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🤝Martin Tobias: Founder/Operator → 2 IPO’s → GP @ Incisive Ventures

Who are the outside the box Syndicate GP’s and how do they think about allocating capital via SPV’s?

Today, we are excited to interview Martin Tobias, the founder of Incisive Ventures. 

Incisive Ventures is a Pre-Seed Fund in Seattle to invest in technology companies that reduce friction at scale, leveraging the partner’s network built as an angel investor in 60+ companies in the sector, including 4 unicorns, that secured $2.5B+ in follow-on financing. 

Martin is a serial entrepreneur who has also invested in over 250 companies as an angel, half a dozen as a venture partner at a major VC firm, and a limited partner in over a dozen VC funds. He is also the Founder of a leading Angel network, Element8. 

As a 3x venture-backed CEO with experience from Microsoft and Accenture, he has raised over $500M (including two IPOs) for his own companies. This unique combination of investing in and operating early-stage technology companies gives Martin an advantage in working with founders and securing follow-on financing in the most transformative early-stage technology companies.

Our interview with Martin Tobias below:

1. Tell us about your background as an operator prior to being a VC?

In college I was a double major in business and computer science.  It was pre-PC days (my first program I wrote on a DEC VAX card reader), and I was always interested in how software could make money in business as opposed to many of the purely technical computer problems most people were working on.   My first use of Excel was to write a stock trading program that did pretty well.  Out of college I went to Andersen Consulting (now Accenture) and then to Microsoft.  At Microsoft I helped build the enterprise licensing system which was the basis for all electronic licensing today.  We were basically using technology to reduce shipping boxes of CDs and simplify logistics and operations for companies (no more tracking physical watermarked licenses).  As part of that, I was working with some of the early software companies in the digital rights management space that were all startups at the time.  I realized the startups were having a lot more fun than I was at the big Microsoft, so I decided to start something myself.

PCs were still mostly monochrome monitors without speakers and sound cards.  The multimedia on PCs thing was just getting going.  Windows Media and Real networks had just launched.  All the media was on CDroms, albums, cassettes and video tapes.  I realized to enable multimedia on the PC at scale someone would have to figure out how to convert traditional media to digital media at scale.  I left Microsoft on a Friday and Monday I was CEO of Loudeye Technologies.  We won big contracts, grew to over 500 people and went public in three years in March of 2000. We were the absolute last company to go public in the DotCom boom.  As I say about bubbles, it is better to be in one than to not have a seat when the music stops.  

When I was at Microsoft working with startups, I met a guy in Silicon Valley named Ron Conway who was raising a VC fund. I didn’t know what a VC fund was or that I could join one, but he seemed smart enough, so I gave him some money.  That fund invested in these guys Larry and Sergey and I still hold some of those shares today.  That gave me a lifelong lesson about investing early is smart people who are creating something potentially transformational.  I started investing in startups myself (including my own, Loudeye).  

After Loudeye, I took a couple of years off but got bored and joined some exMSFT friends who had started Ignition Partners in Seattle.  I did a couple of investments with them and was an LP in their funds.  I liked being an investor.  Around that time, everyone was talking about peak oil and oil was skyrocketing.  It seemed to me to be a very backward industry that could use some of the innovation that was sweeping through the enterprise with the software industry, so I decided to look for investments in the energy sector.  Ignition didn’t want to invest in energy, so I started writing my own checks.  I found a company that thought it could build a better biodiesel refinery out of commodity parts versus custom engineering that was the standard. It struck me as a bit like the PC against the Mainframe.  I invested. Liked the company so much I became the CEO. That was Imperium Renewables.  We built the largest biodiesel refinery in the world in Washington, and were on file to go public in 2008.  The IPO window closed before we could get it done, and the company could not grow anymore, so I left to take another couple years off.

I made some more angel investments, joined a bunch of other venture funds and looked around for company ideas.  I just wandered around meeting smart people and learning about industries until something sounded fun enough to do including two more times as CEO (Tippr.com and Upgrade Labs).

By 2020 I had invested directly in over 250 companies, been a 3x venture-funded CEO, and was an LP in over 17 VC funds.

2. How did you get into venture?

I started as an LP in Ron Conway's Silicon Valley Angels fund while at Microsoft.  Then I was an active angel and joined Ignition Partners as a Venture Partner in 2001.  As a CEO, I kept making angel investments and LP checks.  In 2020 I was CEO of Upgrade Labs in LA.  We got shut down by the pandemic, and I decided to take time off again.  Having failed at retirement multiple times before, I knew I had to either start something again as CEO or lean into investing.  

