Month: November 2022

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How do You Know if You Should Professionalize as an Investor?

climb, grow, elevation

Last Friday, one of the greatest operators and super-connectors I know, who also moonlights as an angel investor, asked me: How do I know if I should professionalize as an investor?

Undeniably, a great question. But before I share my answer to her question, I thought it’d be best if I first elaborated on what “professionalize” means in this context. It’s a term we have used more than once here at On Deck Angels. And as a result, it has spilled over into the vocabulary I use even outside of venture. But in the context of investing, professionalize is where one would go from an amateur, part-time investor to a full-time investor. Either working at a fund, starting their own syndicate or fund, or as a full-time angel.

The thing is, to be a career startup investor, you have to be lucky. The capital required to have a seat at the poker table is high. While there are many platforms — from Republic to Wefunder to Titan Invest — that are working to democratize access, the truth, for now, still is that to access the best deals, you’re either lucky as a network leader or as a capital allocator. In other words, do you know the best and most entrepreneurial talent? And do you have a frick-ton of money?

And given that some element of luck on top of skill is table stakes, I felt the best response I could give wasn’t in the form of a statement or opinion, but in the form of five questions.

  1. Why do you invest? What compels you to continue investing?
  2. What are two positive adjectives you would use to describe your sibling*? What are two negative adjectives you would use to describe your sibling*?
    • *Or life partner, or someone you know really really well.
  3. Have you ever laid someone off and regretted it? Why did you regret it? And at point after the event did you notice your regret?
    • If not… as an investor, have you ever said no to a founder and regretted it? Why did you regret it? And at point after the event did you notice your regret?
  4. Of the five people you hang out with most, what are common traits that at least two of them have? List as many as you can.
  5. If you were to start a fund or syndicate tomorrow, what would you call it?

So before you keep reading, I would recommend pausing. And to pull out a notepad and jot your own answers down to the questions above. It’s a useful exercise I ask myself, and evidently others as well, if you’re looking to professionalize as an investor.

When you’re ready, keep reading beyond the below image, as I’ll share my rationale behind the above questions.

*Author’s Note: Effectively, I was trying to space out the questions from the rationale of why I ask them below as much as I could, so that the below text wouldn’t influence your thinking (if you plan on doing this exercise).

windy road, path, goal
Photo by Adelin Grigorescu on Unsplash

So, why the five questions?

  1. Motivation – Why are you an investor? The underlying motivation matters. Are you in it for money? To pay it forward? To prove someone or some notion wrong? How fleeting is your motivation? Raising a fund is a decade-long relationship. Raising three is two-decades long of a relationship. So, the question is how deep is your motivation. Can it last multiple decades?
  2. Strengths/weaknesses – This question is adapted from Doug Leone’s. People often describe others in comparison to themselves. For example, if I say Joanna is funny, by transitive property, I believe Joanna is funnier than I am. If I say Kai is smart, I believe Kai is smarter than I am. I often find this question to be much more useful in understanding a person than just asking for their strengths and weaknesses. After all, adjectives are, by definition, comparative words.
  3. Standards – This question is a riff on Matt Mochary’s. If your answer to the question is no, then you don’t know your bar for excellence. Why does your bar matter? There’s a saying that A-players hire other A-players because they know just much it takes to win. B-players, on the other hand, know they’re not as good as A-players, but on average, still want to feel superior, so they hire C-players. A-players can stand B-players, but can’t stand C-players. So eventually, the A-players leave your company. Why does this matter for an investor? You need to be able to differentiate between an A-player and a B-player. The difference between a great founder and a good founder is a fine line, and most people miss it. If you want to have a chance at being a top decile investor, you need to know. After all, people often learn more from loss than from gain. For the second part of the question, being a great investor — or to be fair, a great anything — is all about the velocity in which you learn. Speed and direction.
  4. Deal flow – This question is a proxy of where you’re going to the majority of your early deal flow, and likely who and where you’re connected the most with. The follow up would be do you get enough quality deal flow from people with these traits. In other words, if you had the capital, are you confident you could put at least $250K to use every quarter? If not, stay a scout or raise a syndicate instead of a fund. Until you can build up to this.
  5. Legacy – Building a fund is multi-generational. Just three funds would be a 20-year relationship. And the best funds often outlive the founder(s) themselves. So the biggest question here is what kind of legacy are you trying to build? Or are you trying to build one? This legacy, founded upon your values, determines how you plan for succession and who you raise to be your firm’s next leaders.

