work with all of our founder. I mean, we, you you'll spend as a venture investor, you'll spend a lot of your time and a decent amount of your capital on, uh, companies that are, are not the ones that necessarily, um, go to the moon, but you want to help everyone find, you know, kind of the best outcome that they can over time.

And so, um, you know, we would, uh, we support, you know, almost every company we invest that I'd say through multiple rounds, but we also do try to concentrate the capital over time in what we think of as the most kind of compelling opportunities with the, with the multiple strategies thing. I think. I, I definitely see the pros.

I mean, you need growth, you need growth stage investors because you know, it's a different skillset, underwriting, an investment, you know, when a company has lots of data, if you have a thousand employees and a hundred million in revenue, there's a lot of data structured differently,

MPD: [00:12:21] different everything's different.

Totally. Yeah.

Josh Stein: [00:12:23] Yeah. Well, absolutely. Right. Um, you know, so I think there's definitely a thing for that or a need for that. Um, I think, uh, the question I would have is why be a single firm at all? Um, you know, versus why not have those as separate firms and that that's where maybe we differ with sort of some of the conventional wisdom, right?

MPD: [00:12:39] So, so at your core threshold is an early stage investment firm that meaningfully fully participates. I'm sure you, it sounds like you participate more with the companies that are doing well, that you guys invest your operational resources and your time across the board, regardless to be a good partner.

What does that mean for an entrepreneur? Let's say entrepreneur comes in, let's say they've got a hot company and they've got options. Why do they pick threshold? Why, why is, why is your money, the money that they should be grabbing.

Josh Stein: [00:13:09] Yeah. So, you know, the, the thing that we always encourage founders to do is talk to other founders, you know, cause that's like the, you know, it's to do the references on us.

And I think what people hear pretty consistently is that, um, you know, that we're kind of the people that are the, the, the most engaged sort of most, um, active, um, with the founder. So, because we don't work with a lot of companies that allows us to really focus that time and attention. And I think that, um, you know, at the early stage, I don't think you need like a, you know, to be, if you're a founder and you've, you know, you're 10 employees or 20 plays and you're, you know, you're in that kind of scaling process, you don't really need to be working with like a dozen investors.

What you really need is I think one or two that are really kind of engaged in paying attention and, you know, those conversations tend to happen. Um, you know, pretty frequently, right. Um, as opposed to kind of in a late stage company might have a quarterly board meeting. Right. Um, you know, it's more of an organic process kind of at the earliest, taken up the phone

MPD: [00:14:05] and coffees and.

Is that more describing, right. Less of formal board meetings and PowerPoints. And so what kind of things are they coming to you for? Is there a pattern or it's just all the typical operational stuff that comes up from HR to sales strategies? Is it all, or is there a thing you guys specialize in that you want everyone to know about?

Josh Stein: [00:14:26] Um, I, I think for us it's kind of everything, but one of the things we tried to do with our team is also have different skillsets among the partners. So for example, at threshold, I tend to focus on the go-to-market side and I'm on the sales and marketing. And so I'll, you know, there's companies where I lead the investment for the firm, but then I'll also work with founders where I'm not the lead partner, but I'm helping them with their go to market.

Um, one of my partners, Heidi Roizen is probably one of the most experienced board members, um, in Silicon Valley. Right. And so she has kind of that perspective. My partner, Emily Melton, uh, is one of the deepest in healthcare and healthcare tech in terms of that, any structure, it's just something we've been very, you know, about half of our portfolios.

Related to healthcare tech in one way or another. Cause it's just the massive market undergoing huge transition right now. There's kind of incredible opportunities there. And so we try to really kind of, um, you know, have different skill sets within the partnership. One benefit of having a small team in a small portfolio is also that all of our partners can know all of the companies and vice versa.

Right. So, you know, um, I, when I was a founder, I worked with a number of firms, you know, they would typically have a hundred to 200 portfolio companies or, or more right. And it wouldn't be uncommon for me to run into like a GP at one of those firms at an event. And they, you know, they'd invested, you know, 10 or $15 million in company, but they, they would have no idea who I was.

