Jul 8, 2022 · 1h 26m · news
Mike Chalfen: How to Build Anti-Fragile Venture Portfolios Today | 20VC #904 · 20VC with Harry Stebbings
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Solo venture capitalist Mike Chalfen shares deep insights into navigating market corrections, constructing anti-fragile portfolios, and reforming traditional startup board dynamics to foster more collaborative, empathetic founder relations.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 18.5% of the talking time here. How this is scored →
Harry as informed peer 4.3 Guest teaching 5.1 Guest disagreement 1.8 Harry pushing back 2.8
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 21:29 Mike dismantles Keith Raboy's acid test premise
When presented with Keith Raboy's metric that half of friends must laugh at good deals, Mike dismisses the premise by pointing out that Raboy's friends simply don't represent a large enough market.
Hardest push from Harry ▶ 4:41 Harry directly calls out GP/LP incentive misalignmentHarry forcefully interrupts to challenge GPs shipping winning portfolio companies to multi-stage funds just to look good to LPs, asserting he doesn't care about LP appearance over returns.
Biggest teaching moment ▶ 1:07:40 Mike proposes a 3-year statute of limitations on board seatsMike reframes board governance dynamics by arguing that board seats should automatically expire after three years, putting power back in the hands of founders rather than board members accruing perpetual rights.
Harry holds his own ▶ 1:18:56 Harry asserts pro-rata participation is a lazy default decisionHarry pushes back against standard VC reserve conventions by taking a strong stance that taking pro-rata is a lazy, middle-ground decision rather than a high-conviction choice.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Mike Chalfen's Path to Venture Capital | 2 | 3 | 1 | 0 | Harry welcomes Mike warmly and asks for his background. Mike outlines his journey from civil rights history to BCG and early venture capital at Apex Partners. | |
| The Conflict of Managing Careers vs. Investments | 6 | 4 | 2 | 4 | Harry interjects aggressively on GP and LP misalignment, challenging GPs who ship winners to multi-stage firms to look good. Mike reframes the discussion around founder-centric decision making. | |
| The Reflective Solo VC and the Limits of Firm-Building | 3 | 5 | 1 | 2 | Mike explains his transition to solo VC and offers a deep critique of why most venture capitalists are poor firm builders due to the reflective nature of their role. Harry adds brief context about his own firm-building experience. | |
| Surviving Market Corrections and Investing with Diligence | 4 | 6 | 2 | 3 | Harry frames market correction questions using listener input. Mike educates on macro differences between 2000 and today, citing Peter Englander's zero dollar valuation test as an enduring investment filter. | |
| Embracing Uncertainty and Managing Investor Insecurity | 3 | 5 | 1 | 1 | Harry lightheartedly brings up Warren Buffett analogies while asking how to mentor insecure young investors. Mike breaks down the psychological distinction between inherent uncertainty and actionable anxiety. | |
| Anti-Fragile Portfolio Construction and Market Timing | 5 | 6 | 3 | 4 | Harry cites Keith Raboy's acid test on consensus investments. Mike dismantles the premise by pointing out Raboy's friends represent too small a market sample, before walking through anti-fragile portfolio construction. | |
| Capital Concentration, Reserves, and Founder Trust | 5 | 5 | 3 | 5 | Harry roleplays an aggressive founder demanding follow-on capital to challenge Mike's reserve strategy. Mike stays calm, detailing how to handle loss of trust with empathy and facts. | |
| Ego, Empathy, and the Leveling Power of Hardship | 4 | 6 | 1 | 2 | Harry presses Mike on personal ego management during his early career highs. Mike openly recounts severe personal hardships including losing his father, getting fired, and divorce, illustrating how hardship built genuine empathy. | |
| The Diligence Mindset and Outcome Scenario Planning | 5 | 6 | 2 | 3 | Harry brings up insights from mutual peers and challenges outcome scenario planning. Mike explains how the recent market artificially overcapitalized businesses before proving unit economics. | |
| Understanding the Core of Unit Economics | 4 | 6 | 1 | 2 | Harry points out that younger VCs misunderstand unit economics. Mike defines true unit economics as the eventual power to control one's destiny without relying on external capital. | |
| Rejecting FOMO and Optimizing Board Dynamics | 5 | 5 | 2 | 4 | Harry admits to constant paranoid FOMO and asserts boards add little value. Mike explains avoiding FOMO as a deliberate solo VC model choice and details why seed-stage boards are often net negative. | |
| Board Preparation and Statute of Limitations on Seats | 5 | 5 | 2 | 3 | Harry discusses board room power dynamics with prominent investors like Alfred Lin. Mike proposes a firm statute of limitations on board seats after three years to empower founders. | |
| Autonomous Founder Execution and Quick Fire Insights | 6 | 5 | 3 | 5 | Harry passionately rants about founders asking permission instead of executing, and takes a firm stance against pro-rata as a lazy default decision. Mike pushes back with nuanced market realities. | |
| Venture Reflections, the Power of Mentorship, and Ockley | 3 | 4 | 1 | 1 | Mike outlines what he would change in venture capital, pointing to a severe lack of true mentorship. He concludes by detailing his thesis for his recent investment in Ockley. |
Statements from this episode (25)
Chalfen: Only three VC firms existed in London in 1996
“There were only three firms in London that did VC.”
