Apr 30, 2018 · 28m · 20vc
20VC: Why Follow-On Investments Are Always A Better Investment, Why Spray and Pray Investing Is Like The Stock Market & Why Startups Need A Board From Day One with Jerry Neumann
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In this episode of The 20 Minute VC, host Harry Stebbings interviews veteran angel investor Jerry Neumann about portfolio construction, startup board governance, valuation discipline, and follow-on reserve strategies.
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 28.9% of the talking time here. How this is scored →
Harry as informed peer 2.9 Guest teaching 3.9 Guest disagreement 2.1 Harry pushing back 2.3
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 19:23 Rejecting 'packaging' framing
Jerry directly rejects Harry's quote from Jason Lemkin asserting that VC is about packaging a product for the next investor, insisting that real value creation requires structural progress rather than superficial presentation.
Hardest push from Harry ▶ 10:45 Company vs founder priority dilemmaHarry challenges the comfortable narrative of investor-founder alignment by forcing Jerry to choose between prioritizing the interests of the company or the founder.
Biggest teaching moment ▶ 15:44 Valuation and distribution mathJerry dismantles the widespread Silicon Valley idea that entry price is irrelevant under binary outcomes, using binomial distributions and his proprietary spreadsheet of enterprise exits to prove price sensitivity matters.
Harry holds his own ▶ 5:11 Power law quality assumption caveatHarry interrupts Jerry's power law explanation to point out the crucial mathematical caveat that the power law model assumes uniform quality across investments, forcing Jerry to concede 'that's the rub'.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Welcome and Initial Greeting | 4 | 5 | 2 | 3 | Harry prompts Jerry on portfolio construction and Perez's casino capitalism idea. Harry demonstrates technical understanding by interrupting Jerry's power law explanation to highlight the hidden assumption of constant deal quality. Jerry reframes passive spray-and-pray strategies using a detailed garden analogy and power law statistics. | |
| Hands-On Value Add and Establishing Boards Early | 2 | 4 | 2 | 1 | Harry uses a question from Fred Destin to prompt Jerry on VC value-add and early board creation. Jerry explains his hands-on monthly accountability process with early founders and contends that companies need boards from day one even if founders resist. Harry asks conversational follow-ups without pressing. | |
| Board Dynamics, Transparency, and Company vs. Founder Priority | 3 | 4 | 2 | 3 | Harry introduces a sharp binary question asking whether investors should be company-first or founder-first. Jerry explains why removing early founders almost always destroys company value rather than saving it. The dynamic remains collaborative while addressing core fiduciary tensions. | |
| Evaluating Great Board Members and Winning Competitive Deals | 4 | 5 | 3 | 4 | Harry quotes Jason Lemkin to challenge how solo investors can win deals against heavyweights like Wilson or Gurley. Jerry explicitly rejects the premise by turning the question around to analyze how founders filter VCs. Jerry's reframe highlights how positioning and warm introduction filters determine deal winning. | |
| Valuation Frameworks and Price Sensitivity | 3 | 5 | 2 | 2 | Harry probes Jerry's price sensitivity against Silicon Valley's typical entry price indifference. Jerry educates on valuation using binomial distributions and his empirical dataset of enterprise software exit prices. Harry guides the topic and lets Jerry elaborate on his quantitative framework. | |
| Solo Investor Decision-Making and Mitigating Financing Risk | 4 | 4 | 4 | 4 | Harry pushes a provocative quote from Jason Lemkin stating VC is merely packaging products to sell to the next investor. Jerry firmly dismisses the cynical framing, distinguishing superficial packaging from genuine operational progress. Harry pushes the mechanical view, prompting Jerry's direct correction. | |
| Follow-On Investment Strategy and Reserve Allocation | 3 | 4 | 3 | 3 | Harry brings up Mike Maples' view that bridge rounds are bridges to nowhere to test Jerry's follow-on strategy. Jerry rejects the blanket label, reframing early bridges as tranched investments necessary due to expanding inter-round timelines. Harry pushes back on risk while Jerry outlines his capital discipline. | |
| Quickfire Round: Books, Work-Life Balance, and Contrarian Views | 2 | 3 | 1 | 1 | Harry conducts a quickfire round covering books, work-life balance, and ecosystem views. Jerry provides concise answers and explains the formal academic distinction between measurable risk and unmeasurable uncertainty. The dynamic is lighthearted and fast-paced. | |
| Investment Spotlight: EdMit and Conclusion | 1 | 1 | 0 | 0 | Harry asks Jerry to highlight his investment in EdMit. Jerry outlines the investment thesis around team knowledge and market size before Harry closes the show. The segment is brief and promotional. |
Statements from this episode (18)
Neumann: Half of early-stage investors enter venture capital by accident
“So I think half of the early stage investors out there did it on purpose, and the rest of us got into it by accident.”
