I had a founder ask me yesterday, “How much money does an investor expect you to bootstrap with?”
The short answer I gave him, “It depends.”
The longer answer… well, there is no one number or specific range that investors look at. It’s a case-by-case scenario. Of course that’s not the answer he, nor you my reader, were hoping to hear. If I left you on that alone, I’d imagine this essay would be the single greatest contributor to my unsubscribe rate.
The real answer is that capital is not the unit of measurement. It can be, and may seem to be in today’s ever-increasing pace of development. Rather, it starts from a question. What is your minimum viable assumption? Something I’ve also alluded to before.
What is the minimum viable assumption? The big assumption you must prove in order to catalyze your startup’s growth. Or as Gagan Biyani, founder of Maven, puts it in the frame of minimum viable tests – “a specific test of an assumption that must be true for the business to succeed.”
Oftentimes, that assumption is synonymous to your the biggest risks of your business. Or in other cases, your biggest barriers to entry.
One of the questions we investors try to answer when we meet with a founder is: What is the biggest risk of this business? And is the person who can solve this risk in the room (or on the team slide)? It is one of a handful of risks we must underwrite to move forward with an investment.
Your ability to raise capital is directly correlated with your ability to inspire confidence in your investors that you will need little to no help getting to your next milestone. An unfortunate, but true paradox.
Circling back to the question that catalyzed this essay, how much money does an investor expect you to bootstrap with? The answer, as much as you need to prove your minimum viable assumption. Can you conquer the biggest risk of your business on your own capital? If you can, you’re halfway there. That may take $50K. Or maybe $10K. Or $100. Airbnb had to go through three different launches, and selling Obama O’s and Cap’n McCains for $40 per box, before Paul Graham noticed their traction. On the other hand, you have Mailchimp that’s 100% bootstrapped till the day they exited. Each business is different and unique in its own way.
The only addendum I would add here is that this same calculus will most likely not apply if you’re building something in deep tech – be it biotech or general AI or otherwise.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Earlier this week, Zach Coelius shared his path to running a fund with the On Deck Angels community. And near the end of the session, one of our fellows asked something along the lines of: How do you pick great founders? To which, Zach responded, and I’m paraphrasing: I look for really smart people I want to be around. And every person has something different that makes them smart.
I’ve heard many variations of Zach’s closing comment over the years. “I look for someone I want to work for.” “I look for someone who gets me excited about a space I didn’t I’d get excited about.” “A really sharp individual who teaches me something new almost every time we talk.” The common thread, in all these statements, is that the thing that drives early-stage investors to conviction is not quantitative, but qualitative in nature. Moreover, given that the next Steve Jobs or Elon Musk will look nothing like either of the afore-mentioned, it’s hard to build the search for outliers into a reliable mental model, other than the openness to be amazed.
Fred Wilson wrote a great piece at the beginning of this week about his rationale for investing in Coinbase, Twitter, and Dapper. His title, which sums it all up really well, is: Keeping It Simple. His lesson: “That’s keeping it simple. It doesn’t always work. We get more wrong than we get right. But when we get it right, amazing things can happen.”
Along a similar vein, I jumped on a call with a buddy of mine who’s raising his first fund after having an enviable track record as an angel. On this said call, we talked about how junior investors, the bottom 75% of investors, late-stage investors, and investors that have yet to find their own way to get to conviction, spend more time on the quantitative. A very analytical, repeatable, quantifiable approach. For better or for worse, cerebral. On the flip side, the best early-stage investors out there, by track record of consistent top-notch returns, don’t spend nearly as much time obsessing over the numbers. Or evidence. In fact, before you invest at the A, for most businesses, there really isn’t any hard metric that is going to get you from 50 to 90% conviction.
Even in my own personal journey, when I started off, I found myself sticking to the “tried and true” questions:
What are your unit economics?
How many customers do you have? How are they using your product?
What percent of your customers are coming back to use the product on the second day?
What do your retention curves look like?
Your monthly growth rate for the past three months?
All of which, you may notice, are quantitative in nature. In fact, this best part of this blog is that you can literally track my thinking over the past few years. I went from writing about metrics (morehere, just to name a few) I look for in startups to writing about intuition. In fact, even my attempt to codify intuition is, by definition, using my frontal lobe.
