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Under The Hood: How Early-Stage Investor Initialized Spots Future Unicorns

Garry Tan, a co-founder at seed investment firm Initialized Capital, became an investor almost by accident. Tan had joined the prestigious startup accelerator Y Combinator in 2010 as a designer in residence and that same year was given a shot at becoming an investor as the program grew. 

Garry Tan, co-founder and general partner at Initialized.

Previously, Tan co-founded Posterous, a company that made blogging simple, which was accepted into Y Combinator’s Summer 2008 program. While an investor at YC, Tan co-founded Initialized in 2012 with Alexis Ohanian, co-founder of Reddit, another YC company, along with YC partner Harjeet Taggar. (Ohanian is now a  board partner at Initialized and has since founded Seven Seven Six. Taggar rejoined YC as a partner in 2020.)

In the 10 years since Initialized’s founding, the San Francisco-based firm has racked up an impressive stable of unicorn startups—private companies now valued at $1 billion or more—in its portfolio.

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Given that it invested in most of those startups when they were just at the seed stage, I decided to sit down and chat with Tan about the firm’s successful track record, and how his early career at Y Combinator influenced his investment approach at the firm.

An early unicorn hunter

Initialized has 19 portfolio companies it invested in at seed that have since become unicorns, Crunchbase data shows, making it one of the most active early investors in future $1 billion-plus startups. That number jumps to 23 companies if you include initial funding at Series A. 

Unicorns in its portfolio include:

  • Coinbase, a cryptocurrency trading platform valued at around $38 billion as a publicly traded company as of the market close on Feb. 22;
  • Grocery delivery startup Instacart, valued at $39 billion;
  • Cruise, the self-driving car unicorn that’s now valued at $30 billion;
  • Freight forwarding company Flexport, now valued at $8 billion; and
  • Artist fan base platform Patreon, most recently valued at $4 billion.

All of these companies are category-defining in their sector and represent some of the early bets from Initialized’s first two funds. 

Tan said he knew Cruise co-founder Kyle Vogt from his YC days, and invested as “computer vision and compute” came together for self-driving technology to be viable.

And Flexport, another YC company, added “software to a late adopter industry,” Tan said. 

All told, Initialized ranks fourth on Crunchbase’s list of most active investors in unicorn portfolio companies at seed, tied with Techstars. The only investors that rank with higher counts are Y Combinator, SV Angel and 500 Startups, though those organizations also invest at much greater volumes at seed.  

Investors Seed Portfolio Counts That Are Unicorns As Of Feb 21, 2022.

‘When it’s not obvious’

Initialized has evolved as a firm from its earliest days, when Tan was investing part time out of its first fund of $7 million. Its most recent core fund 6, raised in December 2021, was $530 million alongside an opportunity fund of $170 million. 

These days, the fund has six partners including general partners Alda Leu Dennis and Brett Gibson, as well as Jennifer Wolf, Kim-Mai Cutler and Parul Singh. It also has four principals with a new principal, Abdul Ly, announced earlier this month. 

Prior to fund 6, Initialized only invested at seed. It is now expanding to Series A as well. 

Initialized Core Funds 1 Through 6 2012 To 2020

“Everyone and their mom is fighting over the post million-dollar a year, growing 3x a year startup like it’s shot out of a can,” said Tan. “Everyone wants to give money to people who don’t need their help.”

Initialized likes to invest “when it’s not obvious,” he said, as it did when he first invested in Instacart and Coinbase. 

“Would we go work there?” is something the Initialized team often asks itself, according to Tan. “Would we choose to live in that world?”

Tan readily admits that he has seen and missed out on many companies that turned out to be successful. In those cases, he passed on the investment because either the company was later than seed stage, or Initialized moved too slowly as a firm. Other times, an investor doesn’t win the deal due to poor founder fit. 

The ‘canonical Initialized startup’

One of Initialized’s more recent investments is in Shelf Engine, a startup that aims to reduce food waste from 30 percent to 10 percent, and is now in 2,700 grocery stores. The startup analyzes the amount of perishable goods required by a grocer, manages ordering and compensates for waste. 

Tan said the startup is a “case study for the canonical Initialized startup”—a company building a product that would make a significant impact mixing a smart business idea with technology. 

“We got (the founders) to quit their jobs, because we believed in what they’re doing,” he said.