And, and that always struck me as kind of strange. And so, you know, we try to have more of this kind of, um, you know, there there's a cost to scale, right? Um, on the, on the investing side. So our, our strategy venture, our strategy is it. I would argue it's it fundamentally doesn't scale. Um, which is ironic because we're looking for companies at scale, but, but we're okay with that.

We've kind of said, you know, um, to do what we do and to do it well, you know, it's, it's not something that, you know, we're never going to be the biggest. We just want to be the best,

MPD: [00:16:09] really focused on generating returns, multiples and having positive impact of the entrepreneurs.

Josh Stein: [00:16:15] And I'd really stress the ladder.

I mean, I think that the returns come, like if you, if you, if you pick interesting opportunities and good people to work with, and if you apply, you know, the right effort, I think the returns come. I think that the kind of joy we take in the business is really working with the founders and, and at least, you know, um, I'll speak for myself.

I mean, that, that's really, when I look back, as you kindly pointed out on, uh, you know, a lot of years, um, you know, it's not the, it's not the numbers that, you know, get me excited. It's like the, you know, having worked with founders and watching them build this out resonates,

MPD: [00:16:49] I mean, you're an entrepreneur.

Right. Like, you've been doing stuff on the operating side before he didn't come at this directly from consulting with only consulting background. So I understand why your DNA.

Josh Stein: [00:17:02] I wouldn't say I was like a great founder or anything, but, uh, you know, I, I think I was a better investment as a founder, but the, I think I going to be really hard to be a venture investor without having spent some time at a startup.

I it's, it's possible for sure. Like, there are definitely people who, if you start really early in venture and you, you know, you're going, you're meeting lots of founders, you're going to not support me. And so I think you can absolutely pick that up, but the, um, you know, I think coming like right for like banking or consulting would be, it would be really not a great idea.

Um, you know, you'd ask what kind of the, the sort of, um, types of, you know, one, one thing that's really interesting venture is, um, you know, the founders are always going to be much deeper in the technologies and the industries and the companies than they were like when I was running, you know, my company is like, you know, you're you eat and you wake up and you know, your, this, all your thing, that is the one company.

As an introvert or you're kind of your broader, but you're also shallower, but the interesting, those two perspectives go really well. So, um, you know, like if, uh, let's say the VP of sales quits, right, right. Um, that may be the first time that that found is probably the first time that founder has dealt with that.

I've seen that half a dozen times and each situation is different, but I can sit down and funder and say, look, okay, I've seen this before. Like, here's kind of what we did at these things. And here's what works. And by the way, you can call, you know, you call Aaron at box and, you know, ask him how he handled it, you know, this kind of thing.

And that, that I think tends to be the kind of really helpful value add that we can bring. But I think, um, also recognizing that it's not that we have like better information at all. It's just, it's a different perspective. It's like, you know, as an investor, you're kind of the shallow and wide versus the really deepened.

I

MPD: [00:18:36] appreciate the humility in that. I feel like when I first started out in venture, I think the misperception I had when I didn't counter a lot of other young investors that a lot of folks had. Was that they thought because people are asking them for money and I'm being very nice to them that there was an assumption that they actually knew more.

I think it's very rare for a VC to know more about an industry than the entrepreneur. Very rare.

Josh Stein: [00:18:58] Um, but the, Oh, I, I, I, I think, I mean, if that's the case, then you know that that's probably

MPD: [00:19:04] a problem. It's the pattern matching and general operating skills that I think apply. So when you've talked about, let me, let me take this a different direction for a second.

You've got a very unique strategy. Um, in that you're very focused on very few things. As you've mentioned, it's not super scalable. Um, and I, I go on a tangent here for a second. I think one of the limiting factors in scaling venture funds is board seats. We can talk about that if you're interested, but what I look at this, um, it sounds a lot different than the iteration of the firm before.