All I need to worry about are moments when a founder teaches me something new that I didn’t know I would love. A simple, but surprisingly rare happenstance. I see a lot of good startup ideas and teams, even some great ones. But it’s rare I meet an “Oh sh*t!” one. Subsequently, that probably also means, at my current stage, I’d make a poor fund manager, since I don’t have enough consistently high-quality deal flow. Consistent, yes. High-quality, in my humble opinion, yes. But consistently high-quality, I’m still too early. At least in the scope of “Oh sh*t!”
One of the greatest sobering facts about venture is that it’s a business that’s designed to keep you humble. Like Fred mentioned, I am wrong way more often than I’m right. And the times I trusted my head over my gut are times I find most regretful. To better illustrate this, let me share an anecdote.
Back in 2018, one of my good friends introduced me to a set of co-founders. Scratch that. Even before they started working on the business idea. And I’m going to abstract the name of the startup. But if you’re a frequent reader of this blog, you’ve probably already seen the trail of cookie crumbs.
I met them for the first time at their beautiful, well-furnished SF apartment with Scandinavian furniture that definitely warranted a pretty price tag. Out of curiosity, I asked how much it cost to live there. And for four bedrooms and three baths, they shared a ridiculously low number. A third of the price I imagined they’d be paying. Then of course, I had to ask how much the furniture cost. “$100, just to ship them over. Otherwise, they’re all free.”
Apparently, they networked their way into a community of office managers. They learned that so many venture-backed startups in the Bay, upon receiving funding, want to look like Airbnb. Founders buy the most expensive furniture – modern layouts, quirky chairs, rustic-looking tables. They also bring the creme de la creme of interior designers to help them set it all up.
But as statistics show, most of these fold every year. When they do, the last thing they want to worry about is their reminder of frivolous spending. As such, office managers end up with so many pieces of high-end furniture they just need to get rid of. Those same pieces of artisanal furniture now sat in these three founders’ living room. And it’s even crazier to know that they weren’t from the Bay. They didn’t have connections coming here, nor jobs lined up initially.
The stories didn’t stop there. In subsequent catchups, I learned of their previous hustles. Each blew my mind more than the last.
When it finally came down to it, and I had the chance to invest, I fell into the comfort of the shackles of borrowed mental models, demand for traction, metrics, the whole nine yards of what made me sound like a really smart, possibly high-browed, VC. And I said no. Today, they’re worth over nine figures, with 8-figure revenue numbers at their last funding round.
I amassed a massive anti-portfolio in my early days trusting my brain over my gut. A brain, like most, was and continues to be incapable of fully understanding the effects of the power law.
To borrow a Pat Grady lesson, any person with a head above two shoulders – in other words, a recurring practitioner of logic and reasoning – is capable of figuring out what’s wrong. But as an early-stage investor, one of the biggest mental hurdles you have to overcome, is spending more time imagining what can go really, really right. And not its counterpart.
As an investor before product-market fit, you invest belief capital, not optimization capital. You’re not putting fuel on the fire. You’re putting faith in a person – in a team – and in an insight.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Good writing is always about things that are important to you, things that are scary to you, things that eat you up. But the writing is a way of not allowing those things to destroy you.” — John Edgar Wideman
I go through these sinusoidal episodes where I write about my journey as a person. A world where things just aren’t perfect. And I, like everyone else who graces this planet, am struggling to find where I fit in the world. And when I’m swimming in the depths of self-discovery, I find that for an audience of entrepreneurs and investors, I really haven’t written much about my discoveries and re-discoveries in the wonderful land of innovation. The other half of it is for my fear of knowledge atrophy.
And so, I spend back to back to back weeks writing about the inner workings and the robust mental models of some of the world’s top intellectual athletes. Then in hindsight, once again, I realize that my blog begins to read just like any other business blog – any other startup, VC, tech blog – out there. And I fear that I’ve lost my voice. So, I re-embark on a literary path of introspection and growth.
The great Charlie Kaufman once said about his time on Adam Resnick’s show, Get a Life, “Adam Resnick’s scripts were the best on the show. And we all tried to write in Adam’s voice. That was the job. And I was frustrated with my results. But it occurred to me that there was no solution to this problem as long as my job was to imitate someone else’s voice. I can maybe get close but I was never going to get better at it than Adam.
“The obvious solution was not to throw my hands up but try to find myself in a situation where I was doing me, not someone else. Do you. It isn’t easy, but it’s essential. It’s not easy because there’s a lot in the way. In many cases, a major obstacle is your deeply seated belief that ‘you’ is not interesting. And since convincing yourself that you are interesting is probably not going to happen, take it off the table. Agree.
