Hunter Walk thinks your TAM slide is stupid.
That’s one viewpoint that the seed-stage investor shared with TechCrunch that made us laugh during our recent conversation. Walk joined us for an Extra Crunch Live chat late last week that was a mix of advice and insight about what the seed-stage Homebrew partner looks for in founders and companies to invest in.
In the case of founders, “attitude matters as much as aptitude sometimes,” Walk said, adding that “grit” and “resilience” are things he favors in entrepreneurs. Why do those qualities matter? Walk cited the Mike Tyson quip about everyone having a plan until they get punched in the face, saying that “building an early-stage startup, you get punched in the face almost daily.”
Form one line, folks considering building a new company.
We also dug into fintech, where Walk and his Homebrew partner Satya Patel have made a number of investments that have turned out well, including Plaid, Finix, Chime and so on. According to Walk, his firm has made investments into the startup category across funds because it felt that two things were going to happen. First, that “a lot of data that had been siloed and unavailable was going to become available,” citing Plaid as an example of the trend.
Second, that the top-down model of building tooling that made chiefs happier than front-line workers was going to flip in the financial world. New software was going to look quite different and focus on the individuals’ needs. Chime, the American neobank, was his example of this trend bearing out in the market.
We’ve excerpted a number of key moments and have embedded the session’s full audio and video below. Enjoy, and if you aren’t an Extra Crunch member, you can get an inexpensive trial here.
All in all it was a lively chat and a good time. We ran a bit short on time but did squeeze in a good number of audience questions, so a big thanks to everyone who turned out live for the show and took part.
Hunter Walk
And now, three key sections from the transcript that we’ve selected for you. They have been edited and condensed for clarity. Enjoy!
The realities of being a seed-stage investor
There’s nothing more painful than being right about the sector but wrong about the company you invested in. That’s happened to us once or twice. You punch yourself in the face every time you keep reading about the company that you passed on, or company that you didn’t see that succeeded. Because you’re like, we were right, we were right, we were right, but it doesn’t matter.
You have to balance the desire to have perfect information with the reality of what it means to be a seed-stage investor, which is, you get one bite at the apple. If I was a multi-stage fund, I’d have the shot to say: There’s seven [companies to pick from, and] I’m only gonna make one bet in this category. I don’t want to make the wrong bet. Am I the type of fund, am I the type of person who can stock all seven between [Series] A and [Series] B and then try to pounce on the one that I feel great about? And is my partnership going to support me? And am I willing to pay above market because I think this is the outlier? There’s certainly some funds that deploy that strategy. I don’t think we have the luxury of deploying that strategy.
Why TAM is bullshit at the seed state
I love when there’s a big problem and a small TAM. I think the TAM slide […] is the dumbest slide in the deck. It’s essentially a litmus test that says, can you show me a number that has a billion [dollars] somewhere. It leads people to say things like construction is a $7 trillion industry. So what? Tell me about what problem you’re going to solve.
One of our best investments so far in Fund One, in terms of what’s already returned, was a company called BuildingConnected, [they do] construction SaaS. […] They eventually exited to Autodesk for about $275 million cash after raising two rapid Series Bs, so it worked out great for everybody.
Their slides said construction is a $7 trillion business. I was like, okay, I don’t care about that, [what’s] the problem you’re solving? How much are people spending on that software now? And you know what they said? 100 million dollars.
A lot of investors would shut down at that point and be like, too small […] if you get 50% of it you’re a $50 million business — that’s not venture scale. But I was curious. Why is it only 100 million dollars, if you think this business is gonna be so important? They said, well, because that hundred million dollars represents about a 10th of a percent of the problem value — a 10th of 100th of a percent of the problem value. Because that hundred million dollars is being spent on 10 to 15-year-old enterprise software that’s really bad. And everybody else is using fax, email, telephone. And so we think if we can actually solve this problem, it’s a multi-billion-dollar problem that’s just not yet represented by the actual spend. So when I hear that I lean in.
On mission-driven founders
Mission driven founders really matter to us. And what that means to us is [that] they’ve got an interest in solving this problem beyond the net present value of what an outcome might be, or independent of what venture believes about whether their industry is cool or not. They didn’t wake up last night and just all of a sudden decide to build a drone company. […] We think of that as founder market fit, which I think matters even more than product market fit from an earlier stage.