The New World of VC and Building a Durable Firm with Category Ventures' Villi Iltchev

0:08Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. In this episode, I had the pleasure of welcoming Billy Ilchef, founder and managing partner of Category Ventures. Before starting Category Ventures in 2024, Billy has had a long history in technology, both in operating roles at companies like Box and LifeLock, as well as investing roles at firms such as August Capital and Two Sigma. We covered a lot of ground during our conversation, including his inspiration for starting a new firm in this market and the experiences in his past that informed his true north.

0:43We also spoke about the mass fragmentation of the venture market today and what it means to consistently win in early-stage investing in a market that's so heavily crowded with dedicated seed funds and also larger funds who are active in seed. I really enjoyed the authenticity of the conversation and I hope you do as well. Samir Khadji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third-party investments or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate.

1:25Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Billy, it's great to see you, and I'm glad we're getting this done finally. Thank you. Thanks for having me, Samir. It's been up and coming for a few weeks now, so glad to make it happen. Yeah, there's going to be a lot of things that we're going to unpack, but maybe we start off with your journey into technology and venture and a little bit about your background leading up to Category Ventures.

2:00Yeah, I mean, I get oftentimes a question from young people, how can I follow my path? And my answer tends to be like, don't, because if I have to repeat my path myself, again, I don't know that I could. It's a bunch of random events that got me to where I was. Obviously, you have to kind of have a prepared mind for the next step in your career journey. But my journey into tech was I was very interested in tech at a young age before that's during the dot-com bubble that I got really excited about tech. Started even investing whatever money I had at the time, which was very little into tech stocks.

2:38I lost most of it. But when I went to business school, I very much had this idea of getting into tech somehow. how I couldn't really get into tech out of the gate because I was an international student. And there were very few tech companies at the time that were sponsoring international students other than maybe a few consulting firms. And so I started my career actually in finance. And that's what brought me to California doing tech investment banking, covering software companies and internet companies, semiconductor companies, all kinds of stuff at the time. and that got me into San Francisco and Silicon Valley.

3:17The first opportunity I had a few years later to actually lead finance and get in working industry. I took advantage of it. I had gotten married and so I had more job flexibility. And so I ended up joining one of my clients, Hewlett Packard, in 2008 before the financial crisis. And another one of my clients, Salesforce, called back a few, a year and a half later. And I could totally see the rise of cloud computing and SaaS and thought that is the future of software. And I wanted to be part of it. And so I joined Salesforce, which was actually probably the best thing that happened to me career-wise because Salesforce was such a relevant, impactful company in the ecosystem.

4:03It was probably at the time when I joined in 2009 bigger than the entire SaaS ecosystem combined. And so I was at the right place at the right time, working for the right founder, right company. It was really an amazing experience. And so I was leading there the strategy team, which included the investment arm of Salesforce, what is now Salesforce Ventures, as well as the strategy and M &A function. Great experience. I had a couple of other operating roles after that. I was one of the execs at a company called LifeLock. And then Box after that, before and after the IPR, I had invested in Box when I was at Salesforce, which kind of prepared me for venture in many ways.

4:45But venture was not the end state. It wasn't the goal. I actually didn't know what I wanted to do. Every single step in my journey was kind of being at the right place, right time, being prepared to take that next step in my career. and when I started talking to venture capital firms, it turned out that a lot of the things I had done made me well-suited to be a VC. I joined August Capital in 2016, which was just an amazing opportunity and a great place for me to start my career in venture. After August, I spent five years at Two Sigma Ventures, kind of continued on that journey, which kind of prepared me and led me to finally kind of decide to do it myself, start my own firm, category ventures, and build a new venture capital firm.

5:35You mentioned a lot of different things there, and it does sound like you had a lot of serendipity throughout your career. But when I talked to a lot of emerging managers, and I've had a lot of people that have started to fund one or are on to fund two now, and all those experiences in some way shape the mental model of the type of firm based on the observations working with founders being in some cases within companies like you were at LifeLock and Box. Maybe tell us a little bit about the true north and the gap in the market that you saw that you could fill with the firm. Yeah. I mean, I think one of the reasons I am where I am today and kind of the mental model that I've built over time is my ability to pull from this wide variety of experiences I've had, being an operator at like four different companies.

