The Upside & Downside of This New VC Firms Strategy



Silicon Valley has long prided itself for creating the Pied Pipers of the world, but venture capitalists themselves have been reluctant to disrupt their own industry and the traditional 2/20 model.

But just recently, Kent Goldman, a former First Round Capital partner, is trying something radical: he’s spreading the wealth with his founders.

It’s simple enough. All founders in his portfolio get a cut of the carry, which is unheard of in VC. I was a bit reticent when I read about his new approach so I decided to write up a list of the pros and cons:


-Collaboration on a whole new level. A lot of times, founders will remain one dimensional, not because they are lazy but because they only know so much. By fusing founders with different skill sets together, you can create an environment of successful ideas.

Don’t know anything about marketing? No problem. Ask the founder who does. Need help with your coding? No worries. Someone has your back.

-Everyone is in it for everyone else. The Amish people are renown for their sense of community. When everyone lends a helping hand, the entire village thrives. Upside is well on their way to creating their own little version of an Amish startup paradise.

This has one major implication: a very young startup in it’s infancy won’t have to hire as many people because all the founders can contribute to each others startups and lend a helping hand.

-Deal flow magnet. If startup founders knew they could get a piece of the action, why not take Upsides money? This model could be a great differentiator and help make the founder’s decision much easier.

With that said, the skeptic in me still sees some potential hiccups:


-How helpful can founders actually be? If you throw a bunch of people into a room and ask them to assemble a rocket, chances are that the rocket scientist will be the only one who knows how to do it.

And this could be the same thing for Upside startups. With so many different types of companies doing vastly different things, you might not always get the synergy that you expected.

One founder’s unique skillset won’t be of much use if the other founders can’t take advantage of it.

-Conflict of interest: lets imagine a scenario where two different founders in Upsides portfolio are helping each other out. Let’s call them Startup A and Startup B. The collaboration goes great and both companies go on to attract investors for a Series-A round.

But here’s the problem: one investor (Big Wig VC) is deciding to invest in Startup A but discovers that Startup B, which just so happens to be a direct competitor to one of their own startups (Startup C) has been helping Startup A.

If Startup A helped create more value for Startup B, that would essentially screw over Big Wig VC and Startup C, which he invested in. In other words, why would you invest in a company that helped one of your competitors? It makes no sense.

So Big Wig VC is left with a choice of having to pass up on a potentially big deal or pissing off Startup C’s founder if he decides to go through with the deal.

As you can see, this is one possible problem that could cause a lot of tension between all parties involved.

-Are founders properly incentivized? Say if Startup A is doing incredibly well and a lot of that had to do with Startup B’s founder, who added a ton of value to Startup A.

But what if Startup B was doing really bad and no other Upside founder was capable of helping? Should Startup B’s founder just give up on his own startup and expect a golden parachute from Startup A when it is acquired/IPOed?

The truth is, even with this unique VC model, the majority of startups will fail and only a small portion of Upsides portfolio will be successful. Could this create different and undesirable motivations amongst the founders?

-Everyone has his or her own opinion. When Upside starts investing in multiple companies and the network of founders grow, who is right and who is wrong? Say if Startup A needs help and Startups B and C offers their assistance. The problem is that the founders from both B and C have 2 completely divergent opinions and solutions.

So who should Startup A listen to? If there is one thing I’ve learned from retail is that too many options on the menu can cause decision paralysis. Having a team of founders helping each other out might not always be a good thing because it’s human nature to be biased and to assume you are right.

As you can see, this new model has as many advantages as it does disadvantages, but I have to applaud Kent for his desire to shake things up, especially in an antiquated industry such as venture capital. I wish Kent and Upside’s future companies all the best!
Reprinted by Permission.
Image Credit: CC by victoria harjadi

About the author: Jay Deng

Jay Deng is an angel investor and venture capitalist. He invested in two companies whose exits topped $800 million. He is also the CEO and founder of Diva For Less.

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