Can a Portfolio Star Ever Be Too Expensive?

College football is undergoing a real sea change,  though there has always been one constant - tons of money. Penn State hired James Franklin in 2014 with a 6-year contract - starting with a $4.3m salary for the 2014 season. Franklin quickly righted the ship - finishing in the top 20 every year from 2016-2019, and in the top 15 from 2022-2024. While PSU always seemed to be in the conversation, they also failed to win the really big games. And given the history in State College, big games really matter. 

After 11 seasons, PSU had enough - and fired Franklin after 3 straight losses. However, PSU also won their first three games, started the year ranked #2, and had to pay him $49m to leave. PSU might end up getting part of the buyout back - but there’s also nothing stopping Franklin from taking a dramatically lower paying job (high school coach) with no pressure for the next few years. And he would not have to look far - Franklin grew up 3 hours east of State College.

PSU likely fired Franklin with an eye on their next coaching candidates – and did not have to look too far. Curt Cignetti grew up 2.5 hours west of State College, and has been a winner at every coaching stop (Indiana University of Pennsylvania, Elon, JMU). Indiana University (in Bloomington, not Pennsylvania) hired Cignetti away from JMU in November 2023. Cignetti made $677k at JMU in 2023, and was hired at IU with a 6-year, $27m contract. Fast forward 2 years, and Cignetti just signed an 8-year, $93m extension. While this will place Cignetti in the top 5 highest paid college football coaches, he’s also gone 17-2 (after winning 15 total games the previous 4 seasons). 

Cignetti could potentially flame out in the coming years, but it’s hard to argue that his first 19 games have been nothing short of a miracle. IU just pushed all their chips on his ability to continue winning, and blocked a fellow Big Ten team (PSU) from poaching a local home run hire. $11.6m a year is a big splash for a basketball-first school…but football moves the needle these days - and IU has a big potential winner already sitting in Memorial Stadium. 

So, as usual, what does college football coaching have to do with venture investing? 

Colleges typically have one head football coach, and outside of basketball, few other coaches are in the same crazy tax brackets. So, athletic directors have a portfolio of different coaches/sports - but extremely heavy $s concentration in football (and basketball). As a General Partner, I have limited concentration (it’s rare to have a portfolio company with more than 10% of the Fund), and a much more equal weighted portfolio. I also try to build a portfolio full of winners - instead of taking huge gambles. But, it’s sometimes obvious that I have a winner on my hands - even within 12-18 months of the initial check. 

Curt Cignetti has only coached 1.5 seasons and been on campus for less than 2 years. But, this is the second time (in the last year) that IU has given him a sizable raise. After going 10-0 in his first ten games, IU extended his contract and nearly doubled his salary to $8m/year. Now, they’ve given him another almost 50% raise to $11.6m. Venture valuations can very easily follow this 2x and 1.5x path in quick order - often growing much faster in a shorter time frame. 

I have had a bunch of portfolio companies over the years get out the gates fast, increase their pacing, and start showing huge scaling ability. I’m often not the only one that sees this potential, and growth too. Valuations tend to increase quite quickly as the J curve steepens - and the next rounds can be dramatically pricier than the first round. Curt Cignetti is making nearly 3x what he thought he’d be making less than 2 years ago - but it’s not uncommon for a pre-seed deal to 5x+ their first round valuation in pretty short order. 

I rarely do these rounds, even if I believe in the founder and the Company. This failure to double/triple/place all chips on the potential big winners is very unorthodox in venture - in fact, it’s downright odd. But, I’m also playing a different game - I need a lot of hits, tend to write 1 check and let it ride, and get trigger shy on paying up. In some cases, it was the right move (the valuations got out of hand, and the Company really had to catchup to the ARR multiples over many years). In other cases, I missed out on good returns (nowhere near as good as the first round, but still good - especially when it feels like you have a strong hand). 

I will have the same situation this winter - a star portfolio company will go out for their A/B raise, and I know it’ll be pricey. While the old version of me would have been very happy with the progress, but also happy to take the dilution - I’m changing my tune a bit. If I can model out the next 12-18 months, and have confidence that the Company will grow past the round valuation (assuming a normal market environment, and nothing crazy), I will probably double down. Every deal is a case by case basis, but sometimes it’s better to pay up - especially when you might have a real winner.