In closing

Of course, the five questions aren’t an end-all-be-all. There’s still the ability to think through fund strategy and portfolio construction. There’s fund admin. The back office. Tech stack. Picking strategic markets where you have an unfair advantage. That said, if you can answer the above questions well, you’ll have a compelling narrative to either fundraise from LPs or join a larger fund.

Cover photo by Hu Chen on Unsplash

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, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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#unfiltered #73 The Risks and Opportunities Created By Compelling Narratives

“If you look at all big human achievements, like flying to the moon, for instance, it’s all based on large scale cooperation. How did humans get to the moon? It wasn’t Neil Armstrong flying there by himself. There were millions of people cooperating to build the spaceship, to do the math, to provide the food, to provide the special clothing, and the funding.

“The big question becomes: why are we capable of cooperating on such a large scale when chimpanzees or elephants or pigs can’t?

“It’s the ability to invent and believe fictional stories.”

Yuval Noah Harari is right. He shared the above thoughts in a Startalk episode that came out yesterday.

For any big achievement, and I’m specifically reminded of the recent news with FTX — for FTX to get as large as it did at its peak — it was a monumental achievement. It was the work of many, rather than a single individual. It was the result of many buying into this narrative that Sam Bankman-Fried shared. That includes his team. His customers. His investors, from Sequoia to Tiger to Softbank to Coinbase. Many of whom are smart people who gave into the velocity of the market the last two years.

Source: Sequoia article on FTX
While I’m not sure how I feel about founders playing games during the meeting, I can’t deny the vision isn’t compelling.

To be fair, and this is not to condone the wrongdoings of the FTX team, every founder’s job is to distort reality. To put the human race on a fast track towards a future that is non-fiction to the founder, but fiction to everyone else. A world that isn’t false, but has yet to come. As author William Gibson once said, “The future is already here — it’s just not evenly distributed.”

I also love the thesis of Alexia‘s fund, Dream Machine. We make science fiction non-fiction.

Founders pitch their answer to: What will the world look like? Investors, customers, and talent then make bets with their time and money on which future they would like to see happen and the likelihood of it happening.

FTX is no exception. The fine line is when a founder does get creative, it is imperative for them to have a moral compass, which seems like SBF didn’t have. And of the million and one things they’ve done wrong (no board, giving loans using customer money, fraud, etc. and some more that are more questionable in nature, like political donations, etc. — none of which from what little I know are things I would ever endorse), I have to say they nailed their marketing and messaging. They got a lot of people excited about it fast. It’s easier to get people excited about the future of money than the future of fintech or the future of crypto.

As Jason Lemkin points out, they nailed their website.

The Super Bowl ad

The past week has been an insane week for crypto, namely when FTX filed for bankruptcy. And while there are many different angles to it, I took it upon myself to revisit a podcast episode from two months back where Nathaniel Whittemore, FTX’s former Head of Marketing, shared his marketing insights. Namely, around their 2021 Super Bowl ad.

A Super Bowl ad two years since its founding date. If nothing else, that’s impressive. Moreover, they got Larry David who has been known to never appear on ads to do it for them.

But what I found to be very powerful is Nathaniel breaks down why they chose to do a Super Bowl ad in the first place:

“People always focus on how much [an ad] costs. ‘This ad costs X.’ Which in a vacuum seems so high. […] What I think that analysis doesn’t take into consideration:

  1. “The number of people actually watching those ads. If you’re gonna get X people with an ad that costs a $100,000, but then, 50x that with an ad that costs $5 million, that’s the same ratio.
  2. “But the more important piece is that at least in America, the Super Bowl is the literal one moment each year that people not only are not annoyed with ads, but it is an active part of the experience that they’re having and they’re excited.”

He also does caveat that it doesn’t mean a Super Bowl is good for every kind of marketing campaign. But more so for brand-building, as opposed to product marketing or lead gen.

To echo that, David Sacks wrote a great piece on the importance of having an operating philosophy which I’ve referenced on this blog before. In it, he finds it incredibly powerful for companies to aggregate product updates and marketing campaigns in four big “lightning strikes” (each quarter) rather than have tidbits of information floating around every week.

Of course, companies like Twitch, Salesforce, Apple, and Google have taken it a step further by having a large launch event once a year. As Sacks mentions, “It’s not just about the external marketing value. There’s a huge internal benefit from setting dates and deadlines in order to hit a public launch.” It drives excitement and a narrative that both customers and future customers, as well as team members can get behind. The world is waiting. Your team is shooting to meet and beat expectations. And that’s incredibly motivating.

