Roger Ehrenberg

Roger was the Founder and Managing Partner of IA Ventures. He is a repeat member of the Forbes Midas List.

Table of Contents

• Founder Attributes

• Trust and Transparency

• Finding Product Market Fit and Bridge Rounds

• The IA Ventures Fund Model

• Generating Liquidity

• Selecting LPs

• Sources

Founder Attributes

Roger Ehrenberg and the team at IA delivered a 10x+ net Fund I by putting their blinders on to hype cycles and focusing on finding the most compelling founders. What does a “compelling founder” look like to Roger?

Someone with a grand vision coupled with incredible confidence and a large chip on their shoulder that will enable them to persist and succeed against all odds.

The grand vision should be non-negotiable, but the missions to accomplish it should be highly negotiable

• Unwavering knowledge of and clarity around the future they want to build, but flexible enough to adapt to market circumstances

• Has enough EQ and introspection to take constructive input from the market and their partners

• Not dogmatic, very pragmatic; coachable, but with courage in their convictions

Like Mike Maples Jr and Ann Miura-Ko, Roger is most interested in the novel insights founders have about an existing market where they have secrets that would cause that market to unfold in different ways.

• Or, insights + secrets that would lead to the creation of a market that doesn’t yet exist

Founders should have an encyclopedic knowledge of the market they’re going after. Roger will almost always pass if he finds himself teaching the founder about the market.

Roger’s biggest mistakes have resulted from being so enamored with the market opportunity and technology that he explained away concerns about the founder(s).

• A great product and great market doesn’t compensate for a meh founder

• If you back “B” founders into an “A” market opportunity, the ceiling may actually be a “C” outcome, because “B” founders never recruit “A” people

On the other side of the coin, Roger also believes that backing “A” founders into a “B” market opportunity has a ceiling of a “B” outcome. Market matters.

Trust and Transparency

Probably the most consistent theme I saw in Roger Ehrenberg’s podcast interviews over the last 8 years is his focus on building trust and radically transparent relationships with founders and LPs.

He thinks transparency is the most important quality a VC can have.

He always wants to be viewed as the truth-teller, the person that’s willing to say the hard things. Though, you should always say them in empathetic ways and in appropriate settings.

This transparency isn’t one way — Roger really focuses on creating a space of mutual respect where founders and VCs can be honest with each other.

• When he has these types of relationships, he feels way more comfortable supporting founders with bridges/extensions to get through tough times

• But, if he doesn’t feel founders are being truly honest with him, they likely won’t write that second check

While Roger often takes board seats, especially when founders ask, he doesn’t need to.

He always seeks to be the most important person to the CEO regardless of how much capital they’ve put in relative to other investors.

Finding Product Market Fit and Bridge Rounds

Roger Ehrenberg’s top guidance to founders post-investment references Sequoia’s 2008 RIP Good Times presentation. He encourages pre product market fit founders to be super cash conscious, and hyper metrics driven. They should plan for 30 months of runway with the seed raise and not ramp up spend until they demonstrate real customer traction.

Before Roger even writes the first check into a company, he spends a lot of time with the founder(s) aligning on the metrics and measures of success for the next round. They codify this into a hypothesis document, where they:

• List the hypotheses and secrets the founders think they know that others don’t and articulate how they can be validated in 12-18 months

• Identify the 2-3 key questions they want to answer with the seed round as they reach for product-market fit (which may overlap with the list above)

How does Roger define product market fit in a B2B context?

What if founders don’t find product-market fit in 18 months?

Roger recognizes that some of the most exciting companies have platform-like characteristics that take years to play out. Some of their best companies needed extensions — The Trade Desk needed a few before raising their Series A.

How does Roger decide when to bridge a company? He looks at a combination of how the founders have performed and the likelihood that the company can bridge the gap between current state and a Series A:

Founder attributes for bridge:

• Have they been great at executing?

• Are they resourceful?

• Do they move fast?

• Do they have grit?

• Have they found a pocket of willing early adopters that prove their early hypothesis?

Future state:

• Founder is clear on what the future state of the company needs to look like to raise the Series A

• Founder can articulate what the gap is between that future state and where they are now

• If there is a clear line of sight to that Series A, then an extension makes sense

The IA Ventures Fund Model

Roger Ehrenberg and the team at IA Ventures accomplished their goal, delivering 10x+ net DPI on Fund I and investing in real winners like DIgital Ocean in Fund II. Here’s how they approach portfolio construction:

1. First — they have kept fund sizes consistently under $200M. Fund I was $50M, Fund II was $105M, and Fund III and IV were $160M. They could have easily raised more, especially after Fund I’s success, but remained focused on executing their strategy.

2. Second — each partner focuses on a small number of investments per year (2-3) over a 3-4 year period. Roger gave a caveat to this — “when there’s real blood in the water, we speed up to take advantage of low valuations.”

3. Third — they are ownership sensitive upfront and deploy reserves asymmetrically into “best of fund” and “best of firm” companies. Let’s dive into ownership and reserves a bit more.

When IA invests in a company, they’ll typically write checks of $2M on average, with the goal of owning 15-18% of the company.

Their model, as of 2016, relied on companies reaching the Series A with ~$5M total raised from all investors. That typically looked like a pre-seed of $1M - $2M plus a seed of $3M - $4M or a seed round + extension. Pure new tech isn’t a great fit for IA’s model if it requires too much capital. In 2016, they typically budgeted a total of $3M in capital for pre-Series A companies.

