Folks coming out of school and/or are still in school often ask me how they should break into venture. It’s surprisingly a timeless question. The goalposts change every era. And as the signal-to-noise ratio and regression line oscillates in bull and bear markets, young professionals chase a moving target.
That said, while my opinions will likely change when the facts change, as of now, this is my best proxy for a timeless answer. Market risk versus execution risk.
Let me elaborate.
Early in your career, you should take market risk. Bet where others are not willing to bet. Or have the same starting point as you do. If the starting line is even, it’s all about how much faster you can run compared to your peers. And if you can outlearn them, ideally because of internal drive and motivation, you’ll be the incumbent in the space in the future.
Execution risk is what you pursue as you grow. Your network, your expertise, and your experiences make you a more robust executioner. You’re an incumbent. You’re a juggernaut. There’s no reason to focus on this risk when you’re younger because you don’t have an unfair advantage here. In fact, you have an unfair disadvantage. Others more senior to you have a better network, more expertise, and have done more reps than you have.
Steve Jurvetson recently shared the only rule of business that is inviolate. “Take any company that is large or top three in their industry. They will never lead the charge to disrupt that industry.” He goes on to say, that even in recent years, Google didn’t fight to change search until OpenAI. Apple is innovative outside their core business, but never in their core business. So as a result, innovation needs to come from the bottom. People who are willing to take market risk.
Similarly, in venture, as a young VC, you need to build your own thesis. For as long as you are investing on the basis of someone else’s thesis, you are competing on execution risk. And every VC who’s older, wiser, and more connected than you are on that thesis will out-execute you.
So… the risk you have to take is betting on a brand new thesis. That no one else is pursuing. No one else is investing by it. And that… is market risk.
The above is no less true if you’re an emerging GP. Your fund lacks the resources, likely the connections, the experience, the talent, and the ability to out-execute your incumbent on your incumbent’s thesis. The solution is to just not play when they have the home field advantage.
It’s why thesis and the question “Why does another venture fund need to exist?” matter so much to LPs betting on new fund managers.
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!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
There was a fascinating episode on the Tim Ferriss Show recently, where we get the inside baseball on how David Maisel, founder of Marvel Studios, raised half a billion on a promise for a company who’s public market cap at the time was only a fifth of a billion. Naturally, not only was he against a lot of headwind externally, but internally as well. According to the board at the time, they would only greenlight the idea of producing their own films (as opposed to licensing their IP out) if “Marvel had no risk. Not little risk, but no risk.”
On the cusp of Captain America and Thor being licensed away, David asked the board to give him six months. The “zero risk” pitch then came in the form of external funding, huge financial upside (if things worked out), market timing, and a promise.
Financial upside for Marvel
As David puts it:
“First to my board, the argument, was if we own our own studio, it means we get the full financial upside that they understood very well.” As opposed to licensing, their traditional business model. Where Marvel only got five cents on every dollar of profit. As was the case with SONY and Spiderman.
“Number two, we decide on greenlight when the movies get made that they also understood because they only sold toys really at the time, and the toys were contingent on a movie, which they then control the timing. Now when you’re doing a public company and you’re giving guidance every year, how can you give guidance if you don’t even know what movies are going to get made? And so controlling greenlight was important, full creative control.”
Moreover, the team was able to take 5% of revenues as the producer fee AND keep all non-film revenues (i.e. toys, video games, etc.). And even if four out of the five films lost capital, they’d still make $25M in revenue each. In other words, $100M in sum. Half of Marvel’s public market cap at the time. Whose cap was only based on toy sales.
Market timing
“The bond bubble of 2004 was happening,” as David shared, “so it was a time where there was loans being made that shouldn’t have been made. And a lot of people were enamored with Hollywood as they get enamored every few years.”
Zero downside
Instead of funding the studio off balance sheet, David would go out to fundraise from others. So what was the external pitch?
“Give me four at bats, and if one of them hits, then every movie’s a sequel after that.”
On top of all the above, to me, there were some interesting terms for the investment that helped sweeten the deal:
Merrill Lynch got a 3% success fee upon the $525M closing.
David got a low interest rate loan from Merrill by getting it insured by MPAC, therefore the debt became AAA debt, which “was easy to sell to pensions and easy to sell to individual investors” in case things went awry.