What does this mean for the crypto narrative?

A friend who took a hit from the recent series of events asked me at dinner last night, “What does this mean for crypto?”

Of which I think Yuval does a better job explaining it than I could. In the same podcast episode, he explains, “Not everybody believes in the same god or in any god. But everybody believes in money. And if you think about it, it’s strange because no other animal even knows that money exists. If you give a pig an apple in one hand and a pile of a million dollars in the other hand, the pig would obviously choose the apple. And the chimpanzee the same. And the elephant.

“Nobody, besides us, knows something like money exists in the world. The value of money doesn’t come from the paper. Most of the money in today’s world is not even paper; it’s just electronic data moving between computers. So where’s the value from? It’s from stories we believe.

“We are at risk of the whole thing collapsing. It happens from time to time in history. Inflation to some extent is that. The value of money is not what we were told it is. And inflation can sometimes hit thousands of persons and millions of persons. Eventually, the money becomes worthless.”

I don’t personally believe crypto will become worthless at any predictable point in the future. In fact, I think it has a great future ahead. Just a little early for its time from an infrastructure perspective. But, it is a non-zero possibility. That said, the more institutions, especially larger ones like FTX, that use crypto as the currency of faith, collapses, the more the faith behind the story of crypto will waver. And with repeated bad players, it is a race between mass adoption and the rate faith deteriorates.

For as long as the exchange currency is in dollars, crypto has still yet to be widely adopted. For instance, the value of crypto is pegged as a function of the dollar. As of the day I’m writing this on November 16th, 2022, if you type in bitcoin in Google search, the first search result is that Bitcoin is worth 16,768 US Dollars. In other words, as long as crypto is measured in dollars, the story of the dollar is stronger than that of crypto.

In closing

I’m not here to share my latest scoop or an update on the current situation about FTX. Twitter is filled with these already. Plenty of smart individuals have already covered all the ground I would ever even think about covering. I don’t keep my finger on the pulse of crypto and FTX nearly as much as my friends and colleagues.

Really, the purpose of this blogpost is really my curiosity that in order for FTX to get the notoriety that it has today, the team must have done something really well. And in my eyes, it’s not the product or the business, but the narrative in which they built. So, if someone at HBS or GSB isn’t writing a case study on this, they should.

P.S. Had to pass this to two friends at 6AM this morning to see if this blogpost was even worth publishing. Bless their hearts for their support so early in the morning.

Cover photo by Dollar Gill on Unsplash

#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, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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How to Win Hot Deals

hot, spicy, chili, pepper, deal

Two weeks ago, in an On Deck Angels workshop, one of our community members asked: “What do you recommend to do to increase access to allocation and top-performing deals?” To which I responded briefly with my belief that investors should always try to win their right on the cap table — whether it’s in the current round or the next. And, there are four ways to win that right:

  1. Go early.
  2. Being a valuable asset to the company.
  3. You are never too good to chase the best.
  4. Get to know the lead investor. Specifically, in their mind, be different.

As a footnote to all this, Founder Collective did a study a year or so ago where they found the 30 most valuable companies in the world raised half as much and were worth 4x the 30 most funded companies in the world. So, while hot rounds are great and all, there’s no telling that they’ll be the most valuable companies in ten, even five, years’ time. All that to say, I realize I’m writing this blogpost in a down market — likely only a few quarters of many more before we see the end of this recessionary period. The truth is, there are probably not as many hot rounds as there are before. But they still exist. And as an investor, you want to be ready for when that happens. While you set yourself up to have a prepared mind for getting picked, focus on picking.

To take a deeper dive on getting picked…

Just like it’s important for a founder to find product-market fit, it’s equally as important for an investor to find investor-market fit. Think of your check or your vehicle as a product in and of itself. As an investor, you are either great at picking or great at getting picked or both. For the purpose of responding to the above question, I’ll focus on the latter — getting picked.

It’s a three-sided marketplace where your customers are your LPs, founders, and your co-investors. Of all the above, to be fair, LPs loving you doesn’t necessarily get you better access to deals, so we’ll save that discussion for another day. And while there are many factors to getting picked, it boils down to two things:

  1. Founders love you
  2. Co-investors love you

In both scenarios, you get proprietary access to deals. As Sapphire’s Beezer said, “‘proprietary deal flow’ is not really a thing.” Proprietary access, on the other hand, is a thing.