Through their reserve strategy, IA seeks to own 12-15% at exit in their winners. Each IA Ventures portfolio has 22-25 companies. Of these, 5-7 companies end up having a significant amount of the total invested capital. Of these, 3-5 are “best of fund” and ~2 are “best of firm,” driving the lion’s share of returns.

• “Best of fund” companies are successful in raising Series A’s. IA typically invests a total of ~$6M over the life of the company (or 3x its initial average investment). They expect roughly 1/3 of the fund to fall in this bucket.

• “Best of firm” companies really breakout and eventually IPO or are acquired for large sums (e.g., The Trade Desk, DataDog, Digital Ocean, Wise). IA typically invests $10M - $12M over the life of the company in these.

The firm actively uses recycling to deploy more capital into winners. With Fund I, they invested 120% of committed capital by recycling gains back into the portfolio (primarily into The Trade Desk’s Series B). With Funds III & IV, they think of the $160M raised as $190M with recycling.

Roger says that IA will never raise an opportunity fund. They like the forcing function of constraints. They feel that if they had another vehicle, their decision-making would get “flabby” and they’d start to justify making investments with lower cash-on-cash criteria.

Instead, they allocate their $160M Fund III & IV into a $120M seed strategy and a $40M growth strategy (+ an extra ~$30M from recycling).

Generating Liquidity

Roger Ehrenberg has done a fantastic job of generating DPI for his LPs and even he finds it hard! For this post, I’m going to focus on how Roger has generated liquidity in the form of a mini case study on The Trade Desk.

The Trade Desk (TTD) started in 2009, which couldn’t have been a worse time in the market for ad tech and given the hangover from the global financial crisis.

But Roger and the team at IA were extremely confident in the founders and believed they were on the right track, executing well with a truly differentiated approach.

Adtech was out of vogue and it was a bad time in the markets, making it tough for TTD to attract new investors. IA stepped up and put more money in two bridge rounds. They ended up investing $2.2M out of their $50M Fund I in the company before its Series A.

TTD was ultimately able to raise their Series A in 2011. When they went out for their Series B in 2014, Roger was able to recycle $3M in proceeds from a recent acquisition in their portfolio into that round. At this point, IA had invested over 10% of its committed capital in Fund I into TTD.

TTD announced its Series C in Mar 2016 and went public 9 months later. At this point, IA Ventures owned nearly 20% of the company. This is way more than 95%+ of seed firms have when they enter a company!

IA was obviously locked up, but had demand registration rights. They sold shares post-IPO via two demand registrations at an average exit value of $2.2B. Their $5.2M total investment in TTD turned into $250M - $300M of net DPI to their LPs and alone made IA Ventures I a 5x-6x net fund in less than 10 years.

TTD today has a market cap of $48B. Does Roger regret selling so early? Not at all. He says: “We’re not paid to be public market investors.” IA locked in a top decile fund both from a DPI AND IRR perspective and he would make the same decision all over again.

Going forward, Roger acknowledges that the bar for IPOs has been raised meaningfully higher and strategic M&A is getting much harder to do from a regulatory perspective. He believes that liquidity will be primarily driven by private equity firms and continuation funds in our current market, both of which have far lower valuation ceilings.

Firms will increasingly have to take some money off the table via secondaries in later stage rounds, something that Roger cites Fred Wilson (who he frequently cites as his biggest VC mentor) doing a great job of.

Selecting LPs

Most VCs talk about their criteria for evaluating founders. They rarely talk about their criteria for evaluating LPs. Roger Ehrenberg and the team at IA Ventures have had oversubscribed funds since Fund I, so they have had the luxury of selecting the best fit LPs. He lays out their criteria in his 2020 interview with Samir Kaji on Venture Unlocked:

1. Shared missions: Do we feel great about making money for them and for their investors?

2. Commitment to the asset class: How committed are they to VC? Are they secular committers or cyclical opportunists?

   • To validate this, IA will ask LPs for data on how much they’ve invested in venture for each year they’ve been in the asset class

3. Culture of the organization: How does their partnership interact? How do they make decisions? Have they thought through succession planning and generational transition?

At the very least, IA wants LPs who will do no harm, but ideally, they will challenge IA’s thinking.

Roger cites one individual as a fantastic LP — Lindel Eakman. Roger specifically likes that Lindel goes beyond digging into performance, but seeks to assess their character. One way he does this is by talking to founders of companies that didn’t work to see how they VCs dealt with failure.

I’ll wrap this series up with Roger’s top advice for VCs that are fundraising:

Sources

1. Information Arbitrage - Roger’s original blog

2. 20VC: Why VC Returns Will Get Worse - 2024/02/19

3. Turpentine VC: How Roger Ehrenberg Nets 10x Fund Returns - 2023/09/26

4. Full Ratchet: Building and Leaving the Iconic Seed Firm IA - 2023/09/11

5. University of Michigan E-Hour: Roger Ehrenberg - 2023/09/07

6. 20VC: How Startup Valuations, Fund Deployment Cycles, M&A and IPO Markets Will All Change - 2022/01/31

7. Venture Unlocked: Roger Ehrenberg - 2020/10/13

8. 20VC: The Power of A Concentrated Seed Portfolio - 2017/03/01

9. Venture Studio: Roger Ehrenberg - 2016/05/12