“Perhaps I’m not interesting, but I am the only thing I have to offer. And I want to offer something. And by offering myself in a true way, I am doing a great service to the world. Because it is rare and it will help. As I move through time, things change. I change. The world changes. The way the world sees me changes.”
As a product of what I can only describe as a game of tug-of-war between my right and left brain, I start many essays and unfortunately, lose interest half-way through writing them. As such, I’ve amassed a far-reaching graveyard of zombie posts. Eclectic, disparate monologues. Neither fully alive nor fully dead. Some may see a phoenixlike revival. Others may forever rest as vestigial drafts until Indiana Jones excavates them.
But nevertheless, the act of writing to think – to express – hones my mind like a whetstone to a kitchen knife. The more I do so, the sharper I get. Yet too much so, without application, renders the act of sharpening useless.
A few days back, I stumbled across a fascinating tweet on atrophy and hypertrophy.
There are many things in life that atrophy over time – knowledge, skills, presence. Yet there are a handful of things that hypertrophy – brain, demand for proof, and space, just to name a few. For me, writing exists in both categories. Like most skills, it is perishable. Yet the more I see, hear, and learn, the more I demand to myself that I need to put pen on paper. A personal intellectual renaissance.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Recently, I stumbled across a captivating perspective on aphorisms via Tim Ferriss’ 5-Bullet Fridays. The Procrustean Bed. To be fair, before reading it on Tim’s newlsetter, I haven’t even heard of the concept. In one of his newsletters, he cites two incredible sources:
” ‘Something designed to produce conformity by unnatural or violent means. In Greek mythology, Procrustes was a robber who tied his victims to a bed, either stretching or cutting off their legs in order to make them fit it.’ (Source: Oxford Dictionary of English Idioms).
“Nassim Taleb has a related book of aphorisms titled The Bed of Procrustes. He explains the title thusly: ‘Every aphorism here is about a Procrustean bed of sorts—we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve tension by squeezing life and the world into crisp commoditized ideas, reductive categories, specific vocabularies, and prepackaged narratives, which, on the occasion, has explosive consequences.’ “
Down the investing rabbithole
There exist a number of aphorisms in the investing world. Chief of which reads “buy low, sell high.” Public market assets are quite liquid. Hypothetically, you can cash out whenever you want. Such liquidity has paved way for psychological inconsistencies to maximize gratification. In language with unnecessary jargon redacted, the option to sell is less motivated by rational thinking but more by fear of losing money – loss aversion. If you invest $100 into the public market, you can choose if you want to cash out at $95, $90, or $120 or $200. While there is a non-zero chance of you losing your entire principal, chances are you’ll liquidate your positions before that happens.
On the other hand, private market investments are illiquid. Upon investment, there is no liquid market in which you can sell immediately. At best, you have to wait 3-5 years before a rapidly marked-up investment creates opportunities for distributions in the secondary market. In other words, cash money while companies are still private. In the private markets, your principal either appreciates in multiples, rather than percentages, or bottoms out. Any in-betweens will neither make or break your investment strategy, and are often out of your immediate control. So in this case, illiquidity is a feature, not a bug.
The notion of exiting positions as a private market investor, therefore, gravitates towards a singularity – when you make a damn good investment. The only time you really have an option to choose whether you can sell or not, when otherwise, it becomes a tax write-off or a small exit outside of your immediate control.
When should you sell?
Should you ever sell?
And if you sell, how much should you sell?
To answer all the above questions…
With the help of Shawn and Ratan, I wrote a blogpost on how to think about exiting positions at the beginning of this year. A topic of which I am still very much a rookie at, which may be quite apparent in this essay as well. Nevertheless I’m going to try to elaborate more on the notion of selling positions as an early-stage investor.
In a memo earlier this year, Howard Marks wrote that there are two main reasons people choose to sell: “because they’re up and because they’re down.”
When “they’re down”
Let’s start with the latter. When “they’re down.” Like I mentioned before, there are often very few options to sell when things are down. While I’m not proud that these investors exist in the early-stage private markets, I’ve seen and heard of some investors who try to make a last ditch effort to regain some of their principal when the startup goes south. Selling off IP. As well as assets. Or forcing the founders to make a modest exit, so that the investors cap their downside. Maybe at best, this returns them 2x on their capital (rarely the case).
But let’s say that’s the “best” case scenario. And let’s say it’s a $25M Fund I, writing $250K checks. A 2x net return means they got back $750K. $750K is far from returning the $25M fund. Not even close to doing so. You need over 30 of those “exits” to just break even for your fund. So, if you’re an investor penny pinching here, you’re in the wrong game AND you’re going to lose out on the relationships with the founding team.
