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Alexis Ohanian on why former founders make the best VCs

The Reddit cofounder has teamed up with former Y Combinator partner Garry Tan to run the VC firm Initialized Capital, and they are bringing the lessons they learned from the other side of the table.

Alexis Ohanian on why former founders make the best VCs
[Photo: Photo by Seb Daly/Web Summit via Sportsfile]

Former all-stars often make the best coaches in sports, and now a pair of tech industry hall-of-famers believe they can prove the same to be true in venture capital.

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After spending years on the metaphorical field, Reddit cofounder Alexis Ohanian recently traded in his cleats for a clipboard, bringing his intimate knowledge of the entrepreneurship game to his portfolio of rising stars.

“I definitely felt like I got recruited and sort of graduated to that coaching position,” says Ohanain, sitting next to former Y Combinator partner Garry Tan, during the Web Summit technology conference in Lisbon, Portugal in early November. “As Garry said in his panel earlier, game recognizes game, and I think the only way to do this job well is to have done it yourself.”

The two former entrepreneurs and Y Combinator alumni now run a VC firm with over $500 million under management. Initialized Capital in many ways resembles a startup, from its emphasis on culture and transparency to the diversity of skills within its ranks to its internal software applications.

“We are a startup; design, product, engineering, marketing, getting people to use it and community, these are things every startup ends up needing,” says Tan. “We built a team of people who are experts at all the disciplines that a startup is going to need at an early stage, and we connect them all and turn them into cyborgs using software,” adds Ohanian.

Ohanian explains that Silicon Valley’s VC culture often revolves around secrecy and speculation, which he believes is counterproductive for both entrepreneurs and investors. Instead he and Tan put a strong emphasis on transparency, and use internal software tools designed by Tan to share information and collaborate on high-level decisions.

“At just about every other VC firm partners want to hoard information, especially bad information, about their companies, because they don’t want their other partners to know their companies are struggling,” says Ohanian. “The reality is that every company is always struggling–there’s no company on Earth that doesn’t have struggles–our job is to identify those problems early and either find someone around the table at Initialized that can help, or someone they know that can help provide that solution.”

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Taking a page from Y Combinator

These principals, according to the entrepreneurs-turned-venture-capitalists, are ripped straight from the Y Combinator playbook. The Bay Area seed accelerator housed and developed Ohanian and Reddit cofounder Steve Huffman when they launched the website in 2005. It is also where Tan got his first taste in investing in startups and building internal software like the YC internal alumni social network Bookface.

“YC is super interesting because it’s not about the pedigree, it’s not about buzzwords, you have a 10-minute interview that is purely about what you’re building, the capability to build it, and if people actually want it,” says Tan. “To us that’s the basics of investing; can you sit across from someone and get excited about what they’re doing, and know they’re capable of doing it because you’re capable of evaluating their work.”

From one carpenter to another

It’s that ability to evaluate an entrepreneur’s technical capabilities that Ohanian and Tan believe makes former founders best suited for the VC role. They point to a famous Steve Jobs quote about a carpenter building a chest of drawers to illustrate their point.

“You’re not going to use a piece of plywood on the back, even though it faces the wall and nobody will ever see it,” said the late Apple cofounder. “You’ll know it’s there, so you’re going to use a beautiful piece of wood on the back. For you to sleep well at night, the aesthetic, the quality, has to be carried all the way through”

Tan explains that only another carpenter would know to look at the hidden panel to evaluate the creator’s level of care and dedication, but Ohanian takes it a step further.

“A bunch of random people can stare at the cabinet for a long time and bullshit about why it’s good or bad but not really know, whereas we’ve been making cabinets for a while, so we know where to look to see if that cabinet maker really did the extra 10%,” he says.

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That extra 10%, which only a fellow craftsman would identify, was plainly visible in one  of Initialized’s first and most successful investments. Upon downloading Instacart Tan says it had a lot of things going for it, but he was most impressed by the smoothness of the scrolling, of all things.

“As a software engineer, that 10% is writing code that has good threading, so when you’re scrolling you’re not doing things on the main UI thread, you’re doing it in the background, so you can scroll and it doesn’t get jerky,” he says. “For a prototype, for something one person had just made because they just wanted to make it, that was powerful for me.”

Last month Instacart raised $600 million at a $7.6 billion valuation.

Easy lessons learned the hard way

As former entrepreneurs now seated on the other side of the venture capital table, Ohanian and Tan have spent a lot of time lately thinking about the advice they would have wanted VCs to give them as they were building their startups.

Ohanian, for one, wishes someone had given him a pep talk about what should and should not be worthy of his focus and attention as a startup founder.

I wasted so much time worrying about our competitors,” he says.All these [now defunct] companies that I still remember the names of because I cared so much about them and I paid attention to everything they were doing, it was so stupid, and I wish someone had told me that it was absolutely not going to matter at all.”

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Ohanian adds that as a VC many of his portfolio companies operate in competitive spaces, but he says the ones that will ultimately thrive are those that concern themselves with building the best product they can, rather than comparing themselves to their peers.

“For us, being vulnerable with our founders is a great way for them to be vulnerable with us,” says Tan. “If we can just help people avoid the thousands of landmines we’ve seen, there will be more companies that actually succeed.”

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About the author

Jared Lindzon is a freelance journalist born, raised and residing in Toronto, covering technology, entrepreneurship, entertainment and more for a wide variety of publications in Canada, the United States and around the world. When he's not playing with gadgets, interviewing entrepreneurs or traveling to music festivals and tech conferences you can usually find him diligently practicing his third-person bio writing skills.

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