Chalfen: Mid-level VC investors prioritize career management over fund returns
“If you're a mid-level person, if you were a mid-level person at Apex, you would do the right thing in order to look good, further your career rather than optimize returns.”
Mike Chalfen was the first investor to commit to Illumio
“I was the first person to Commit to Illumio, which turned into a very good, good business and investment.”
Chalfen: Most Venture Capitalists Are Bad at Building Firms
“And actually I think a lot of VCs are not good at building firms.”
Chalfen: Macroeconomic headwinds will persist for a couple of years
“It looks like there's going to be economic headwinds for a couple of years, and in 2000, it was really a sort of our corner of the market was suffering, but the wider world didn't suffer in quite the same way.”
Chalfen: Products VCs Personally Want Address Markets That Are Too Small
“But I learned early in my career that any business opportunity where I or my partners thought was a very good service that they would definitely use, that was almost certainly addressing way too small a market opportunity, right?”
Chalfen: Half of Founders Ask Chalfen Ventures to Sole-Underwrite Rounds
“So quite frequently in the last year or two, I've made offers term, you know, issued term sheets to companies saying I can underwrite the round. Or, and I want to invest at least X, which is typically half. And so they've got a choice and actually what's come …”
Chalfen: Anti-Fragile VC Portfolios Diversify Risk Types, Not Company Count
“I think what's important to me is that you sort of have a reasonably sort of anti-fragile portfolio construction, not by virtue of having 30 or 20 or whatever number of investments, but by virtue of having different kinds of risks. That you're taking with your…”
Chalfen: Initial VC checks shouldn't exceed 11% of fund capital
“So I think you wouldn't want to get over, you wouldn't want to get over, I don't know, 10% of the fund, 10, 11% of the fund with the first check, my view. But if you can pick two businesses which you want to become 15 to 20% of the fund, then that's sort of a …”
Mike Chalfen requires 10x return potential for follow-on venture investments
“You've got to believe that the new money is tenx money. I do. That's how I think of it.”
Mike Chalfen operates sub-$100M funds to minimize follow-on signaling pressure
“So by sort of removing that possibility from my funds by virtue of size, you know, they're sort of sub hundred million dollars. You know, it's, I'm under less pressure to invest a lot in the next round typically.”
Chalfen discloses being fired by Apax Partners after dot-com bust
“And you know, I got divorced, and then dumped, like Apex fired me.”
Chalfen: Venture capitalists without personal adversity worry me
“What worries me in the venture business to a degree is people for whom nothing's ever really gone wrong. And life's been pretty easy.”
Chalfen: Recommended passing on investment in Mark Suster during dot-com crash
“And we said, no, and that was my recommendation was not to put A dollar in.”
Chalfen: The Foundry produced 35-40% profit margins for 10 years capital-free
“So, you know, an example is a winner for me from. 1112 years ago called the foundry, which was making the 35 or 40% margins when it was really not very big. And it didn't grow that fast, but it produced a 40% margin, 35, 40% margins for 10 years, growing at, y…”
Chalfen: VC market overfunded startups as scale-ready from 2020 to 2022
“And that's a way that the whole market, in my opinion, the last two years has overfunded businesses as if they're ready to scale.”
Chalfen: Poor Unit Economics Leave Startups Dependent on Greater Fools
“Poor unit economics mean you're always relying on the next investor and ultimately the greater fool.”
Chalfen: Failed Multiple Times Investing in Service-to-Software Startups
“I think businesses that start in certain services and the objective is to build out and use the service process to build out software to automate. I think that's very, very, very, I found that very hard to do. And so I've invested in businesses like that a cou…”
Chalfen: Formal boards at the seed stage are net negative
“So my view is that at seed stage, a board is of limited value. The most value is weekly, bi-weekly spending time with teams, helping them solve problems quickly so that they're not waiting for the board in order to say, by the way, I've got this problem. And t…”
Chalfen: Board meetings fail when treated as reporting forums
“You know, I think too many boards are talking shops, but even good boards I think are inefficient. So, you know, with the board, you want to clarify any factual questions up front. Then, you know, so information should come out early, factual questions clarifi…”
Mike Chalfen: VC board seats should have a three-year limit
“Like, what drives me mad is everyone's accruing the right to be on the boards round by round. One or two board members get added. There should be a statute of limitations. But after three years, you no longer have the right to be on the board. Boom. And then i…”
Chalfen: Carry handcuffs in VC firms suppress internal dissent
“The venture partnerships solve for stability because it's such a long-term business. And there are these sort of carry handcuffs that sort of you know, vesting that encourage people to try and stick around. And I think that as a result, dissent is very, like, …”
Chalfen: Recycling capital from 3x to 10x deals optimizes VC returns
“We build a portfolio and if you can take money that looks like it's going to make another three X and put it into a 10 X opportunity that's earlier. That recycling is, is actively good.”