1Mby1M AI Investor Forum: Mark Phillips, Founder and Managing Partner at 11 Tribes Ventures (Part 2)

Sramana Mitra: Let me just comment on what you said. The problem with the venture capital model that we have arrived at this point over the last, let’s say 30 years, is that it is all consuming. The investors expect the entrepreneur to put everything aside except for making the venture a success; and that success must be success that makes the investors money. Otherwise, it’s not considered a success. If the investors don’t make money, the founder’s not going to make any money at all.

So, 7-10 years of life can end up in nothing, by way of wealth creation and what is determined as success.

Mark Phillips: Yes.

Sramana Mitra: So, that’s a very depressing scenario, but I think the balance of mental health, balance of life, family relationships, it all goes by the wayside.

Mark Phillips: Indeed, it does. I don’t want anyone to hear this and think that we’re taking the easy way out, Sramana, I think we’re simply addressing the facts. Harvard had a study, which has been cited many times over now, where they found that in 63% of startup failures, the founder will attribute that failure to people related issues.

This isn’t just a nice to have or me patting myself on the back trying to make myself feel better because I’m helping people. I am, and I’m proud of it. But in our estimation as a firm and as an investor, it’s also a risk mitigating strategy to say, “Hey, maybe two or three companies in our portfolio would’ve failed because of co-founder conflict.” But because of our mindset, because of the thesis we bring to our partnership, and because of the founder resilience commitment that we’ve made, that co-founder conflict is avoided. It’s a value creation mechanism. It’s been amazing to see it come to life throughout our portfolio.

Sramana Mitra: I hear you. Now, let me ask you for the more traditional part of your business, which is venture capital. You’re in the business of venture capital to make money. You’re not, not in the business of venture capital to not make money. So, now tell me, what is your fund’s investment thesis?

Mark Phillips: Indeed, I appreciate that. We are here to make money, and if we do not make money, then investors stop giving us their money, and we cease to have a business, as you understand fully well, Sramana.

Our thesis is indeed a little bit different. So, it follows in suit with everything that I’ve just shared. I hope the why is very clear to you and to those that are listening.

We’re a Midwest based firm; venture capital in the Midwest is still a little bit of an oxymoron, if I’m being completely honest. A lot of Midwest and non-coast VCs have tried to play the same game. Andreessen Horowitz announced just yesterday that they’re raising a $20 billion fund to allocate into early stage AI. If we try to play the same game as Andreessen and if we’re simply scouts and getting them onto our cap table, we do not have the same return profile. We are not looking for the same types of deals.

When you started this call, Sramana, you alluded to this idea of supporting diversity in terms of the way that people think about the way they want to build their business. We feel the exact same way when we look at the companies we’re targeting.

There’re really three things that I would point out to you. The first and foremost is, we are very price-sensitive investors. I think as an asset class, we have lost sight of the fact that price matters. Many of these large funds are pumping twenties and thirties of millions of dollars into early stage startups who might not even have a real go-to-market strategy in place yet. But when you do that, you place unrealistic expectations on the entrepreneurs who are taking that money.

For all the founders listening, you must understand, each of these firms has an underwriting mechanism that they’re operating within. So, if you are taking $20 million on a $50 million pre-money valuation, that firm is at least underwriting your performance to 10x, probably something closer to 20-30x. So, all of a sudden, the only thing, to your point, Sramana, that looks like success to that VC is a unicorn outcome.

This segment is part 2 in the series : 1Mby1M AI Investor Forum: Mark Phillips, Founder and Managing Partner at 11 Tribes Ventures
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