Why the wrong game?
Venture is a hit-driven business. It’s not about your batting average but about the magnitude of the home runs you hit. We bat for 100x returns, which also increases the probability of misses, determined by ability to return the fund or not. If you’re optimizing for local maximums, you’d probably do better as a public market investor.
And why do relationships matter?
One, the startup world is a smaller world than you think. People gossip.
Two, statistically, first swings at bat rarely work out. In research done by Cowboy Ventures, they found 80% of unicorns had at least one co-founder with previous founding experience. Paris Innovation Review also found that “86% started their project with a partner, after having created other companies.” Two of many otherstudies. So, even though this venture didn’t achieve financial success for an investor, the next might. Or the one after that. Assuming you bet on the right people, it’ll just take a couple iterations before timing, market, and product also match up. If you leave on bad terms on this deal, you won’t be able to get in when things do work out.
Three, what makes early-stage investing incredible is the relationships you build along the way. The ability to learn and grow with really smart people.
When “they’re up”
The question of if to sell often leads to controversial debate. I know of some investors who never sell any of their stock. And that if they sell, to them, it is a measure of their lack of faith in a founder. And they would never want to feel that they’re betting against the founders. That’s okay if you’re an angel. But if you’re a VC, you have a fiduciary responsibility to your investors, which means you’ll eventually have to sell.
The question of when to sell is often answered in broad strokes with laws around QSBS, which states that if you hold a qualified small business stock for longer than five years, you’re not subject to capital gains taxes in the US. But should you sell in the 6th year or 10th year? And under what market conditions? Do you sell in a boom market or on the precipice of a bust market? For a company you believe in the long-term potential, regardless of short-term fluctuations, I’m a big fan of what Bill Miller said in his Q3 2021 Market Letter. “We believe time, not timing, is the key to building wealth in the [market].”
But when things are going really, really, really well, it’s okay to take money off the table, even ahead of the end of the fund’s 10-year lifespan. In fact, Union Square Ventures generally sells 15-30% of their position in their top portfolio companies to distribute back to their LPs. Fred Wilson‘s personal framework lies around “[selling] one third of the position immediately, put one third away for a long term hold, and actively manage the other third.”
To most, including myself, the goalposts for selling how much seem arbitrary. USV sold 30% of their position in Twitter to return twice the entire fund. Menlo Ventures sold almost half of their stake in Uber when Softbank offered to buy. Whereas, Benchmark sold 15% of its Uber shares. I also have really smart friends who liquidate 50% of their stake in a token if a single cryptocurrency reaches double digit percentages of their net worth.
It’s all about the opportunity cost
In a game where arbitrage matters, and the “why” matter more than the “what”, it was love at first sight when Howard Marks shared his mental model on selling. He boils it down to the simple economic concept of opportunity cost:
“If your investment thesis seems less valid than it did previously and/or the probability that it will prove accurate has declined, selling some or all of the holding is probably appropriate.
“Likewise, if another investment comes along that appears to have more promise – to offer a superior risk-adjusted prospective return – it’s reasonable to reduce or eliminate existing holdings to make room for it.”
In sum, the option to sell is not an isolated decision, but rather one which considers the other investment opportunities you have available to you. For a number of VCs, this breaks into the calculus of recycling carry and what to use early distributions to invest in next. If you’re a VC with consistent AND high-quality deal flow, you’d probably want to reinvest. If you’re a VC without either of the two (i.e. only consistency or quality) or an emerging angel, your goal is to get both. In having both, you then have access to relative selection.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
When winds and waves a mutual contest wage, These foaming anger, those impelling rage; Thy blissful light can cheer the dismal gloom, And foster hopes beyond a wat’ry doom.
– John William Smith, “The Lighthouse,” 1814
Marc Andreessenanswered a few weeks back to a question that has been ringing in many founders’ minds. What product do founders want to buy from investors? For the past few years, the natural answer rose as operational expertise. A notion that still holds true for the earliest stages of starting a business when you bring on strategic angels as small checks to help you find product-market fit. As you continue down the path and start raising institutional capital, the answer becomes more and more amorphous.
I've always thought the biggest thing a founder buys from a VC is a bridge loan of credibility in advance of tangible evidence.
