Reid Hoffman's $30M bet: Send partners, not cash, to startups
Launching from stealth, Sweat Equity Ventures is a new venture concept that trades operational and recruiting expertise for equity in startups.
Anjney Midha had a fresh $27 million in venture capital and the vision to build his augmented-reality startup, but he also had a problem. Midha needed to triple the size of his team to pull off the engineering feat of building his platform, and he was struggling to find the right people. That's when he was introduced to Dan Portillo, who had previously worked as the head of talent at Greylock Partners.
"I had a particular mental model of what an operating partner is, which is someone who was helpful, but kind of just gives you advice, and sits on the sidelines," Midha, founder and CEO of Ubiquity6, said. "Instead, Dan started to roll up his sleeves and understood exactly from a mission, vision, business-opportunity standpoint why what we were doing was so massive." It also helped that Portillo immediately offered up a dozen names of people to call to help build up Midha's team.
It's the kind of recruiting service Portillo once offered during his seven years at Greylock, but on a super-charged scale. He told Protocol he felt like operating partners at venture firms could only do so much when a firm's priority was dollar returns. So Portillo created Sweat Equity Ventures, which has been operating in stealth since fall 2018 and launches publicly Thursday, to build a new kind of venture model that trades operators' and recruiters' experience for equity.
Portillo's vision is backed by $30 million from Greylock partner and LinkedIn co-founder Reid Hoffman. He recognized that most venture investments trade a general partner and cash, along with some services, for equity. But Hoffman and Portillo wanted to push the idea further and see if founders would trade equity for value-adding services alone.
"It's a unique channel for equity that's different from the normal cycle of dollar returns," Hoffman said.
Instead of investing money, SEV puts its crew to work inside the startups, with staff in some instances even standing in as an acting CTO, writing code or coaching founders. It's even had partners' names appear on patents alongside startup employees. The companies pay SEV in common stock shares, the same held by the startups' rank-and-file employees, and SEV's team, in turn, get paid salaries by the firm and also receive part of the firm's carry like a traditional venture model. SEV staff will stay on within a startup as long as they're needed to carry out the roadmap for the company they committed to when they "invested."
"There's no fund that I know of that will write a statement of work that commits to: We will ship this product, we will hire these people, we will work with you to secure funding," Portillo said. "It's very deliverable-based."
Dan Portillo's Sweat Equity Ventures will build a new kind of venture model that trades operators' and recruiters' experience for equity.Photo: Courtesy of SEV
Venture firms for years have been expanding the services they offer entrepreneurs and started using them as a competitive edge to win deals. In Portillo's seven years at Greylock, part of his job was coming in to close hot deals by placing workers at a company. Portillo found some of the earliest employees for Instagram before Greylock invested (it was then bought by Facebook just a few days later). Despite the expansion in services, most venture funds still follow the traditional model where 2% of the fund goes to covering the firm's operational costs, with a large portion diverted to partner salaries.
"My view is that the 2% was never really going to be enough to deliver the kinds of services that you want in a dedicated way," Portillo said.
Portillo's thesis, backed by Hoffman, is that you could spin off some of those venture services and still get the financial upside of betting on growing startups. To realize his vision, Portillo recruited a staff of 13, including six partners, from ex-Amazon engineers to Facebook recruiters and go-to-market strategists from MongoDB. At a recent SEV meeting, the team cycled through the progress they were making with their nine portfolio companies, such as expanding a recruiting pipeline at one company, and condensing a pitch deck from 38 to 10 slides, at another. All of the work is tracked against the goals SEV had promised to the startups.
"We're not cheap from an equity perspective, so companies want to use us in ways that are most valuable," Portillo said. SEV negotiates the amount of equity it takes in a startup depending on the scope of work they're undertaking, the firm said.
SEV's focus so far has been enterprise businesses. It's working with workplace collaboration startup Coda, mobile app developer Colony Labs, autonomous delivery company Nuro.ai, and the machine-learning startup Verta, as well as Ubiquity6. Like other venture firms, it won't work with competing businesses to avoid concerns around recruiting or intellectual property.
Whether SEV will deliver outsized returns is still a toss-up. Portillo said he thinks the venture firm will have the advantage coming into companies early, working at the earliest stages alongside the founders to determine which investments are likely to succeed. But even Hoffman says he "doesn't know," but hopes it will be on the level of a typical venture equity return.
Hoffman does believe Sweat Equity will be able to snag shares of some of the fastest-rising companies as it's not competing to offer the largest pile of cash like venture funds traditionally do to win deals. "I think a substantial part of the Sweat Equity portfolio will likely end up being the companies that people already know are super hot, like Nuro," Hoffman said. "But the way that Sweat Equity gets to be investors is putting in the recruiting effort."
For Ubiquity6, SEV's approach has so far paid off. Within a year, the company had scaled from 16 to 65 people, Midha said, and he still has biweekly check-ins with Portillo. To Midha, the combination of working with traditional venture capitalists on his board, then the SEV team on the ground, has been an indispensable combination.
"It seems like you're flying with jet packs as a founder," he said. "I see that as a very fantastic development for VC."