Over the past few years, I’ve connected with lots of investors outside Atlanta interested in learning more about the city’s start-up ecosystem. It isn’t easy to understand, I’ve often heard, and they want to know why. I explain that Atlanta’s ecosystem is composed of mini communities built around similarities. Universities (Georgia Tech, Atlanta University Center, and others), neighborhoods, and coworking spaces all have their own communities. These types of mini communities are a normal part of a healthy start-up ecosystem. The challenge in Atlanta is that they don’t overlap enough. In my explanations, I say that people don’t like to leave their neighborhoods. That’s half joke, half truth. More accurately, people are less inclined to leave their preferred mini community.

Venture Atlanta is this week, and many events are taking place. Yesterday I attended two evening events given by different mini communities. An investor and a founder were tagging along with me. Both were from out of town and interested in learning about the Atlanta start-up ecosystem. As we left the first event and entered the second, one of them commented that the events felt like two different worlds. Both were attending by amazing people from mini communities who want Atlanta to win—people who were noticeably different and only minimally overlapping. As we left the last event, my two guests shared that attending the two events (which were two miles apart) and seeing the mini communities helped them understand the Atlanta ecosystem.

Legendary companies are built when high-potential entrepreneurs are matched with capital, scaling knowledge, and relationships. Atlanta’s mini-community dynamic creates network distance, which fosters inefficient matching.

I see an opportunity to supercharge early-stage entrepreneurship in Atlanta. If the number of conduits between these mini communities were to grow, the free flow of information and relationships in the city would do likewise, thus reducing network distance and increasing matching efficiency.

I’ve shared my views on how short-term valuation changes affect psychology. I was reminded of them recently when I had a great dinner with two established, successful founders, one of whom recently sold his company. The topic of public markets came up, and both shared that their portfolios have lost material amounts of money. The most interesting thing they said was that looking at their portfolios regularly is frustrating. One of them even mentioned that he was nervous about checking it given the recent market trajectory. They’re both considering selling losing positions to stop the bleeding.

Liquidity is a big difference between the public and private markets (i.e., venture capital). Some view the liquid nature of public markets as a benefit. There are benefits to it, but I also see a downside. Because of the liquidity of public markets, investors can constantly check the value of their investments. When valuations fall for macro reasons (i.e., the company is doing fine), some investors may sell their investments with the click of a button. Even though the company is doing fine and could appreciate significantly in value in the future, today’s pain is too much to bear, and people sell prematurely.

Private markets are different. Investors can’t check the current value of an investment. Companies are usually valued at the last round of capital raised. As companies face hurdles or the macro market changes, the valuation is still at the latest round. Resetting the valuation usually means raising a new round or a private party transition between two parties. Neither of these options is easy. If a seller is able to coordinate a transaction with a willing buyer, some companies can have the right to block the transaction. All of this means that investors in private companies are more likely to stick it out with private investments when times get tough.

The illiquid nature of private investments makes it hard for some people to embrace them. I think this illiquidity isn’t necessarily a bad thing. For winners, it forces investors to stick with investments during hard times. As companies get past the hard times, these investors reap returns they likely would have missed out on if they’d been able to sell their investment early.

Last year I had a friendly debate with someone about getting more capital to more early-stage founders. At the time, I believed scale was the way to go. Build larger VC firms (not funds) to increase the number of seats in a historically cottage industry. Make it possible to institutionalize the knowledge of how best to fund and support early-stage founders, which would become more distributed as team members left these larger firms. Build firms, not funds, was mostly my thought process.

I’ve had the opportunity to speak with many emerging and established VC fund managers, their limited partners (LPs), academics, and of course founders since then. These conversations have made me realize my original thesis was incorrect (that’s the power of discovery). Scaling larger VC firms with larger funds isn’t the way to get more capital in the hands of high-potential early-stage founders.