Now I’m not sure if this is standard Hollywood practice. But I imagine it’s not, at least back in ’03 and ’04. I’m a venture guy after all. And as one, the above is news to me.
That said, the banks David went to fundraise from were not taking equity. It was “pure debt. So very low interest rate. And the only collateral were the film rights to ten Marvel characters of which we could make for the movies.” Which, to me, ten characters sounds like a lot for a company whose business is characters. I also imagine these were characters that had some level of historical fanbase, so they weren’t random ones from the archives.
But David clarifies. “A lot of people misunderstand that they think we pledged ten of our characters as collateral. It wasn’t that at all because in the worst case scenario, it only got collected if we lost money on those first four movies. And then those six characters, we owned all the rights besides film. And if a film was ever made by the bank, whoever collected this collateral, we got the same license fee that we get if we just license it that day to a party. So there was no opportunity cost.”
And the promise
This is history now, but at the time, was a bold claim. The idea was borne out of frustration as an entertainment investor. That:
Marvel couldn’t capture a large part of enterprise value through productions with just licensing
The first movie business was horrible. Sequels, on the other hand, were a lot more predictable. So, the focus after the first movie would not be on predicting profit, but maximizing profit margins.
So David had a thought. “What if after the first movie, every movie after that was a sequel or a quasi-sequel, which required all the characters, or a lot of the characters, to show up in multiple movies?”
The idea of sequel snowballed into what we now know as the MCU — the Marvel Cinematic Universe.
Bringing it back to venture
It’s a nice corollary to raising a Fund I, where you’re also selling a promise. A world vision. A painting of the future. Nothing’s proven yet. You’re sure as hell not selling a repeatable strategy yet, and definitely not any returns. Since there’s a good chance you haven’t returned capital to LPs before.
And this is true for not just funders, but also founders. In the words of Mike Maples, “Breakthrough builders are visitors from the future, telling us what’s coming. They seem crazy in the present but they are right about the future.
“Legendary builders, therefore, must stand in the future and pull the present from the current reality to the future of their design. People living in the present usually dislike breakthrough ideas when they first hear about them. They have no context for what will be radically different in the future. So an important additional job of the builder is to persuade early like-minded people to join a new movement.”
Dissent is a luxury
The truth is loads of people will disagree with you. You’re not looking for consensus. In fact, it’s better to be wrong and alone than right and with the crowd if you’re in the venture world. Either as a founder or an emerging GP. It’s something I recently learned from the one and only Chris Douvos. If you imagine a 2×2 matrix… On one axis, you have right and wrong. On the other, you have with the crowd and alone. You want to be in the right and alone quadrant for sure. That’s where “fortune and glory” exists. It’s where alpha exists. It is how you become an outlier and achieved outsized returns.
But the prerequisite to be there is to have the guts to start in the wrong and alone quadrant. If you start from being right and in the crowd, you’re one among many. And that doesn’t give you the liberty to have independent thinking. You’re constantly trapped in noise.
It’s as Abhiraj Bhal says. “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” You want people to question you. And as humans, we like to fit in. But to create something transcendent, external doubt is your best friend.
As such, your promise of the future must seem bizarre.
Don’t start with the product, start with your customers
When you have a promise, admittedly, the easiest way is to start engineering it right away. Without market validation. Without stress testing. Which pigeonholes a number of founders. I forgot the origination, but there’s a great line that says, “The only difference between a hallucination and a vision is that other people can see the latter.”
And in order to test that, you need to get in front of potential users and customers first. Max, someone I had the joy of working with, once wrote the below timeless tweet:
My hot take of the day:
Most aspiring startup founders who think they should learn to code would be better off learning to write well instead.
As Elizabeth once shared: “We decided that we’d start with no product. We would not build anything. And, we just started selling ads. We manually brokered deals with publishers and advertisers and took a cut in between. We got our customers by emailing people and setting up the copy and links ourselves. People would pay me through my personal PayPal account. It was only when we realized we were onto something that we started building technology to remove bottlenecks.”
On the investor side, it’s building a thesis where great investments fall into. It’s a way of looking at the world in a perspective that may seem foreign to others, but almost obvious in retrospect. The thesis should elicit the response, “Why didn’t I think of that first?” But no matter how obvious, you are the best positioned to bring the thesis to life. That doesn’t mean you need returns yet. Although good graduation rates certainly help as a leading indicator.
