One could probably argue with that Gateway, the Bay Area-based early-stage venture firm, is punching above its weight. The roughly 15-year-old firm has only about $500 million in assets under management — including a $150 million fund it quietly closed in January — and makes only a handful of new investments each year. Yet with investments in Okta, Lyft and Starkware that were valued at 8 billion dollars in May, by the way his focused approach seems to be paying off.
Writing so few checks, especially in a booming market, can be frustrating for some investors. But over the years it forced Floodgate’s small team to sort through many thousands of proposals and identify those it believes 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 big ideas look like—and why most concepts aren’t big ideas.
To get more details on the program—and also hear Miura-Ko’s current perspective on the startup scene right now—we spoke with her earlier this week. Our chat has been slightly edited for length.
TC: This summer you invited many students to work on startup ideas with you here in the Bay Area. Have you incubated companies together? How did the whole thing go?
AM: We went to a builder community that we had built the year before, and to [Stanford’s] engineering school [where I teach], and the CS department at a number of universities and said, “Hey, if you’re interested in being a future founder and you’re a great builder, then we’re interested in talking to you.” The basic message was, “We don’t need you to have an idea that you work. 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 quickly and actually get the product out [sometimes] but you should also be curious about the history of the industry in which you work. .
The goal is to help them identify big ideas. What is your definition of a big idea and how do you know it when you see one?
I realized that there are two types of businesses that can actually get really big. One is: you have an idea, and most people actually already understand that idea, but you’re just better operationally, and that’s how you execute everyone else. What I realized is that as a seed investor, we don’t really have an advantage investing in these companies because we don’t see enough of the operations to know who is the best at running that type of startup. So when the founders heard,[You] need a little more traction before we make a decision,” that’s most likely because you’re running a business that’s more operationally focused, compared to the second type, which I think is insight-focused.
Insights-driven business is really about identifying what we call an inflection point, which has several components. First, there is some kind of change that has taken place. It could be technical—CRISPR was invented—or a regulatory change event, such as telemedicine across state lines being allowed, or it could be societal. The most common one that people point to now is simply working from home.
The change event makes a new feature possible, or makes the product possible to build cheaper or faster, or you can also have a completely different business model that is possible. [For example] you license it instead of paying for it on a monthly basis or vice versa. Or the business ecosystem is fundamentally changing.
When this happens, if you can tie it [that inflection point and change event to]“Therefore, this will create fundamental traction and adoption of my product over the next two to three years,” now you have an idea that the initial investors must be [funding]. [And] that’s the type of thing we’re really looking for our students to really understand.
Are you funding these students?
yes We write checks for $50,000 to all the companies and then a bunch of them will just end up saying, “We’re not going to do this anymore,” and in that case they’ll close up shop. [But] we had two companies that are [going concerns] with an investment from us and then one that can actually take an additional investment and one like that [already] make an external investment. And so we have four out of 10 companies still operating.
How much of a bet does that $50,000 buy you?
We’re still revising that for next year, so I don’t want to put a needle in what we’re going to do. But this is a SAFE note. And then for the follow-up financing, it varies in terms of what the person needs and also [it’s tied to] when we invest in this company so it also varies in valuation.
Four out of 10 is a pretty good hit rate. Were these students mostly from Stanford?
What’s really great is that we did have 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 multiple different universities. . . and we’re really excited to try to expand into as many universities as possible. One interesting thing we learned is that Stanford students are simply very well educated when it comes to startups. The beauty of having Stanford students in this network was that our Stanford students attracted the other students to the networks that Stanford students are so fortunate to have.
I remember talking to a 19-year-old student at Stanford, probably 10 years ago, who said he felt pressured to become a founder because of the culture at the school. Does that bother you?
yes That’s why I designed it carefully so that you have a way out. I think it’s so important to recognize that not everyone has to be a founder. And actually in the relationships that I have with my students, I’ll say to certain students that I know very well, “You have these amazing skill sets that are so unique and not found in many people that you should go to a big company ; you will have so much influence there. In fact, I will directly advise students not to become founders [because] it is such a specific desire or [requires] such a specific set of skills at a specific time that from my personal point of view 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] for people who have good ideas to go in that direction. But my hope is that really by giving them that kind of exposure, they can figure out if there’s a founder inside.
Out of curiosity does Floodgate use scouts?
We do not have a scouting program. I guess our network of friends, family and founders is technically our scouts. But we don’t have a financial program like many people do. I have this kind of network of “non-partners” that I meet with on a regular basis – it’s angel investors and small fund investors – and what we do is we’ll literally share three or four interesting companies that we’ve looked at in the last two weeks . And then we share with each other how we would do it thoroughly. And if other people are interested in looking at the company, we invite them to come in.
Somewhat related, Y Combinator just finished its last demo day. As an early stage investor, are you keeping a close eye on YC? What do you think of the organization as it exists today?
I think they’re doing a huge service to founders, and I think people who want exposure are getting it [it]. I have great respect for the product they offer and the community they offer and the way fundraising is enabled as a result.
To me, it’s just a harder platform to engage with. If I’m only doing two to five investments a year, I’m asked to put a check with a SAFE note that if I sign tonight, you know, it’s one rating, 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 it feels quite right. So the ones that I’ve worked with are actually founders that I knew before they even got into YC.
But I understand why the founders like it and I think there’s a tremendous amount of work they put into the product and I wouldn’t list YC. I know every year some people say that the classes are too big and everything is too diluted and expensive. But you know there will be one or two successful hits in each group.