Why do investors look for signal in the first place? A means to de-risk a very early, and very risky bet. A product of asymmetric information. Investors invest in lines not dots, but the truth is, most investors don’t have the time – luxury or ability – to see all lines. So what they must do instead is look for specific dots – be it traction, co-investors, or founding team “legitimacy” – that would help them trace out of a line of best fit. As Precursor’s Charles Hudson wrote earlier this week,
After 8ish years of pre-seed investing in 300+ companies, the biggest gap I see between VCs and founders is the relative weight placed on current traction by founders and the importance the next VC puts on market opportunity. Only gets bigger with each extra round raised.
1. Founders focus on traction – it's quantitative, many want fundraising to be deterministic (it isn't) 2. VCs have better market intel on what "great" traction looks like 3. For a co w top 10% traction, that can be the story. Applies to very few.
By definition, signal should be a leading indicator of long-term business value. Yet, for most investors in the world, what they look for are lagging indicators of conviction.
The signal paradox
In the investing world, there’s a paradoxical notion of signal. Through many conversations with syndicate leads, data teams of investing platforms, and LPs, I realized a common thread. For the majority of investors in the world, at the early stages, signal comes not from the founder, but from other funders.
In a syndicate, there are three things that make a deal move fast:
Great co-investors
Great traction
And, great team
Arguably in that order. Synonymously, as an emerging fund manager, the best way to raise from family offices* (I’ll explain below why FO’s are my reference point here) who are notoriously closed off to cold emails, you need:
Tier 1 VCs as your co-investors
Tier 1 GPs as your fund’s LPs
Or, deals that family offices wanted to get into anyway (which isn’t mutually exclusive from the above as well)
Quite noticeably, for many investors out there, signal comes in the form of people with a proven track record already. Or to break it down even more. Signal comes in the form of familiarity. Familiarity in the form of warm intros or college classmates or pattern recognition. The easiest pattern to follow for any investor without needing to do too much diligence or requiring too much personal conviction (I know, it’s funny), but to be able to write fast checks, is other top-tier investors. If you’re a founder who’ve fundraised before, you’re probably very familiar with this notion. Consciously or subconsciously. I’m gonna bet money that you’ve been asked, “Which other investors are you talking to? And how far along the process are you with them?” Or simply, “Do you have a lead investor?”
While there are some nuances to the last question, like the inability for smaller investors to pay for legal counsel fees, to have the resources to completely diligence a startup, or just that the check size required to lead/fill the round is just too large for them, generally speaking, my argument still stands. Put nicely, for many investors, they’re looking for external validation of the product. Put harshly, that question is a band-aid approach to their inability to get to conviction.
As a founder, you have to realize that capital has become a commodity. Investors are in the business of selling money. And subsequently, making $1 become $2. Or for a great early-stage investor, $1 becomes $5. There are many ways to underwrite risk. The one that requires the least amount of new thinking, or thought leadership, is following firms who have proven their investing acumen already and consistently.
*Additional context on family offices
I specifically mention family offices above since most LPs in Fund I’s are individuals and angels. Mostly small checks. And can quickly fill up the limit the SEC has set for how many accredited investors you can have investing in your fund. And their reason to invest is based on the founding GPs – very similar to why investors would back startups at the pre-seed stage.
While some GPs do pitch to institutional LPs (i.e. endowments, pension funds, fund of funds, etc.), very, very little institutional capital goes to Fund I’s and II’s – very similar to the fact that Tiger or Coatue very rarely invest before the A. You have yet to have a track record where they can fit into their financial model. They’re underwriting a very different type of risk. And so, if you’re a Fund I GP looking for larger checks, you’re looking to generational wealth in the form of family offices, who are surprisingly closed off to cold emails. But I digress.
The surplus of “signal” in 2021
In the last year, we’ve seen some record-breaking numbers. We’ve been in an exciting boom market. There have never been more venture dollars poured into the ecosystem. In fact, there were 1,148 concurrent unicorns in 2021. Half of which were new. In comparison, 2020 minted just 167 unicorns. Just looking at the two charts from Crunchbase below, we see just how crazy 2021 was.
And quite reflectively, there have never been as many “experts” in the market. To be fair, when everyone’s portfolio and/or startup is raising consecutive rounds of funding and mark ups are a dime a dozen, psychologically, I would also feel good about myself too. Everyone’s an “expert” in a boom market, especially if a16z or Tiger is leading the round. And a16z’s done double the number of deals they did in 2020. And Tiger’s invested 4 out of every 5 business days. In full disclosure, I did feel quite proud of myself as well. Nevertheless, I do my best to stay humble in this business.