I decided to lean into investing and started writing angel checks myself.  A bunch of my friends saw I was actively investing again and asked to invest with me.  In the old days, you had to send the deck around to your friends and they all had to do their own diligence. It was like herding cats.  I had been an investor in syndicates on AngelList and that seemed like a better way to share diligence and invest with your friends, so I started a Syndicate on AngelList in 2020 (now with over 3000 LPs).  All of my deals were oversubscribed, so a number of my LPs asked me to start a fund so they could just invest in all that I was investing in.  I saw how hard it was in the early 2000s to run the back-end of a venture fund at Ignition and I had never really wanted to be a GP if I had to do all the admin work.  AL had productized it so well, that as a manager I could just focus on deal sourcing and supporting the companies without all the back office BS, so I decided to start a fund as a GP.  

I am now on my second fund (vintage 2022), the first fund where I am the GP (at AL you are technically a sub advisor to their GP).

3. How long were you doing SPVs and how was that experience?

I started investing in SPVs through AngelList in 2017 and started my own syndicate in 2020.  I also invested before that in some SPVs set up through lawyers.  The old way to do SPVs (through lawyers) was expensive and cumbersome.  When AngelList and others productized the SPV process including K1s and everything, they also lowered the price significantly increasing access to managers as well as investors.  Today it is a couple clicks to create an SPV and invite your friends to invest.  Platforms like Angellist will also refer LPs so you don’t have to know all the investors in your syndicate.  It is 100x easier today to offer SPVs.  

My thesis as a venture investor is software companies that reduce friction at scale.  Productization of the SPV experience removed tons of friction at scale and has significantly increased capital access for companies and opportunity access for investors.  SPVs have become an integral part of the venture ecosystem.  With a few exceptions (Assure, etc.) my experience with SPVs has been very positive.  I have been able to get more money as an angel into companies I was investing in anyway and have gotten access to companies I had no direct relationship with before.

4. Why did you start a $10m venture fund focused on pre-seed?

In mid 2022, I had been actively investing as an angel, syndicate lead, and out of a $2.5M AL fund.  The check size varied from $10K to about $400K, with the average check size being around $40k.  The portfolio had 66 investments and was marked to about 2.8x TVPI and 32% IRR.  I noticed that some of my biggest winners were smaller checks.  I had read somewhere that having a standard check size was a superior strategy early, so I decided to test it.  I got curious about what the return would be if I had written a standard check size of $250K across the same portfolio.  It would have been over 8x TVPI and 112% IRR.  Since 60 $250K checks were outside my personal budget, I decided to raise the fund.  I am currently the largest LP.  To me, every check is a personal check.

5. Why do you write $250k checks?

According to Pitchbook, the average check in a $1M pre-seed round is $25K. We all know that the more you invest earlier (and are right) the better the returns.  Given my analysis of the superior returns for a $250K check, I decided that if I could create a process to gain 10x the conviction of an angel very early, the first institutional money into a company, I should be able to make top decile returns.  Since I am the largest LP, I wanted to have the highest probability of a successful strategy.  This means having a professional diligence process, 100x the deal flow of an angel, and the ability to write a meaningful check very early.  At $250K, you are also large enough that the CEO will pay attention and you get pro-rata rights and other things that angels typically do not.    

With Incisive Ventures Fund 1, we will write 30 $250K checks out of the fund and offer pro-rata to LPs through SPVS.  We expect to have $30-$40M in pro-rata rights, so it will look more like a $50M fund opportunity to the LPs.  I believe the combination of a fund and SPVs is the right strategy for pre-seed funds.

6. Why do you like investing at pre-seed?

The most exciting part of the startup journey for me as a CEO and investor is when it is non-obvious.  An idea, a passionate, experienced team, and a couple of early believing customers.  The idea of separate Angel, Pre-seed, Seed and Series A rounds is relatively new in the last 5-10 years.  I spilled some ink on how I see the differences on my blog. When I was at Ignition and we led the Series A of Docusign in 2003, it was $4M on $7M pre.  That was a Series A in 2003.  As capital has expanded in VC, so have the number of stages.  If you are at ideation stage, pre MVP, I call that the angel round (or Friends and Family).  Pre-Seed IMO is the first institutional round with professional venture funds, raising $500-$2M after the MVP has been in the market for 3 months or more.  That is a pre-seed for B2B software where I invest.  For deeptech, hardware, drug discovery, etc, the round sizes and stages are very different.  

I love Pre-seed because I have been in the CEO seat there and my network is especially optimized to help with to main jobs of a company in Pre Seed:  Getting the first customers/sign of Product Market Fit and Raising the next round.  I have built a firm to specialize in those two things including software to make warm intros at scale to both investors and customers.  I find that my operator experience is most helpful in pre-seed.  As an investor that is also where there is some validation of the idea from early customers and you can build higher conviction than an angel while still getting in at a reasonable valuation.

