- Dan Portillo founded Sweat Equity Ventures, a VC firm that works with founders in exchange for company equity instead of writing funding checks, with $30 million in backing from LinkedIn founder Reid Hoffman.
- Portillo previously worked at Greylock with Hoffman and had helped scale internet giant Mozilla prior to getting into venture.
- Instead of the traditional VC operating structure, the entire $30 million is dedicated to hiring top engineers and other business experts who can then embed with Sweat Equity portfolio companies and build the company alongside the founders.
- This kind of structure works because of how competitive venture funding has gotten, Portillo told Business Insider. Sweat Equity is able to work alongside traditional venture firms while providing services smaller firms can't offer on their own, he said.
- The competitive nature of funding means that it's never been easier for a founder to raise funding, but Portillo said one of the upsides to the equity model is it lowers dilution and helps increase a startup's valuation down the road.
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Silicon Valley is awash in cash. Venture firms are raising bigger and bigger funds to keep pace with increasingly large deal sizes, and startups are raising multiple rounds in a single year.
But the modern day gold rush has had some unexpected consequences. Untested business models and problematic founders are raking in millions of dollars in funding without much to show for it, while investors are showing up unannounced in startup offices to try and get in on hot deals. Funding timelines are compressed, putting even more pressure on investors to figure out which deals have the most potential. The high-risk, high-reward venture model has gotten even riskier.
That's partly what convinced Dan Portillo to leave Greylock, a tech venture firm in Silicon Valley, and start Sweat Equity Ventures in 2018. The firm, which officially launched on February 6, takes a different approach to winning over entrepreneurs — instead of writing checks and sitting on boards, Sweat Equity works alongside founders to build the business in exchange for stake in the company.
"There's more capital than ever and it's increasingly commoditized," Portillo said. "Then we have a collection of people that have experience building and scaling companies, and a billionaire willing to support what we are doing. That Venn diagram came together in just the right way."
Portillo explained that Sweat Equity operates more like the startups it works alongside than a traditional VC fund. Reid Hoffman, the billionaire LinkedIn founder and Greylock partner, put up $30 million in funding for the firm. The funds are entirely dedicated to operations and hiring within the firm itself, Portillo said, instead of the more typical investing structure among VC limited partners. Rather than writing checks and hoping for big exits from the sidelines, Portillo and his team are working in startup offices alongside the founding teams to make those exits happen.
"It made sense given the current environment," Portillo said. "We accrue our stake in common stock, so we align with founders more than ever before. Venture has become 'capital plus what,' and we focus on the 'plus what'."
Filling a need with less dilution
After a career in venture and other startups like Mozilla, Portillo said he relied heavily on his extensive network to recruit top talent to Sweat Equity. In his role as Head of Talent at Greylock, Portillo said he constantly heard from young startups about how hard it was to get the right employees early, so he built a team that could plug in to different companies as CTOs, heads of engineering, or go to market experts. The sweet spot is deep tech or enterprise software at the earliest stages, he said.
"You get to know each other," Portillo said. "We help with key introductions and help with whatever they need at that stage of the company. We develop a statement of work, but of course that changes immediately after we start because that's just startups."
Aside from technical expertise, Portillo has another selling point for skeptical founders. Because Sweat Equity doesn't have to come into a company during a funding cycle and doesn't write the check, founders suffer significantly less dilution down the road. That's also a good deal for investors working alongside Sweat Equity that may not have the same capacity to offer such a robust range of services, he said.
"If we do those things right, we more than pay for ourselves in the dilution the founders don't have to take in later funding rounds, and ultimately wind up with a better valuation," Portillo said.
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