Initialized likes to discover a team early, sometimes even before a company is founded, and prefers to write the first check. 

Shelf Engine co-founder Stefan Kalb ran a chain of sandwich shops and realized 30 percent of its food ingredients end up in the garbage. With the help of a friend who worked at Microsoft, he decided to build ordering software that better matched demand and supply. 

They struggled for four years with charging grocers for software until they realized customers “want to buy an outcome, which is lower food waste,” according to Tan. 

On ownership matters

Initialized has invested in some iconic companies, many of which graduated out of YC programs—not that surprising given the firm’s ties to the accelerator. In the accelerator’s early days, YC partners were not discouraged from investing in its program cohorts.   

Initialized invested in “Coinbase before bitcoin was even a thing” and in Instacart “right when this idea of mobile delivery could happen,” said Tan. 

In those early days, Initialized also invested in Algolia, Patreon, Goat Group and more recently in Athelas, Rippling, Ro and Truepill—all companies that have since become unicorns. 

But the proportions it owned were small. In fund 1 and fund 2, it owned around 2 percent. By fund 3—raised in 2017 after a big time gap from fund 2 raised in 2013—its ownership was between 5 percent and 10 percent. By the time it raised fund 4 in 2018, the firm was committed to a minimum 10 percent ownership in its investments. 

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“There’s no such thing as value investing in venture broadly, but especially at the early stage,” said Tan, who acknowledges that the early-stage funding environment is pretty competitive, which means investors need to move quickly and not ask founders “to take a haircut to work with us.” 

The average that Initialized invests is $4.5 million, Tan notes. Only two years ago, its check size was closer to $2.2 million. The company targets a minimum ownership of 10 percent and average of 15 percent, and invests in around 45 companies per two-year fund. 

The firm sets aside half of the first check for pro rata follow-on funding and tries to maintain full pro rata as much as it can. 

It does not lead two rounds in a row, which “makes it very straightforward for the rest of the ecosystem,” he said.  

New investments

Based on an analysis of new versus follow-on investment counts—an interesting way to understand a seed fund—it is clear Initialized has become more focused over time investing in fewer companies even as it raised much larger funds. 

Since fund 3 in 2017, it averages 20 new investments per year. Counts in 2021 on the chart are lower, due in part to companies that are still in stealth. 

Initialized Deal Counts, New Vs. Follow-On 2012 to 2021

The Y Combinator connection

Initialized has a strong crossover with YC portfolio companies. Of the 23 unicorns it invested in early, 18 are YC companies. Around 61 percent of its portfolio of 262 companies is comprised of YC companies, per Crunchbase data. 

While that’s striking, Initialized is not the only investor that overlaps heavily with Y Combinator. Other investors that have high counts of YC companies in their portfolio include FundersClub and SV Angel

SV Angel, which typically invests smaller amounts in lots of companies, has 25 percent of its portfolio matched with YC. FundersClub—which is itself a YC company—with a model of vetting startups for accredited investors, matches 65 percent of its portfolio with YC, per Crunchbase data. 

More than money

Initialized aims to bring much more than cash to the companies it invests in, Tan said. “We can write the check,” he said. “But then even more important than writing the check, we help them tell the story, we help them recruit, we help them get customers and we help them raise all the next rounds of capital.”

Tan has a YouTube channel that has attracted 200,000 subscribers. That platform has impacted many of Initialized’s portfolio companies in a positive way, according to Tan: Some executives who have come on the show have used it as a recruiting platform, while others have seen their enterprise sales double based on a single interview.   

‘10x growth’

Tan said he’s witnessed “10x growth in the number of people who are starting companies” in his time as an investor.

There were around 25 startups in a Y Combinator batch in 2010, when Tan was with the accelerator. Last year had more than 300 companies per YC batch.

There are also many more venture capitalists today than there were a decade ago, with firms raising larger funds with less time between raising those funds. And public market investors are also active in the private funding markets. 

Global funding in 2021 was well over $600 billion compared to less than $60 billion in 2012, according to Crunchbase data.

“VC itself has grown from $10 billion, $20 billion a year, to more than $100 billion,” Tan said. “I think we’re on the way to a trillion dollars a year.”

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Clarification: This story was updated to reflect that Initialized co-founder Alexis Ohanian’s current title with the firm is board partner.

Illustration: Dom Guzman

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