Interestingly enough, while there were more seed, pre-seed and angel dollars going into startups, progressively, less startups were getting funded. Effectively, while the overall number of dollars invested look great, less founders come to bat. A smaller top of funnel means a more concentrated funnel in consecutive rounds.
The truth is fundraising will get harder over the next year and valuations won’t be as high. You can expect the current market correction in the public markets to soon be reflected in the private ones. So you may need to spend 12 months longer growing into your next round’s target valuation.
So where should investors look for signal?
In fairness, I am ill-equipped to answer this question for the masses. And most likely will never be fully equipped to make generalist statements. That said, I have and will continue to share what signal looks like for me. And if you’re a founder, here’s my template to conviction.
Two weeks ago, I broke down my sense of intuition around startup investing. I won’t go too deep in this essay, but I do share a more detailed internal calculus there. To put it simply, I look for different signals across the spectrum of idea plausibility and stages.
Signal by idea plausibility
Idea Plausibility
Key Question
Context
Plausible
Why this?
Most people can see why this idea should exist. Because of the consensus, you’re competing in a saturated market of similar, if not the same ideas. Therefore, to stand out, you must show traction.
Possible
Why now?
It makes sense that this idea should exist, but it’s unclear whether there’s a market for this. To stand out, you have to convince investors on the market, and subsequently the market timing.
Preposterous
Why you?
Hands down, this is just crazy. You’re clearly in the non-consensus. Now the only way you can redeem yourself is if you have incredible insight and foresight. What’s the future you see and why does that make sense given the information we have today? If an investor doesn’t walk out of that meeting having been mind-blown on your lesson from the future, you’ve got no chance.
Signals by stage
Stage of investment
Key Question
Context
Pre-seed
Why you?
The earlier you go, the less quantitative data you have to support your bet. And therefore, your bet is largely on the founder. For me, it matters less their XX years of experience, but more so their expertise. In other words, insight. Can I learn something new in my first meeting (and consecutive ones too) with them?
At the pre-seed, there is also one more key signal I look for in founders – their level of focus. Rather than wanting to do everything, can they streamline their resources to tackle one thing? What is their minimum viable assumption they have to prove before they can build their MVP (or MLP – minimum lovable product)? Startups often die of indigestion, not starvation.
Seed
Why now?
By the seed stage these days, you’ve either found your product-market fit or really close to finding it. The larger your round, the more you’re feeling the pull of the market. Whereas pull can come be measured (i.e. daily organic sign ups, demand converting to supply in a marketplace, etc.), sometimes when you’re at the cusp of it, there’s a level of foresight that is required. Some leading indicator for the business often comes as a lagging indicator from industry trends. What is the inflection point(s) (political, socio-economic, technological, cultural) we are at today that is going to have compounding effects on the business?
Series A
Why this?
By the time you get to the A, you’re ready to scale. In other words, what you mainly need is to add fuel to the fire. I place a larger emphasis on traction here. Admittedly for me, compared to the two earlier stages, this is more of a numbers conversation. The best founders here have a very clear picture of what worked and didn’t work for the business. They’re already familiar with their main GTM channel, but are exploring new opportunities for channel-market fit where they need capital to test.
Not incredibly pertinent yet, but founders will have started thinking about their Act II. What’s the next product they’re going to offer to secure their immortality in the market?
In closing
A simple litmus test I often share with founders on signal is:
Your ability to raise capital is directly correlated with your ability to inspire confidence in your investor that you will get straight A’s with little to no help.
This isn’t just true for myself, but also most investors out there. While the best investors out there will always be there for you in your time of need, before they decide to jump aboard the same ship with you, you need to convince them that you’re a top 10% founder. Or a top 1% in-the-making.
While I dislike using the dating analogy, it’s an apt comparison in this case. You’re not going to share your deepest, least desirable secrets on your first date. You’re also not going around saying you’re the perfect – and I underscore perfect – partner without any flaws. ‘Cause that’s as much baloney as an unknown African prince in your inbox telling you to help him secure $5 million in gold bars by helping him set up a Swiss bank account with a deposit of $10K. It’s too good to be true. In reality, you’re most likely going to share that you have a number of great qualities, but you’re still growing in many ways.
Admit what you don’t know or don’t have. As long as it’s not mission critical or the biggest risk in your business (and if it is, figure that out before you raise VC funding), the investors who truly believe in you will understand. Always err on the side of honesty, but not bravado.
‘Cause you yourself are a signal. If you’ve got your bases covered and still have to go out of your way to convince an investor or try to flip their “no”, they’re probably not worth your time.
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