Larger funds create challenges for LPs and VC fund managers (emerging and established) doing early-stage investing:

• Smaller funds are a better fit because they enable fund managers to write a check that’s an appropriate size for an early-stage company.
• Early-stage investors need to suspend disbelief and make nonconsensual investment decisions. Otherwise, investors fund what everybody else is funding. That’s hard to do in a large organization, because decisions tend to lean toward consensus when more people are involved. Smaller teams are more likely to make nonconsensual decisions.
• I also believe in a world where great founders are more geographically dispersed—centralized capital deployment isn’t as effective in reaching high-potential founders. A dispersed model would be more effective because it would help capital meet founders where they are.

It’s been interesting to see my thinking on this topic evolve and realize that the person I was chatting with was more right in his thinking than I was.

I’ve had the privilege of chatting with many emerging VC fund managers this year. One thing I consistently hear about is a goal to raise continually larger funds. For example, a first fund might be $10 million. If it does well, they’re planning for fund two to be $50 million and fund three to exceed $100 million. They’re driven to do this to increase cash flow from management fees, which provide them with more resources.

Most of the emerging managers I’ve chatted with are investing very early. Most aim to invest as close to when the company is created as possible, even if there isn’t a product yet. These emerging managers have unique perspectives and networks they believe position them to find non-consensus and high-potential founders very early. I agree that they’re more likely to find and fund non-consensus founders or markets, and I view them as playing an important role in the early-stage start-up ecosystem. If things go well, these founders, fund managers, and fund limited partners will realize massive outcomes.

Raising larger funds will give emerging managers more resources, but it will also compel them to begin investing at a later stage. The challenge here is that the edge they have investing early might not carry over into a later stage.

The current VC fund fee structure—specifically, the traditional management fee, usually 2%—isn’t ideal for emerging VC fund managers. Successful emerging VC managers want more resources, and rightly so. But they don’t necessarily want bigger funds, because it’s harder to deploy a larger pool of capital. I see an opportunity to provide an alternate structure to emerging managers investing early-stage who exhibit early signs of success. I think this will not only solve the resource problem but also better align emerging managers, their limited partners, and founders. The early-stage startup ecosystem will be the better for it.

Mentoring is important to founders. Good mentors can help you get to your destination faster. They have experience, and they can share with you what they’ve learned from it—that’s a lot of the value of a mentor. You can incorporate their learnings into your decision-making and make better decisions without giving up the time it takes to live those experiences. It’s common for a founder’s trajectory to be changed forever by sitting down with an accomplished entrepreneur for thirty minutes.

Not everyone is fortunate enough to have the right network to get mentoring from an accomplished entrepreneur. The network distance is just too far. Founders shouldn’t let that stop them—learning from others can be accomplished in other ways. I think autobiographies and biographies are a great alternative. Many founders who’ve had a massive impact on society are the subjects of biographies or autobiographies, and their learnings are usually incorporated into these books. That wisdom won’t tell you how to build your business, make a specific decision, or be related to your industry. But these books will share the path these entrepreneurs took, what they learned along the way, and what allowed them to succeed.

If you’re a founder hoping to fill your experience gap through mentorship, consider picking up some books!

Today marks the end of my one-hundred-thirty-third week of working from home (mostly). Here are my takeaways from week one hundred thirty-three:

• Getting better – Last week, an idea I pitched got a warm reception during a few conversations. This week, people were interested in it. That’s better but still not great. I need to keep in mind that these are all friendlies. I’ll keep tightening it up and improving it.  
• Network distance – The number of relationships through which a piece of information must travel to connect two individuals is network distance. It’s a real thing and can be a big hurdle for people. This week was a reminder that if you keep hustling, keep shaking trees, you’re more likely to close the gap and connect with the people you’re targeting.
• Change of scenery – I focused on things that required some creativity. At the suggestion of a buddy, I tried changing up my location. It worked. I got in the groove and came up with some great stuff because of that change. For me, the more natural light, the better.  

Week one hundred thirty-three was a week of breakthroughs. Looking forward to next week.

