Entrepreneur First the Index VC Fund

I took part in Entrepreneur First’s (EF’s) first Berlin cohort last summer. I have largely refrained from talking about my experience, even in private so far, but this hasn’t prevented a lot of people from giving me their opinions on the business model of EF.

The EF hypothesis sounds simple: get enough smart and motivated people together in a cohort and give them the opportunity (time, access to funds, etc.) to start businesses together and some of them will succeed…. bigly.

The venture capital community here in Berlin are not so convinced. Personally I sympathise with their doubts. Certainly from an operations point of view, scaling EF has seen problems. However, as a business model it may be genius.

What’s the real business model here?

I did some back of an envelope calculations, over coffee, with a friend recently. My gut told me that there was method behind EF’s apparent madness and I wanted to prove it to him.

In my cohort 10 teams received funding of UK£80,000. I convert this to a round €100,000 per team – totaling €1m for the cohort. There are some fixed costs around overheads and cohort stipends, but these are small and disappear as we scale-up the numbers. In return for their €1m pre-seed investment, EF receive a total of 10% of the shares in each of the founded companies.

Focusing on a single geographical location, there are two cohorts per 12 month period, meaning it takes 5 years to run through 10 cohorts. And so, assuming no expansion, that’s €10m of the original fund being invested into 100 very early-stage companies. All of this in exchange for 10% of the created companies. So far, so VC.

The next simplification is the only one I can’t really stand over. It may be where the EF business model founders. But it is not the central point of this article. I’m going to ignore the fact that there are multiple further rounds of investment going into the created companies. EF have the right to participate in follow-on rounds up until roughly Series A. And they are allowed to keep their participation at a number approaching 15% total ownership during that period. Since they don’t get diluted, over that period, I’m going to completely ignore the economics of follow-on investments – I would love if somebody from the VC investment world would educate me on this part of the maths. For now, let’s just assume that credible VCs would not have contributed to EF if their maths on this aspect of the model were shaky.

Following the jump in logic: the goal of EF is to have a unicorn return the fund. So if they are at roughly 10% ownership of these 100 companies, for a total outlay of just €10m… they need 10x€10m to return that part of the fund.

If they have just a single unicorn from the 100 companies then they 10x the fund.

This is part 1 of the genius of their business model. While it’s pretty unlikely that any one of the ten companies in my cohort will become a unicorn, it is a realistic possibility (note the non-probabilistic language) that in 10 cohorts one such company will be formed. Mathematically speaking – using these very rough numbers – to return the fund they just need 1 company in 1000 to be a unicorn (the actual odds are of course worse than this due to the simplifications I made about costs).

At this point you might be pretty annoyed with me taking such liberties with the mathematics of repeated rounds of financing and attendant dilution until exit. Meanwhile I claim that it’s genius that 1 company out of 100, or 1000, founded might just become a unicorn.

This is only genius in a context. The context is a global glut of money looking for smarter ways to access good investments. The context is a massive global expansion of the EF model.

By covering 10s, if not eventually 100s, of locations EF corners the market on early-stage investment. They become the place to go for young, untested, entrepreneurs looking for funding – the famous network effect. We are already seeing this in London where half the companies founded in the summer cohort had been in operation before they ever joined the programme. EF operates as a combined magnet and a low-cost filter – and believe me they keep their costs low! (Correction: Matt Clifford has told me on LinkedIn that their figures for teams joining the program as a pre-existing team were, “3 teams of 16 funded in London (and I think even fewer in the next cohort).” My figures are based on my personal count at the kick-off for companies receiving the £80,000 investment, in August, but they may be faulty.)

Part 2 of the genius of their business model – and this is the true genius – is its resemblance to an Index Fund. Nobody has ever figured out how to do passive investing into early-stage businesses before. EF have.

Index Funds are how you should invest unless you’re an insider. They are passive, so they are low cost. They do not fall foul of human frailty in terms of hubris and judgment. And, let’s face it, insider investment does not scale. EF have a scalable model for investing into early-stage companies. This massively deleverages their risk, while still allowing them to hope for the massive returns.

I now see EF as a tracker on the returns of global entrepreneurship.


For EF. I’ve already given EF plenty of unpaid for advice, but here the advice is clear. Index funds thrive on two things:

  • Low costs
  • Lack of bias in the Index

If you can keep the quality of your entrepreneurial talent pool up, you increase your returns. But since nobody knows how to do this, I suggest you ignore this aspect and allow the market to decide. This is the opposite to the YC approach.

The only thing that can kill you is the catastrophic Ops failures which we’ve seen in your global expansion. Network effects can work both for and against you!

For Young Entrepreneurs. Be aware of what you are getting into. There is no model for putting teams together. What EF have done in the past was a concierge service. That ended one year ago. From now on, this is a scaling global company focused on automation and costs. This is not a bad thing. They are scaling access to early-stage investment, which was previously the domain of the privileged.

For VCs. Be very wary. These guys are going to eat your lunch! They are scaling a particularly rewarding aspect of the investment pipeline in a way which has never been seen before. You are still operating a (relatively) high-cost filter on their outputs, which ultimately makes them their money.

2 Replies to “Entrepreneur First the Index VC Fund”

  1. Hey David – aren’t there plenty of seed VC funds? If someone wanted a portfolio over early stage investments – which I think is how you’re using the term ‘index’ – then there seem to be many options besides EF.

    I think EF’s most distinct genius (as compared to a conventional seed VC) is in aggregating talent and creating opportunities for founders to meet.

    Universities sometimes work for this, but after that it’s hard to get the right founding team together all at the same time. Imagine how many incredible start-ups go unbuilt because the right people never met at the right time. It has to be orders of magnitude more than the number we actually see created!

    I think it is the aggregating mechanism that creates a melting pot that would be completely impossible for individual founders without the programme (the advice/funding/demo days seem useful as well, but possible to replicate in other ways).

    Now, any particular founder or team might find that more or less valuable. But it’s hard to deny that for the right founders, it’s 1) genuinely distinct 2) really f***ing valuable!

    Full disclosure, Matt is a very small investor in my start up, but we didn’t do EF. I think that gives me a good perspective to see the value for those who do!

    1. Hi Marc, thanks for the comment.

      I am using Index in the sense of John Bogle (recently deceased). The investment statistics show that nobody beats the market on an ongoing basis. Therefore, unless you have some hidden advantage, you should just passively track the market.

      Since you haven’t been through EF, and perhaps more importantly since EF has changed considerably since undergoing Blitzscaling, what you’ve heard about the network and the supports are largely no longer applicable. Many good people go through EF, but the network effects are oriented in EF’s favour not towards the benefit of the individual entrepreneurs. So I’m not sure what ‘it’ you’re referring to that’s, “really f***ing valuable,”…

      A corollary of my post is that spending on supports, etc. is not in their interest given that I see them as a passive investment strategy.

      (Almost) PS. Understand that my blog post is not here to criticise either EF or your investor. They get quite a lot of that at present in private circles (not by me). My post is actually a response to the criticism. I argue that there is method behind some of the apparent madness.

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