Neumann: Power law dynamics make larger VC portfolios yield higher returns
“With a power law, the more investments you make, the higher your average.”
Neumann: Spray-and-pray VC strategies fail without active lead investors
“If you're making a hundred investments where you're the lead or there is no lead and nobody is helping the entrepreneur, then I think that's not going to work.”
Neumann: Early-stage startups without active board members perform significantly worse
“My experience is the companies where there is nobody involved from the beginning on the board helping the entrepreneur tend to do a lot worse than the companies where there is somebody involved.”
Neumann: VCs should limit portfolio size to what they can actively support
“You can only have as many companies as you can actively help.”
Neumann: Startup founders should establish a board of directors from day one
“I think they should have a board from day one, and I know that's not a popular opinion, especially with founders”
Neumann: Startups almost always perform worse after removing their founders
“When you remove the founder from a company, the company almost always does worse.”
Neumann: Josh Koppelman challenges founders effectively without creating defensiveness
“Because he had been an entrepreneur. He could challenge Founders on their premises from a base of experience, and also because when he did so, he didn't do it in a way that the founder would have a hard time, except he'd never made the founders defensive. He c…”
Neumann: Seed entry pricing matters despite Silicon Valley binary outcome beliefs
“I don't believe in the binary outcome that Silicon Valley has been sort of talking about for the past 10 years. You know, it doesn't matter what the entry price is because the outcome is either going to be huge or nothing. I think that even if that were true, …”
Neumann tracks hundreds of enterprise software exits to set seed pricing
“As to determining price, the way that I keep close track of exits in the markets that I'm in, so I have a spreadsheet of hundreds of exits in enterprise software, and I kind of have a feel, having done all that research, for what the sweet spot for an exit is,…”
Neumann: Top seed funds like USV outperform when market prices are low
“If you look at the best performing venture funds in history, at least seed stage, like things like USV, you will find that they started investing in a market where the market price was below the indicated discounted price. When the market is above where the in…”
Neumann writes internal investment memos for every deal as a solo investor
“I write myself an investment memo. I kind of feel stupid doing it because nobody else reads it, but I force myself to do it.”
Neumann rejects Jason Lemkin's view that VC is just packaging startups
“I don't look at it that way. If you say it that way, it makes it sound like you're trying to gild the lily, right? You're trying to sell them something that's not actually true. I do think that you need to know what the company needs to look like to raise more…”
Neumann: Always secures pro-rata because follow-ons are superior investments
“I always insist on getting pro rata in a company because I think that the second investment is a much better investment than the first investment.”
Neumann allocates twice as much capital to follow-ons as initial checks
“So I have twice as much money in second rounds as first rounds.”
Neumann: $500K pre-seed startups almost certainly need $1M+ before Series A
“So if you raise a pre-seed round of 500 K, you're almost certainly going to need At least another million to get to the series A.”
Neumann always re-invests if a portfolio company secures an outside lead
“So if they have a lead for the second round, I will, I think I have always invested. I don't tell them I always will, but I have always, but that means they have to convince somebody else that the company is worth investing in.”