I’ve been watching Apple push into financial services for some time (see here, here, and here). And I believe Apple will become the go-to consumer and small business bank. My thesis is that distribution in banking is going digital, and iPhones are the perfect distribution method for digital banking. Banking is one of the few markets large enough to move the needle for a company the size of Apple that also has high user engagement (people checking bank accounts, transferring money, etc.).

Today, Apple announced a new high-yield savings account in conjunction with Goldman Sachs. To open one of these accounts, one must have an Apple Card.

Banking is an antiquated business that’s overdue for disruption—and Apple is perfectly positioned to disrupt it. I believe the steps it’s taking will eventually lead to iBank or Apple Bank. It’s interesting to see execution of such a massive plan play out before our very eyes. I don’t think most realize what’s happening, but I do. I can’t wait to see the improvements Apple makes in the banking world over the next few years or a decade.

I had a great chat about matching with a founder friend today. We agreed that great companies are built when founders are matched with capital, knowledge, and resources. The matching is the important part—and the most difficult part at the early stages. The more inefficient matching is, the less likely it is that resources will reach founders who will use them best.

Matching is network driven. The closer founders’ networks are to the networks of people who have capital and expertise, the more likely effective matching is to occur. The farther away they are, the less likely it is to occur. Said differently, network distance affects how efficient matching of high-potential founders and the resources they need is.

If we want to match capital and resources with high-potential founders, we have to reduce network distance to make the matching process more efficient.

One of the most noticeable changes in the last few years has been geographic diversity. People’s priorities have changed, and where they choose to live has followed suit. The common thought was that you needed to be near a tech hub like San Francisco to be matched with resources to increase your chances of succeeding. Some people still want to be near these traditional tech hubs, but many have opted for other cities more aligned with professional and personal goals.

Geographic density was a big part of what made these tech hubs so powerful. It’s also why many venture capital funds were traditionally located in tech hubs. The closer you are to someone geographically, the more often you’ll interact with them—or at least have a chance to. More frequent interactions increase the flow of resources, knowledge, etc.

Geographic diversity is a big change in the start-up world. I suspect it will lead to big changes in venture capital. We’ll likely see more variety in the structures and operations of venture capital funds.

Venture capital is an industry that changes when it’s forced to, and I think geographic diversity will force big changes.

I met with a successful founder who shared an interesting insight with me: he sold his company for ~$200 million and is happy he wasn’t able to easily raise capital early in his journey. Most founders view insufficient resources as a negative, so my curiosity was sparked.

The founder and his early investors viewed the market they were going after as a $10+ billion opportunity. It was a new market, and his company was at the forefront. Wanting to be the undisputed market leader, he tried to raise a war chest to go after this opportunity. He didn’t raise the $100 million he wanted, but he was able to raise $20 million.

Fast forward a few years. An interesting thing happened. The new market he was going after ended up not being as big as they’d anticipated: $1 or $2 billion instead of $10+ billion. The much smaller market was split among this founder and all his competitors.

As the smaller market size became clearer and investors started getting closer to the end of their fund life cycles (~10 years), they started thinking about the company exit. They decided to run a process to sell the company and got an offer for ~$200 million. It wasn’t the $1+ billion they’d hoped for years earlier, but it was satisfactory given the smaller-than-expected market.

I won’t get into all the math, but since the founder raised ~$20 million total at a fair valuation, the ~$200 million exit gave his investors a satisfactory return. Therefore, the founder and the company’s employees weren’t subject to liquidation preferences. Investors, employees, and the founder were all happy.

Though the ~$20 million this founder raised wasn’t what he hoped for, it ended up being the right amount of capital to build a company appropriate for the size of the market. If he’d raised $100+ million, his outcome would have been materially different. He wouldn’t have been able to sell for ~$200 million because that wouldn’t result in a sufficient return for investors (exiting would have been delayed by years). Or, if he’d sold for ~$200 million, that would have limited or eliminated payouts to himself and his employees because of liquidation preferences.

This founder’s story highlights the importance of founders understanding the potential size of their market (to the extent possible) and seeking resources to build a company appropriate for it.