Bullpen Capital General Partner on Managing People and Personalities When Investing

About Duncan

Duncan Davidson is the Founder & Managing Partner at Bullpen Capital, which invests in post-seed companies that have achieved product-market fit but have not yet proven sufficient market scalability to raise a major VC round. Having two bubble-era IPOs, and being the pitch person on one of them at the peak of the bubble, Davidson learned firsthand that venture capital is a cyclical business. During the bubble, speed matters. During the downturn, he saw two successful strategies: long-term, deep tech, and short-term, value investing in oversold but otherwise solid companies.


On how to coach investors to assess and evaluate the human side

If you’ve walked the walk, it’s easier to empathize. An understanding of the struggles that founding CEOs go through is also vital.

“We started at Bullpen Capital with a culture of being founder-friendly. We had all started companies. Collectively 10 or 11 between us. We'd been on the other side and knew how to deal with VCs. Part of the problem you have in a fund is over time you see this Gaussian curve of situations, positive to negative. You tend to get very concerned if you start seeing the negative and try to guard against it. Culture can be moved by experience to be more callous, more decisive, and almost meaner. Because we started with a founder-friendly, we-used-to-be-there culture, we've never gone that far.

We find that over the course of being a founder or being a CEO can be very lonely. The CEO might start with a group of co-founders and their friends, but eventually, they have got to make some tough decisions, often against the interests of the co-founders. We try to position ourselves to be the trusted adviser to that person, particularly through difficult times.”

On how emotion relates to founders and investors

Founding a company and investing in them is a rollercoaster of emotions.

“When I was doing startups, the highs were really high, and the lows were really low. There are times when you're about to run out of money, and you want to go into your credit card to keep the company going. You're at the very edge. Suddenly, you get saved. That's the low. There are times when you launch something that doesn't work out as you expect, and you've got to reshuffle the deck. That's a low. Then there are highs. Not just going IPO, but scoring a really big account and growing really fast.

A lot of times, a founder goes through a learning cycle. They think it's easy. They're going up a positive move, they know how to do it, and suddenly it's not working. Then they go mentally down what I call the valley of death. They go down to the bottom, and they don't know how to get out of it. They don't know what's going on, and they’re losing control of their company. That's the moment when you get to the bottom of the valley of death because you were overconfident at the top. Getting through that is everything. That's when we have CEO coaches to help people through the valley of death and see the way forward.”

On how founders and investors handle expectation management

Communication is the key to expectation management.

“Often, for a VC, you invest without full knowledge. You get a better understanding at the first or second board meeting. Then you know if you made a good or bad investment because you're going to find out if you are in misalignment with the founding team. Getting into alignment is extremely important. Otherwise, you diverge in expectations, and the founder lives up to the wrong expectations.

It's incumbent upon the VC to take charge of that, not the founder. The investor has to let the founder know when they think they're out of alignment on the direction. At that point, the founder has got a key decision to make. The decision is, they know the business better than the investor does. They’re the one that has the right direction, not the investor. Then it's the founder who needs to stand up to the investor and convince them that's the right direction to go in. If you can't come together, things are just going to diverge.”

On the determining characteristics of fast learning

From the initial pitch meetings, investors must be able to identify a founder’s learning style.

“In a way, part of what you do when you get pitched is viewing what’s coming at you like an intelligence test. For example, no company ever hit their business plan. They either massively exceeded it or massively failed it. The process of walking through the business plan, the numbers, in particular, is an intelligence test of how well the founding team understands their business. Then you look at what their learning style is. If it's to bluff, they're going to fail. They're going to fail because their learning style is pugnacious. It’s not experimental or philosophical. They get stuck.

You can talk about founders being persistent or breaking through brick walls and all that, but that process is not one of being stubborn. It's a problem of trying to figure your way through the brick wall as fast as you can. The stubborn founders banging their heads against the wall gets bloody. The agile founders find a way to go around the wall or pull the bricks out but get through it cleverly. That's learning style. You can usually see that pretty early on.”