May 21, 2018 · 31m · 20vc
20VC: Why The Days of Spray and Pray at Seed Are Over, How To Compete In A World of Sequoia Seed Funds & Why Price Doesn't Matter with Dan Scheinman, Angel Investor @ Zoom & Arista Networks
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of The 20 Minute VC, host Harry Stebbings interviews prominent Silicon Valley angel investor Dan Scheinman, who shares insights on the evolution of seed-stage investing, portfolio construction, competing with top-tier VC funds, and his contrarian thesis on founder evaluation and corporate M&A.
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 26.6% of the talking time here. How this is scored →
Harry as informed peer 3.4 Guest teaching 3.6 Guest disagreement 1.7 Harry pushing back 1.7
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 13:45 Dismissing conventional VC wisdom on Zoom
Dan dismisses mainstream VC opinions by describing patronizing lunches where investors claimed Zoom would fail against free competitors.
Hardest push from Harry ▶ 19:20 Challenging SAFE structuresHarry explicitly introduces Michael Deering's negative views on SAFEs to push Dan to justify using them over convertible notes.
Biggest teaching moment ▶ 6:47 Deconstructing acqui-hire economicsDan educates Harry on how acquirers bypass early investors by allocating deal capital into retention bonuses for engineers rather than acquisition purchase price.
Harry holds his own ▶ 4:53 Citing secondary market expert commentaryHarry demonstrates his domain knowledge by referencing Samuel Shah's thesis on secondary liquidity to challenge Dan's traditional hold strategy.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Dan Scheinman's Background and Transition to Angel Investing | 2 | 2 | 1 | 1 | Harry opens with polite rapport and prompts Dan on his background and stance against 'spray and pray' seed portfolios. Dan lays out his core philosophy that seed investors must target massive exits to remain sustainable amidst declining liquidity. | |
| Secondary Markets and the Evolution of M&A Acquisitions | 4 | 5 | 2 | 2 | Harry cites industry commentary from Samuel Shah to challenge Dan on secondary market usage. Dan counters with an old-school view on holding late-stage winners, then educates Harry on how acqui-hires now structure deals around employee retention rather than investor payout. | |
| Competing Against Multi-Stage Funds at the Seed Stage | 3 | 4 | 2 | 2 | Harry brings up multi-stage giants like Sequoia re-entering the seed stage. Dan acknowledges the threat but explains how angels must hunt in uncrowded seams where fund networks do not reach. | |
| The Role of a Chief Focus Officer and Managing Runway | 4 | 3 | 1 | 2 | Harry probes where Dan spends his operational energy and references Jeff Clavier's 36-month runway rule. Dan reframes runway as a tool for creating leverage over VCs rather than adhering to a strict timeline. | |
| Contrarian Thesis, Experienced Founders, and the Zoom Deal | 3 | 3 | 3 | 2 | Harry asks about identifying outsized returns, prompting Dan to explain his contrarian focus on older founders. Dan colorfully recalls VCs taking him to patronizing lunches to mock his early investment in Zoom. | |
| Art versus Science in Early-Stage Decision Making | 5 | 5 | 2 | 2 | Harry brings up Michael Deering's critique of SAFEs to press Dan on deal structures and price sensitivity. Dan cites Cisco CorpDev data showing that entry price is irrelevant for top-decile outlier winners. | |
| Reserve Allocation Strategy and Pro Rata Rights | 3 | 3 | 1 | 1 | Harry leads a rapid quickfire covering book recommendations, life lessons, missed deals, and fund diversity. Dan shares an anecdote about basketball training to highlight why investors should double down on strengths instead of fixing weaknesses. |
Statements from this episode (20)
More tech companies were created from 2008 to 2018 than prior history
“There have been more companies created in the last 10 years than probably the entire technology business before that”
Acqui-hires are becoming increasingly unfavorable for early-stage investors
“A lot of the large companies are no longer really thrilled with tech and talent acquisitions, and those Acquisitions are turning into less and less friendly for early investors”
Seed investing requires concentrating on a few disruptive winners
“I'm focused on finding those few companies that can provide really disruptive returns in order to be able to keep funding the business.”