Do you want to talk about how the strategies evolve from back when it was, you know, I know it's awhile ago now when it was DFJ. Uh, and what you learned from that and why you've taken this current.

Josh Stein: [00:19:50] Yeah, I mean, I think, um, you know, I think the, you know, DFJ, uh, I think, you know, really had a vision of kind of, you know, applying, they, they, you know, they've done really well for themselves.

MPD: [00:20:02] I think it would be helpful to maybe start with an overview of DFJ. I bet you, uh, Oh, sure. Not everyone knows the scope and scale of the firm, which was, yeah.

Josh Stein: [00:20:12] Yeah. So, so do you have to, it was founded by Tim Draper in 1985, uh, when he was real young guy and Tim is a legendary investor, you know, huge personality, very bold thinker, you know, uh, you know, like bought, you know, $20 million of Bitcoin at 600 bucks a Bitcoin, you know, with his own money for it.

Yeah. I mean, that's a, that's a pretty spectacular that, um, you know, but that's pretty typical, Tim, right? He means he's, he's bold. He's sort of fearless. Um, you know, and, and he's also. You know, kind of like, you know, he'll climb one Hill and then he wants to climb a bigger Hill and bigger and bigger. And, you know, he he'd been very, very successful.

Uh, uh, and you know, I think he has his vision was to sort of bring venture capital, um, globally to, you know, kind of every corner of the world and in every sector. And I think I completely agree with the idea that, you know, there's, there's entrepreneurs everywhere and opportunities everywhere. I think, um, at least, you know, my observation was that the, the executing that operationally was challenging and, um, that, uh, the things were lost in terms of the ability to really work closely with the entrepreneurs.

When you have 400 portfolio companies, as the managing partner, it's really hard to even know what all four of those and he's do. Right. Um, and so it's not that that strategy was, was right or wrong. It's just, there was a group of us that said we really want to go back to kind of being able to work really closely with the companies and not have, you know, the partner meetings be, you know, kind of all day, Monday where we're kind of covering the whole empire.

And, um, you know, we kind of. Took the venture part of the business and sort of extracted it and the U S venture part and kind of focus that, um, the, the growth stage, uh, investing team DFJ growth, which is, um, still active, which is a fabulous, Oh, very active. I mean, they're one of the, one of the best growth seizures out there.

They absolutely crushed it. Um, you know, uh, they, they, uh, had always operated pretty independently and, and we, you know, we're still very familiar, but we kind of said, you know, look, if they're, doesn't really make sense for us to be a single firm, like it's, you know, we should, we should be kind of affiliated, but not, not this kind of pipeline.

Um, and, um, yeah. And so, you know, we, we, we sort of, um, uh, kind of spun out the firm in 2013, 2014 and, um, have been sort of threshold threshold since the, the name threshold is newer than that. We, we spend it out initially as DFJ venture, which was sort of a. Uh, small, you have a smaller sort of change. Yeah.

Like a half, three grand, and then we, and then we kind of decided to do this. Yeah. So you shifted, so you've,

MPD: [00:22:39] you've been operating under the new playbook for about a decade. Yeah.

Josh Stein: [00:22:43] Yeah. Oh God, that didn't play. I didn't think of it that way, but you're right. You're welcome. You're welcome. Thank you. Yeah.

MPD: [00:22:49] Okay.

So, but just for people listening, just a little clarity, I mean the DFJ, uh, network at the back of that, when I joined, which was Oh six, I worked with the East coast. Satellite was sprawling. I mean, I believe there was 150 GPS, I believe it was the second or first or second largest firm by deals invested per year in the world.

Um,

Josh Stein: [00:23:12] I think it was most years the largest normally be a few. Yeah. It was an artist. It was, I don't think it was, you know, there are firms that are bigger now, right? Like if you think about like a, like a Sequoia, for example, like, you know, they, you know, they have offices in India and China and growth and early stage there's, there's a lot of different strategies and people.

Um, but yeah, it was, it was really, really big.