6:22And they all were great in some way and dysfunctional or challenged in other ways. And then I was part of two different venture capital firms, very different. Again, August Capital was a historic firm, truly historic, you know, people that most people don't know the history, but like Benchmark and August came out the same firm, TVI. It was just an incredible firm in the 90s, first investor, only investor in Microsoft. Series A and some microsystems and Compaq and Symantec, into it like amazing firm, great history, great legacy, very established. But obviously when you have that prestige and credentials, some other maybe the hunger creep the lack of hunger creeps in into your mindset and you your your drive kind of diminishes and so I learned a lot from that experience and then I joined Two Sigma Ventures which was very much an up and coming from you know a couple of people at Two Sigma were experimenting with this venture model and you know how do you build a venture capital firm.

7:35So actually, I took the August capital lessons, tried to really help to signal put that firm on the map, very much firm building from the get-go. And I think all of these experience kind of led me to be prepared to start Category Ventures and definitely shape kind of how I invest, how I think about opportunities. Whenever you, and this was, you know, 2024, I think when you did the final close or single close of category. And we've been in a time where we haven't had a really blue sky year for a while. So 2021, of course, peak at the market since then, you know, the markets have been pretty choppy, raised the fund, you know, fairly quickly, which we'll get into a second.

8:20But a lot of what I have seen over the last maybe 10 years is a lot of new firms coming to market. I think I count over 2 ,000 seed funds. And from an LP perspective, oftentimes it's very difficult to extract what makes a seed fund really successful over a long period of time. And there's certain markers you can look at, maybe track record in some cases, like you had a track record coming from August from Two Sigma. But oftentimes it's much more around the future view of is this team or is this person going to be able to execute? and often it comes down to prepared mind, not just raising a fund, but thinking about building a long-term franchise.

9:00What was the mental model in terms of the type of ethos you wanted to create for this firm? And how much of that was coming out during your conversations with LPs? Yeah, I mean, I started out even this fundraise very much with an open mind. And the first thing I did before I even decided to do this was to go and ask for a lot of feedback from LPs that I had met over the years that knew me and would be honest with me about my strengths, my weaknesses, my ability to execute on this, but also other GPs who had gone down this journey. just so I understand how to think about it, my level of preparedness, etc.

9:48And so I did a lot of homework leading up to it, which in some ways gave me the confidence to finally kind of go off the deep end and try to do this. And when you start, you just don't know. Unless you've started a fund before, like a startup, like the first time it's always you just don't know what to expect. and neither did I. So I went very much into the process with this mindset of, I have a strategy, I see an opportunity, but I'm very much open for feedback here. And that's how a lot of my conversation started. The opportunity I saw in venture was, you know, my impression of early stage venture was that it is highly fragmented, highly competitive, but also in some sense, subscale.

10:40There are hundreds, and you suggested there are even thousands of these firms that get started or have gotten started over the last few years. And most people start a venture capital firm raising, you know, starting even with their own money, but raising small funds, leveraging their expertise, their network, their insights, and kind of hope to find some good opportunities to invest and build their reputation and track record. And there are hundreds of these firms, but they are subscale. They're by definition subscale. There are hundreds of firms that have 15, 30, 50, 80, even 100 million in fund sizes.

11:22For the most part, they're subscale firms. They can't really lead around. And my insight was even the more established seed funds kind of operate in a subscale way or inflexible way. They're kind of stuck in their box, if you will. We write two, two and a half, maybe$3 million checks into three to$4 million seed rounds, get 10 % ownership, this is what we do. And my impression was early stage venture is just a lot more messy. And you kind of need to meet the founders where they are for the amount of capital they're raising for the opportunity they're pursuing. And those things need to fit together.

12:06And sometimes that may mean a$1.5 million receipt check into a$2 or$2.5 million seed round. But sometimes that may mean a$4 or$5 million check into$6,$7,$8 million seed round. You know, different companies require different amounts of capital. And so try to find, like, try to build a venture capital firm that is super narrow and specific around what check size is the right for what type of ownership, to me, never really made sense. So I wanted to build a firm that is more welcoming and inviting and flexible, which is to say we're the firm that is only focused on enterprise software, B2B only, infra-deaf tools and apps.