7. How do you leverage the syndicate you’ve built over the years today?

Today my syndicate sees the Seed and Series A pro rata opportunities that arise from my Pre-seed fund.  I have found that it is harder to raise SPVs for Angel or per-seed without significant market traction or a name-brand investor.  My portfolio companies have raised follow-on financing from Sequoia, A16z, Index, NEA, Tiger, and more.  LPs in the syndicate tend to write more checks when the round is being led by a top-tier investor.  

8. Thoughts on a syndicate strategy for venture funds that are sub $50m AUM?

I believe every manager of a sub $50M fund should have an SPV strategy.  You will NEVER have enough capital to follow on with your winners.  You will be able to continue to support your founders and you will be providing access to your LPs that they otherwise would not have.  The typical mark-up in my fund is led by an investor who wants the whole round. The only opportunity to co-invest with them comes from my pro-rata rights that I have as an early investor. It is a significant lost opportunity for managers and LPs if these pro-rata rights are not used.  

9. How do you deal with Pay to Play rounds when you invest through an SPV?

This is one of the tricky parts of investing through SPVs.  SPVs are typically one time capital calls.  If there is a financing event in the future that would impinge the value of the shares the SPV holds, like a Pay to Play, you have to figure out how to get the capital to preserve shareholder rights.  I have had this happen a number of times.  A couple of times I have created a new SPV, but a few times the amount was too small to justify the fees.  It is a complicated situation that requires thought and a creative approach.  A few times I have written the pay to play check from my personal funds because I thought it was a good investment and the LPs in the SPV got a free benefit.  If you are thinking of investing in an SPV I might ask the manager what they intend to do if there is a Pay to Play in the future.  His or her response will be telling about the quality of the manager.

10. Any cautionary tales running SPVs?

The big issues are SPV vendor stability, Pay to Play, legal complications and shareholder rights (information, pro rata, etc.).  Many of your readers may know the Assure story.  Assure was an SPV vendor who closed down.  All the SPV managers who had paid fees for SPV management over 10 years had to move their SPVs and pay new fees to a new manager. This was a total mess.  They had to come up with the money to pay the new fees and move the accounting.  Pay attention to the viability of your SPV vendor.  The Pay to Play I discussed above and have faced many times.  In one SPV I ran, the company ended up in a lawsuit with shareholders over fraudulent bank statements.  In that case, shareholders had to fund the legal proceedings.  Again, more capital required into a vehicle where LPs thought their investment was limited.  In that case we called capital from LPs who wanted to participate and gave those that did a preferred return over the other LPs who did not fund the litigation.  The last complication has been shareholder rights.  Sometimes CEOs have played fast and loose with those for syndicates because they have the feeling they are all small investors.  I have seen CEOS not honor pro-rata, information rights, etc.  In those cases I hope you have a good manager of the SPV to fight for your rights.

11. Tell us about Checks I wrote dot com?

Pre-seed is very opaque from a data perspective.  What investors are writing what checks, which companies are getting funded.  Many pre-seed rounds are not announced in public and SAFES don’t have to be filed with the SEC, so they are not in a database.  Pitchbook and Crunchbase do a pretty good job reporting priced rounds from SEC filings, but they are missing 90% of the checks I write.  As a manager, I wanted to get better data on what was happening in pre-seed, so I am building www.ChecksIWrote.com. Investors fill out a form when they write a check and can follow investors, sectors, etc. to see activity.  It is a give and get database so you must participate to use it.  We have over 700 managers on a waitlist and will be launching soon.  Please sign up and help me fix the data problem in pre-seed.

12. What do you love or hate most about venture capital?

I dislike the friction in the venture market.  VCs say no 99% of the time, founders hear no 99% of the time.  One reason I became much more active on Twitter is to communicate directly with founders what my sweet spot is so it will be easier to find me.  I get frustrated when people don’t read my blog or even my twitter bio long enough to see that I am not an investor in Crypto, hardware, drug discovery, etc.  Spamming investors without any research is my biggest frustration.  

I love working with passionate founders.  As an operator myself I have been in your shoes.  I have been in the software industry for over 30 years and I believe these next few years will be the best time to start companies in my lifetime.  I love when companies build something that makes life easier for a lot of people.  There is alot to build.  

I am more optimistic about creating value in the software industry than I have ever been in my life. I will be an investor for the rest of my life.  Mostly because I suck at retirement and hate golf. 

🌱 If you liked reading this interview, check out our past interviews below:

• 🤝Jeremy Terman: DoorDash IPO → Investor & Operator, unique Approach to Landing past 2 Roles

• 🤝 Catching up with NBA Player & Olympian Matthew "Delly" Dellavedova: Life Beyond Basketball as an Early-Stage Investor.

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✍️ Written by Zachary and Alex