Walking into the Homebrew (named after the famed 1970’s hobbyist computer club) offices in SF provides for a very different experience than what would be normally expected from a typical venture capital firm. Amidst rows of desks reserved for Homebrew portfolio company teams, sit Homebrew founders Hunter Walk and Satya Patel.  No opulent Partner offices and no unnecessary frills. Consistent with their operating DNA and Homebrew’s entrepreneur-first mantra, the office feels more like a small start-up than investment firm.

Recently they were gracious enough to share with us their thoughts on the early stage venture market, startups, and what makes Homebrew different.

Why Homebrew was created

At first, we just wanted to figure out a way to work together again based on our friendship and the positive experiences we had together through Google and as co-investors. We realized it was now or never because we’d be consumed by the next thing for a long period of time. The most exciting part for us was starting Homebrew around a theme that we were very passionate about.

On the “bottom’s up” economy investing approach

At a macro level, there were a couple of key themes that we observed from our personal experience at YouTube, Twitter and Google. First, we saw how technology platforms were fundamentally leveling the playing field. Our view is that as technology continues to get cheaper and more accessible that it allows the “little guy” to finally reap the same benefits that big companies have enjoyed for years.   This will allow for massive advances in innovation in untapped sectors.

The second theme we saw was that the work contract between employer and employee had changed. People used to work for the same company for 40 years and earn a pension. Now as we move towards a more knowledge-based economy, entire categories of jobs are going away or becoming lower paying. That’s creating the economic necessity for people to figure out different ways of generating income, monetizing their time, their assets, their knowledge, and their skills.

Combining these two themes created the core drivers that serve as the wind in the sails of what we now call the bottom-up economy. There are lots of sources of capital out there but there are very few sources of capital that are willing to be accountable for the early years of a company’s life. For us, that means leading the seed round and taking a board seat when appropriate. Probably, most importantly being willing to roll up our sleeves to help on a day-to-day basis.

On why they are transparent in an industry that has historically been opaque

I think we’re part of a wave of venture capitalists that think transparency and authenticity aren’t just brand positioning, but personal attributes that are important to live by. You’re seeing this movement among startups to talk openly about what financings are like. The glory and struggle of success and failure, the institutional knowledge out there on the entrepreneurial side has grown 1000X from when I first got out here in the Valley in 1998. Up until recently on the VC side it’s really lagged. Not only has it lagged, but I think you do have some folks who see that black box as a competitive advantage or a way for them to spin the story to suit their needs with their investors or entrepreneurs. The information that we put out there comes from who we are and wanting to think in a public forum. It comes from believing that we are in a collaborative environment at the early stage and it’s a way for us to have our peers understand us. And because we treat Homebrew as our product, we also want to make sure that we’re continually improving that product and we buy into the idea that learning out in the open and learning with other people is the fastest way to learn and get better.

Why operating experience has proved invaluable for them in investing

We believe that there are a few things that entrepreneurs are looking for in those early stage financings. The way we define our value-add is how can we get founders to the right answer faster. For things that are urgent, can we take 2 weeks of swirl and turn it into a half hour conversation with us or with a subject matter expert at the right company. We select our group of advisors based on their experiences and the problems that our founders are likely to encounter.

We can be proactive in building our organization around a set of principles rather than trying to scramble and be reactive to every company we back. If you’re going to be a lead investor and fight for that person at the table, you need to be able to stay in touch with that company and to understand where they are based upon the market that they are in and the founder’s mentality. I don’t think our model would work if we were trying to do 50 deals every year. We always say we want to partner with teams who will be successful with or without us. Our goal is to help them increase the probability, scale or slope of their success. Our version of net promoter score with our founders is if they are able to identify something within the last 30 days that we did for them that helped move the business forward and made a real difference.

What they have learned over the past 18 months

I think what we’re discovering now is what the unknowns were. A lot of that has to do with market factors. As an example, our initial checks are much larger than we anticipated which obviously changes how we now think about fund construction, follow on reserves, and how we maintain discipline around our investments. We also anticipated more bad pitches, but the quality of deal flow and entrepreneurs has been very high. We’re seeing a higher percentage of viable businesses in the spaces that we are most interested in. Our mortality rate has been lower than we expected so far which can be attributed to the great founders we have worked with. But as mentioned before, our thinking aloud in a public forum has allowed us to gather great insights from others in the market.

Why they believe Boards are important for an early stage seed company

We think there are a lot of things that are important for the long-term success of companies. There’s obviously product-market fit, which everybody focuses on. We also think culture and organizational management and processes are equally important and developing them early puts a company in a much better position to succeed. One of those things that we think is really important is getting into the routine of having board meeting. It’s really because it helps establish cadence for the entrepreneur. It gives them an opportunity to step back from the day-to-day of a business and focus on strategic issues. It gives them practice before they raise what today is increasingly a very large amount of money at the A round, after which they will have to take board meetings seriously. It signals to the entrepreneur and upstream investment community that you are willing to take a fiduciary responsibility as the investor of record and help the company get to the next stage. For all of those reasons we believe that it is very healthy for to create a board.

Whether they believe successful seed funds will increase in size

I wouldn’t be surprised if our 2nd fund is slightly larger specifically because it provides us the ability to write more meaningful checks and follow on at a higher capacity. We want to be the partner for the life of the company and given these larger rounds we need to have more capital to do that. We have seen other seed funds rise in size and expect that to continue for the firms that demonstrate great value for their entrepreneurs and investors.

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