12:48We're highly technical. We appeal to this technical founder profile. And we are very flexible. We lead seed grounds. And we're very flexible with that means. We can write a$1.5 million check. We can write a$5 million check. Anything in between, whatever is appropriate for that opportunity and the needs of the founder to build the startup they're looking to build. And I thought that there are just very few of those in the market that exist today. And I think founders are mostly lost today when they're looking to raise that seed round. You know, it's such an interesting thing that we should pull the thread on a little bit more because I do agree with you that, you know, firms that are raising, let's say 50, 100, 150, you typically have fairly cookie cutter portfolio constructions, i.e.

13:3925 to 35 companies. 50 % of the fund is going to be initial, 50 % is going to be reserved for follow-on. That leads to a check size of X and an ownership requirement of Y to be able to get to a certain exit ownership that kind of makes sense from a mathematical standpoint. I had somebody on the podcast, Oren Zav, and when Oren was talking about his model, it was very open and kind of founder-based. Like, what is the best opportunity? I might do a Series B. I might do a Series C. It could be a$3 million check. It could be a$15 million check. And for a lot of LPs, the question is, where is that?

14:14Is there some kind of portfolio discipline? Or how do you think about when you size up versus you size down ownership? How do you think about answering, or how did you think about answering some of those questions? Yeah, and I think Oren's model works for Oren because he has such tremendous reputation in the ecosystem and people seek him out. But it is Oren. it is hard to build a firm around this model right an individual elad can do this because he just has tremendous reach and reputation in the ecosystem but it's really hard to create a system around it that scales and so i very much you know even though there were a few conversations that kind of pulled me higher in the market.

15:07It raises a slightly bigger fund. You know, you've done a good job picking, keep picking. Maybe you can do some seed and some eggs. That's what you've done most of your career. Keep doing what you've been doing. And the challenge, I think, with that strategy is I think, well, first of all, it's really hard to lead rounds in kind of the alternative model. I think you earn the right to lead through experience, reputation, and track record. And that is especially pronounced at Series A, which is really the stage where brand and reputation, I would argue, matters the most to founders. That is truly the first big round that puts you on the map.

15:55and the reputation of the firm you raise that round matters to founders a lot and you can't just show up at series a and say hey i have money i do series a's now you earn the right to do these types of deals you can't just show up and do these types of deals you can't go and compete with the best firms for the best deals just by having money and so my strategy was like a i saw an opportunity get seed. I want to build this seed firm. And B, I have the self-awareness and having been in venture for a long time to know that you earn that right to do the Series A deals. And maybe one day in the future of Category, the firm can mature and become this mostly seed with some Series A's in between kind of what Amplify has done.

16:49They've done an extraordinary job. But you do that when And your brand and your reputation allows you to do that, not just because you can raise capital. Well, let's talk about the product for a second, because I think that when you look at pre-seed and that$2.5 million round versus that$7 million seed round, which is going to invite other types of investors, especially some of the bigger firms that will look at that and say, I can put in six of the seven or six of the eight. And it's going to be a valuation that might be 2x, which you're willing to pay because it's optionality for them. They want to get ones that then can go into Series A, Series B, Series C and continue to pump capital in through the lifecycle.

17:28What is that, almost that go-to-market motion that allows you to win in those type of rounds? This is a great question. And it is kind of the core belief that I have in founding this firm. I think the reason oftentimes founders go to the larger firms is because it is a lot easier, right? It's a lot easier to go to one of the big firms. They're going to write a check. To them, writing that$4 million or$5 million check is the equivalent of me writing a$200 or$250K check. Who cares? No big deal, right? It's just a lot easier. And that's actually an indictment of the seed ecosystem today and kind of the core thesis.