Lenny Rachitsky and Yuriy Timen put out a great piece on activation rates recently. In it, there’s one line I particularly like, when they defined the activation metric:

“Your activation milestone (often referred to as your ‘aha moment’) is the earliest point in your onboarding flow that, by showing your product’s value, is predictive of long-term retention.”

The product, your fund or check. Retention, how likely they are to keep you on their speed dial (for a particular topic or function). And there are two distinct qualities of a great activation metric: “highly predictable” and “highly actionable.”

  • Highly predictable: The founders know exactly what they can get from you. The value you give isn’t vague, like “we invest in the best early-stage founders.” a16z can afford to say that. You can’t.
  • Highly actionable: Knowing what value founders can get from you, they know the exact types of questions to ask you to best extract that value.

The earlier you are in your investing journey, the more obvious you should make the above.

Taking the product analogy in stride, how do you get to a point where your customers get to your activation milestone? Where they form a new habit around keeping you top of mind?

How do you get founders to love you?

In my mind, there are two ways we can measure if founders love you:

  1. For founders you’ve invested in: If they answer with your name to “If you were to start a new company, who are the first three investors you would bring back to your cap table?”
  2. For founders you haven’t invested in: You get (great) deal flow from founders you passed on.

Tactically, in combination with being predictable and having your value be actionable…

Go early. Be the first check in when they’re still non-obvious. This of course requires a combination of luck and conviction. The latter is more predictable than the first. Be bullish when others are bearish.

Being a valuable asset to the company. Founders have 2 jobs: (a) make money and (b) hire people to make money. As an investor, everything you do is directly or indirectly involved in that. Also, when a founder fundraises, I would ask them what they plan to do with that money (i.e. hire VPs, more engineers, scale to X # of customers), and see if you can be preemptively helpful there.

You are never too good to chase the best. This is something that I picked up from a Pat Grady video some long while back. But to win the best deals, you go to where the founders are, don’t expect them to come to you. That’s how Sarah Guo, Pat’s wife, won a lot of deals that Sequoia wanted to get into.

How do you get co-investors to love you?

The best way to measure this is your co-investors proactively invite you to invest in future deals together.

The best way to get there is to:

Get to know the lead investor. Specifically, in their mind, be different.

Their lead investor might have a large portfolio where they can’t be as helpful to every investment they make. Try to squeeze in the round and be insanely helpful to their/your portfolio. And over time, as you co-invest in more deals, they’ll keep you top of mind for future ones.

For this one, it pays not to be generalist. I don’t mean as a function of industry but as a function of how you add value to your portfolio. Someone who can do everything is less desirable than someone who is really good at just one thing. Say, hiring executives or getting FDA approval or generating PR buzz. Interestingly enough, responsiveness is also a differentiator. I heard an investor say recently that the value of an investor is determined not by what happens during the meeting, but in between meetings. And I completely agree. The cap table doesn’t need another investor. The cap table needs people who will increase the chances of the company’s multi-billion dollar outcome.

The takeaway here is to not be better, but to be different. People can’t tell better, but they can tell different. That’s why the word differentiated is used so much. Have a differentiated approach. Have a diversified portfolio. On the other hand, having a better generalist strategy than a16z or Sequoia is hard to measure. While it may be true in the long run, better is difficult to measure in foresight, but obvious in hindsight. Just like product-market fit. Hard to pinpoint in the windshield, but obvious in the rearview mirror. It’s better to be the in a pool of one than a pool of many. Be the one CEO coach. Be the one who helps founders build robust communities. Or, be something that no one expects. Like Charlie Munger, be the best 30 second mind in the world.

Another reason I left this in the co-investor love section is that while being different does help you stand out to founders, there seems to be a lot more logo chasing from founders. Differentiation, unfortunately, falls short of brand recognition. I genuinely hope that this does change in the next few quarters.

In closing

While the question that inspired this blogpost is meant for hot rounds, the same holds for just being a great investor. One thing I’ve told many applicants to On Deck Angels is that we look for folks who are excited about putting investor on their resume and is willing to put in the legwork to become a great investor. The above is one of many paths to become one.

Arguably the above is how to be a great champion of people. The investor part comes with luck and having an eye for great talent, ideally before others. Betting on the non-obvious before they become obvious.

The best startup investors are disciplined and constantly learning. Some might argue that they may not have the time to entertain hot startups in general. Or at least startups when they are hot.

Photo by Pickled Stardust on Unsplash

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, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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