Dan Scheinman predicts a return to large-scale tech M&A
“So I have, for a variety of reasons, not Participated in secondaries so far, and I believe that there will be exits, that great companies eventually will exit, that we will see a return to some larger M&A in markets where it becomes so critical for some of the…”
Acqui-hires now yield only 1x to 1.5x returns for early investors
“What I've seen has been that, in reality, some of those transactions look a lot more like return of capital or maybe one and a half X kind of returns, and it's no longer that lucrative on that side.”
Big tech is slowing acqui-hires due to internal backlash over retention
“A lot of those companies are slowing down the tech and talent deals because what they found was they were Angering their existing employee base”
Seed angels must be contrarians to compete with mega-funds like Sequoia
“So you have to be increasingly a contrarian in order to try and be successful in a world where Sequoia and others are going to be aggressive.”
Multi-stage VCs will abandon seed investing when the workload accumulates
“I think there's a chance that that may happen again, and as you know, these markets shift and twist and turn, and so I think there could be a chance that these guys, again, intercede, but aren't all that committed when they see how much work there is, where th…”
Founders should raise maximal runway before Series A to maintain leverage
“I believe that the reality is that you want as much runway as possible in order to have as much leverage when you get into that A round.”
Startups need cash reserves during fundraising to prevent predatory VC pricing
“I think you need enough money so that you can achieve your milestones and achieve the mythical product market fit, and still have enough money in the bank that the VC goes, Ooh, I better invest now, rather than let them say, ooh, I'll wait this out, and I'll g…”
Eric Yuan received 2,000 resumes within a week of leaving Cisco
“Eric said to me, he said he had about, I think it was about 3000 people who worked for him, And within a week of leaving, he had 2000 resumes in his inbox of people who wanted to work for him.”
Dan Scheinman wrote a seed check to Eric Yuan before seeing a pitch
“And so at that moment, to be honest, I didn't even care what he was doing. I said, I'm going to write you a check. I'm in because you're the kind of leader that it almost doesn't matter what you're building. I believe in you. And I did write him a check”
Seed investing is 70% EQ and people evaluation
“Truth is, it's 70% of it is really the EQ, because this is all about the people.”
Dan Scheinman prefers priced rounds and SAFEs over convertible debt
“So my ideal preference is to do a price round. My second preference is to do effectively a safe. My dislike is of the convertible debt. I think it's ultimately, it's a lose-lose for both sides when things don't go so well.”
The biggest sin in venture investing is missing outlier winners
“The biggest sin is missing that 10% deal that's the huge winner, right? Because no amount of mediocre kind of deals can make up for missing Uber or whatever, Zoom or Arista or whatever you want to say. No amount of things can make up for missing something that…”
Overpriced seed rounds deter price-disciplined Series A investors
“There's a certain price which I think is too high because what I worry about is not that it doesn't work out numbers-wise, but I worry that it detracts or deters A-round people from actually investing. Because they are more price disciplined.”
Founders in top deals often ask angel investors to forego pro rata
“And the other thing that happens in good deals is the founder frequently doesn't want you to do your pro rata because they want to give the new investors as much room as possible. So I found that there's an alignment generally in the good deals that, hey, stic…”
Older founders are more efficient in spend and thinking than younger ones
“Yes, I believe that older entrepreneurs have the same or more fire. Sometimes the younger entrepreneurs are as technically adept or more than younger entrepreneurs as They drive value. Because of their experience, they're actually more efficient, both in spend…”
Angel investors need an explicit thesis defining what deals they will avoid
“To be a successful angel investor, you have to understand that clear thesis, and that clear thesis has to tell me what kind of deals you won't do, As well as what kind of deals you will do. And you have to be prepared to defend that thesis. And I think if you …”