MPD: [00:23:32] And the DOJ approach to it back then, if I remember correctly was a bit of a franchise model to find a local partnership partner up with them, bring access to capital and knowledge about the industry ad platform value and implement the network. That way that's different than what we're seeing Sequoia and other firms do with their global offices, I think.

Is, is that right? Or is it, are you seeing, as it feels like that Tim was a trendsetter, right? He, he broke new ground and trying to be global about venture, which I think has come to fruition. Um, it's becoming reality if you're looking around at what's happening in innovation front now. Um, but when I look at the model, did the model persist or did people take it a different, take a different path as they looked at global expansion?

Uh, well, you know, or building proprietary. Funds and other times

Josh Stein: [00:24:24] it's more nuanced than that. Right. But it's, you know, so the, the question would be like, you know, do you raise the capital from a single, like in a single process, uh, set of LPs, you know, who, who makes the decisions ultimately, right? Like, do you have like a, kind of a, like a senior set of partners at the global level that have maybe like an override authority that you mean, but just, it would be like, I think you see this just in general in business, which is, there's so many ways that initial first idea, and the first iteration is sort of directionally.

Right. But not perfect. And then it gets iterate, iterate. So you have like answer, right. And then MySpace, and then finally Facebook. Right. I'm sure there'll be, you know, something after that. Um, you know, I would, I would argue that, you know, DFJ is model was kind of yeah. The idea of going global and having all these offices and all these GPS, this was just like thought of as crazy in industry.

And if you look at it now, that's where a lot of the biggest, you know, firms are. And I think they've taken their own twists on it and evolved it. And I think they're probably, I've never seen by the way, the venture industry in more transition and flux, it is right now, like the, everything is changing so dramatically.

Um, uh, but I think that, um, you know, I think it's, it's not exactly the same as the way the DFJ was, but all that said, I think, you know, we still believe that, you know, being focused. I, I think there's, it's arguable that there's an overhead that comes with managing scale and there's, there's pros that come with that.

And I think when we, um, with most of the companies work with will ultimately raise capital from one of the, you know, call it platform funds over time. And I think actually our model works extremely well with them because we're a small fund size, um, which we do very intentionally. Um, you know, we, we may own 15% of a company or something, but, but when they're raising $200 million, we're not going to write a $30 million Parata check.

And so we're not kind of crowding out. You know, um, the, the platform funds there. So we actually, it's easier for us to co-invest or for a platform to go invest with us than it is with another platform fund where they're both looking to, you know, kind of do super pro-rata and jamming as much capital as

MPD: [00:26:22] possible.

Right. So you've got the early stage guys. You've got the growth guys. You've got the firms that do both under one roof and you've got the firms, I believe like Foundry, where they try to do every dollar in the company, very different models, very different approaches. Um, jury's out, I think on which works and probably, uh, probably the jury's out on which works for which GPS is, if you can get the bets right at the early stage, I bet you, every dollar is a great way to go, but it's hard to do.

I,

Josh Stein: [00:26:49] uh, you know, I, I, I think I'll probably all the model. I think you nailed it, which is for which GP. I mean, I think it's really dependent on the personalities of the people. Um, although, you know, one thing, if you look at like private equity, right, um, you know, or hedge funds, as they became much bigger motion institutionalized, I'd argue, they became much less about the personalities of the people.

Um, and they became, you know, more like corporations themselves. And I think some venture firms are starting to look like that, I think. Um, but I think, you know, what, what we do and sort of the roots of the industry are more in these sort of, you know, you really have at the end of the day, you know, five to 10 kind of people that are sort of making the decisions at most of the funds historically.

Um, I think there's a lot of pros that come with that in terms of, you know, being able to be nimble, being able to, uh, you know, there's, there's a lot of, uh, leaps of faith and kind of intuition in venture, right? So there's, you know, um, things like COVID happen. Right. And, you know, you have to kind of, you know, really kind of sit down and go through the portfolio and say, okay, what are we going to do about