18:14I think over the next five years, we're going to see a few firms like Category emerge that are actually able to offer that$4 million or$5 million check to founders. So they don't have to go to the large firms. And because the alternative today has been cobbled together a syndicate of these smaller firms. It takes time. You need to align all of these smaller firms. Nobody has actually meaningful ownership. And so, but the belief I have is that these large firms are just not a good product for founders, it seems. You are probably, and a lot of issues that I see with that model, they, you're probably, you know, they've hired an army of people.

19:01They have a bunch of junior partners that you're probably talking to that may or may not have any meaningful experience investing or other owners that are dabbling in seed to build their track record and reputation. They may or may not be there in a couple of years to support you. Turnover is really high at those firms at that level. If you're dealing with a senior partner, you know, they're busy. They're on 15 boards. That$4 million check they wrote, as I said, that's the equivalent of me writing a$250K check. It doesn't matter. It doesn't move the needle. They don't have time for you, nor are they doing this investment with the intention of working with you and going through the nitty gritty and finding part of market fit and advising you and spending time with you.

19:53And so I just think there's just no alignment in that model with founders other than the money part. There's the signaling, there's the conflicts, there's the willingness to support you over time. The reality is that basically they manage a lot of money. They don't have the time to like put together a bridge, nor would anybody else bridge you. Because if you have one of these big firms on your cap table, why is anybody going to get in the middle of this and try to bridge you? So I just think a new product needs to emerge like in the market. And you're starting to see that now of seed stage focused firms that have some skill and the ability to like do these types of rounds.

20:38Check sizes that are meaningful to the firm that matter to them. And you know the partners are going to care about your startup and treat it with the care that they would if they had written on much larger check. if you're at a big firm. I guess the one counter that I just want to actually bring up, and this is through a conversation I had with another entrepreneur who actually took money from a large tier one Sand Hill shop. And it was a seed round. They raised 5 million. The tier one put it for 4 million. And their view was, as a second time founder, we don't really need a lot of help to get from zero to one.

21:13You know, it's fine. And they had the opposite on the signaling. Their view was signaling is actually positive because, having this big name can allow us to attract talent. It can attract customers. People know there's more cash behind us. And yes, there's that signaling risk that they don't come into the Series A. Why didn't they do the Series A? How would you maybe advise an entrepreneur that's thinking in that way? Listen, when things go up and to the right, it's all good. It doesn't matter what you do or who you raise money from. It's when things are kind of on the margin and take longer to get, find part of market fit or find the monetization.

21:56That's when things get tough. So, you know, if you're optimizing for everything going up into the right, then it doesn't work for you to raise capital from. So do I think employees and customers customers probably less so but to some extent they do pay attention we raise capital yeah maybe maybe on the margin that matters but i don't think that outweighs the downside and the series a challenge is not just the challenge of are they coming into the series a or not the question is are they leading it there's a very reputable firm on sandhill we don't need to drop names but But if they lead your seed, and I'm seeing it at the A, they're smart people.

22:51The whole point of doing that seed, so they can deploy more capital behind it, like, why am I getting in the middle of this? Like, the signaling is actually really strong. And I've always had the mindset of, like, I'll make up my own judgment. But it's there, and that's the reality of it. But I think the bigger problem is what I said earlier, like people move on. They just don't have the experience. You're rarely dealing with one of the senior companies. They're not your point personally. And so if things are not up and to the right from the get-go, those types of firms move on. Right. They just move on.

23:31Yeah, you lose the attention and it's human nature. It only makes sense economically if they put a$4 million check out of a billion dollar fund. And it doesn't move the needle. It doesn't matter, right? But it does matter to a$4 million check going out of$160 million fund, which is very different. And that's why they are going to get that senior attention. But going back to this earn the right to win, right? I think about this a lot when I talk to venture investors. What does constitute the right to win in today's market? Let's say there's 2 ,500 seed funds of which 20%, 30 % can actually lead deals consistently at seed.

24:06What does it actually take to win? Because it's brand. You've done this. It's founder references. It's the fact that you have some kind of value ad proposition that's tangible. What are the different elements? And if you were to force rank those things that help you win consistently with the opportunities that you want to get into, what are those things that constitute that earning the right to win? Yeah, I mean, I think brand and reputation matters. category doesn't have much of a brand today. It's a new firm. All right, I do hope in five years, category is a name that most founders would recognize.

