Floodgate is a seed-stage venture firm based in the Bay Area. A $150 million fund that it quietly closed in January has just around $500 million in assets under management. Its concentrated approach appears to be paying off, as evidenced by its investments in Okta and Starkware, which were valued at $8 billion and $7 billion, respectively.
Writing a lot of checks in a booming market might be hard for some investors. Floodgate has had to sort through thousands of pitches and identify those it thinks have the most potential. Co-founding partner Ann Miura-Ko and senior associate Tyler Whittle have created a program to help student teams understand what big ideas look like.
Called Reactor, the program combines curriculum from classes Miura-Ko teaches at the Stanford School of Engineering and consists of two components – a pre-summer lecture series and a summer accelerator. Indeed, this past summer, 10 teams showed up at Floodgate’s offices for 10 weeks to built and test startups and, in some cases, ditch it all.We talked with Miura-Ko earlier this week to find out more about the program and how she sees the startup scene. Following are excerpts from that chat. Our full conversation can be heard here.
You invited a lot of students to work on startup ideas with you this summer. Is there a company that you are in together? What did the whole thing look like?
We went to a builders community we built the year before, and to a number of universities and asked if anyone was interested in being a founder. There was a message that said we don't need you to have an idea that you're working on. We want you to be a great builder, with a lot of curiosity. You have to be curious about the history of the industry that you are working in if you want to be able to build fast and throw away product.
They want to help them find big ideas. How do you know if a big idea is real?
There are two types of businesses that can become large. You have an idea, and most people know about it, but you are operationally better, and so you execute everyone else. As a seed investor, we don't have an advantage because we don't see enough of the operations to know who is best at operating that type of startup It is most likely because you are running a business that is more operationally focused than the second type, which is insights focused.
An insights-led business has a few components to it. There is a change event that has taken place. It could be a technical invention or a regulatory change event. People say that work from home is the most common.
The change event can make a new feature possible, it can make a product cheaper or faster, or it can make a new business model possible. You can either license it out or have to pay for it monthly. There is a fundamental change to the business ecosystems.
You have an insight that seed investors should be funding if you can tie that event to the next two to three years. We want our students to figure that out.
These students are funded by you.
I agree. We are writing $50,000 checks to all of the companies and then a bunch of them will say, "We're not going to do this anymore." We had two companies that were concerned with investment from us, and one that might actually take on additional investment, and one that already took an outside investment. There are four companies that are still going strong.
How much of a stake do you get?
I don't want to put a pin in what we're going to do because we're still revising that It is safe. When we invest into that company, it depends on what the person needs, as well as the valuation of the company.
The hit rate is four out of ten. Did these students come from the same place?
We had students from multiple universities, including the University of Texas, and we were excited to try it. The piece that we learned is that the students at Stanford are very well educated when it comes to startup. Our students pulled the other students into the networks that theStanford students are so fortunate to have.
I spoke to a 19-year-old student at the time who said he felt pressured to become a founder because of the school's culture. Is that something you worry about?
I agree. I design it so you have a way out. It is important to know that not everyone is a founder. In my relationships with my students, I will often tell them that they should go to a large company because of their unique skill sets. I will tell students not to become founders because it requires a specific skill set in a specific moment and it shouldn't be for everyone.
I concur with you. There is a push for people who are technical to head in that direction. My hope is that by exposing them to this kind of exposure, they will be able to figure out if there is a founder inside.
Floodgate is out of curiosity.
We don't have a program like Scouts. Our friends and family are our scouts. We don't have a financial program like a lot of people do. I have a network of angel investors and investors at small funds who I meet up with on a regular basis, and we will share three or four companies that we have looked at in the last couple of weeks. We are sharing how we would look into it. We want the other people to look at the company.
Y Combinator just finished its latest demo day. Do you follow YC? What do you think is the current state of the organization?
People who want to get exposure get it because they get a tremendous service from them. I have a lot of respect for the product that they offer, the community that they offer, and the way in which raising money can be done.
It's a hard platform to engage with. If I only make two to five investments a year, being asked to put in a check with a rolling SAFE note that, if I sign tonight, is one valuation and if I sign tomorrow, it's at another, and the founders don't even bother The ones I have been talking to are the ones I knew before they joined YC.
I think that there is a lot of work that the founders put into the product, and I wouldn't count them out. Some people think the classes are too big and expensive. There are going to be a couple of runaway hits in every group.
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