24:45But we need to do a lot of things right along the way to get there. And so in the short term, whose brand is it? It's probably my personal brand. Like, you know, until category becomes a household name in this community, then it's mostly your personal brand that you need to leverage and your relevant experience or breadth of experiences that you can bring to the table you know the team you've put together like I alluded to this I want every person on this team to be highly technical one of the things that I've noticed in the ecosystem is there are actually very few firms that you can go to really know that every person on the team is actually highly technical and will get it.

25:33And admittedly, I'm actually not an engineer by background, but I do want that firm to be everybody on the team is highly technical so that we can connect with this highly technical founder and provide them with a different experience. You know, references matter. How you treat people matter, leaving founders with a positive experience every time matters a lot. I see track how many founders I pass on that connect me to another founder. That matters to me a lot. I can't invest in every idea or every founder I meet with, but I can be nice to them and give them meaningful feedback that leaves them with a positive impression that would that allow them to still recommend me to their friends that actually is really important to me kindness is free like it doesn't take any additional incremental effort for you to treat people with respect and give them meaningful candid authentic feedback and so those are like all the little things you need to do to win the and there's other activities community events like other things you can do to drive awareness but i kind of go back to like the core values behind which i founded the firm authenticity like be a real person be a human treat people with like respect give them meaningful feedback teamwork like build a firm where we can all work together collaborate in the same office you know make decisions together kindness and finally intensity you know i want to win i'm a super competitive person i want to win at whatever i do and you need that like drive and intensity to be successful in this business it's very competitive and so i think those core things if you can put them together i think it actually can provide founders with a very different experience than what they would give to other firms.

27:38When you think about all those elements, which is really serving the founder consistently by adding real value that helps them scale from when you invest to when they get to the next phase and so on and so forth, oftentimes it's not just about you providing, but providing sort of this united way across the entire organization. You've hired a number of people within the firm. And I love asking this question because I think it goes back to the ethos that I asked about earlier, which is when you're bringing on people, you mentioned one of the non-negotiables is we want them to be technical, but there are also personality non-negotiables that you're filtering for.

28:16Maybe talk a little bit about that and how did you actually filter for those things during your interviews with some of the people that you brought on? Yes, I do care about the intentionables, right? Back to the values, teamwork. I'm not looking for people that are looking to mark an opportunity in the CRM as their Like, that's not what we're trying to do here. We're trying to collaborate to help each other make a better decision. If we make better decisions, we win. It's not about you making a good decision. That matters over time. I mean, I'm evaluating my team on kind of how they make decisions and, like, how they think about opportunities.

28:57Are they building their track record, their reputation with founders, et cetera, or their ability to attract? founders, but teamwork, being authentic, treating founders with the respect they deserve, leaving them with a positive impression, giving them good feedback. And yeah, that requires a certain personality type to want to work in that type of environment and system. But, and also like back to the intensity, you can't do away without that. You need a certain level of also intensity to be successful. So I'm looking for those components in every person I bring to the team. And as you think about this, this goes back to all of these folks, you know, looking at the end of the day, get into great companies, help those great companies, and then provide, you know, what we hope to be a great return for your limited partners, right?

29:50Which in, you know, LP world, getting a 3x net and higher is, you know, where you want to be as a venture firm, you know, fairly consistently. Not easy to do. I mean, if you look at the math, there's not a lot. There's a very small percentage that get to 3x. In fact, even during the 2010s, that was like top 20%. And in down markets, that's even sometimes less than that. How do you think about building that probability of getting those top end returns? So I think about a venture fund as like, yes, there's the winning, which is once you find a deal that you really like, did you earn the right to win?

30:25But you have to see the deals. You have to make the decisions. Can you break down each one of those and how you think about building an edge in when it comes not just to the winning, but the sourcing and picking? Yeah, I had a conversation with a couple of friends at larger firms a few weeks ago. And the question one of them posed was, what do you optimize for when you hire? Sourcing, judgment, or winning and winning? Those are the three components. And my answer was, if I can have two out of the three, I would pick sourcing and winning and judgment is last. And the reason I say that is there are several reasons.