In that regard, it’s quite similar to how David Maisel foretold of the Universe to come. Obvious once explained, yet still met with resistance from legacy players.
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!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
A friend trapped in his own tumultuous schedule recently reached out to ask how I seemingly effortlessly manage my bandwidth. For starters, I try, but even I get swamped. And I’m sure people I’ve worked with closely can corroborate. So if anyone has a better way, I’m all ears.
That said, as I mentioned, I do try. And naturally, that means I think about balancing my plate a lot. From shower thoughts to systems to keep me accountable. I’m going to share below the four things I shared with him, in hopes you’ll find some use for your own life here.
I have a whiteboard in my shower. (Although, you might remember I mentioned this before.) In a list format in the top right corner of the board, I write down everything I’m involved in, especially the ones that require my attention. This way, everything is always floating around somewhere in the back of head. And when I shower, I take the one I’m most excited about ideating and just let the kids run wild in the attic.
I like asking myself the question: What would I do if I knew I would fail? And subsequently… what skills, relationships, and experiences can I gain that would transcend the outcome of the project itself? With those two questions, it helps to take the emotion out of the equation and consider it rationally. Which helps in arriving at a decision that I won’t regret. And naturally since I have a pretty high bar with what I choose to embark on, that does mean I say no to a lot of things.
Work with people who are as passionate or more passionate than you are about the project or subject matter. You also want to work with people whose passion is independent of yours. For instance, if they’re only doing a project ’cause you’re excited about it, the lack of internal motivation, I’ve found, to be draining over time when I work with someone who isn’t intrinsically motivated to put in their all. It also ensures that if on an odd day out, I’m just 30% as motivated as I am usually, they come in with at least 70% of their motivation. And as long as the collective motivation at any given point in time is greater than 100%, we keep working on it.
Lastly, I categorize activities and projects by how often something requires my attention. Some things require my attention daily. Others weekly. A handful of others biweekly. Or monthly. Or quarterly. A few annually (like taxes, ughhh). And at any given point in time, I will have no more than two items/projects per bucket. For instance, I will have no more than two pressing things that require my attention daily. And so yes, I’m context switching. But not nearly as much as one might think. The caveat is that when an activity becomes muscle memory and requires very little thinking to execute (i.e. exercise, brushing your teeth, showering, journaling, or so on for me), then that activity/project no longer counts toward its respective bucket.
#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!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
This is an addendum to the blogpost I wrote back in April of this year. Catalyzed by something Seth Godin recently shared. Which led me down a rabbit hole, and eventually to this sequel.
Seth Godin shared some fascinating perspective recently. “Turnover is a good thing when we are doing human work, not a bad thing. And what I would do if I was running a real company is I would say the first thing you’ve got to do on your first day is update your LinkedIn page and keep it up to date. And we’re going to have a resume job finding seminar every two weeks here. I don’t want you to stay here because you can’t get a better job. I want you to stay here because the conditions we’ve created, the work we are doing is worth you staying here for. And then I would listen.
“If I’m not creating the conditions where the people who I need to be dancing with want to stay, I have to change the conditions, not curse the people who are leaving.”
Which reminds me of a great Jerry Colonna dictum, “How am I complicit in creating the conditions I say I don’t want?” While the line is meant to be applied to an individual’s own awareness of how their environment is partly a product of their own design, it is equally as powerful in organizational design. Have you created an environment that lends itself to turnover? Is that by intention or lack thereof?
While I’m not urging founders to be less disciplined with their burn rate, Precursor’s Charles Hudson found one interesting piece of data recently. He wrote, “You cannot save your way to success. Our portfolio companies that graduated from pre-seed to seed typically spent more per month than those that failed to graduate. This result was consistent with what I’ve observed; the companies finding product-market fit spend more to keep up with growth and customer demand.”
While the above may be true when you graduate from the pre-seed to the seed, by the time you get to the A, it’s about securing great talent.
But let’s say your star talent has left (meaning that they passed the equivalent of Netflix’s Keeper test or any of these other culture tests). The one thing you DO have to be wary of is the morale of those who stay. Has your team members leaving broken the morale of the company? How fast can you get the team to bounce back?
To set some context, Frank Slootmandefines winning as breaking the competitors’ will to fight. “In a world of software, you break the enemy’s will to fight when you are hiring their people because they have given up. They’d rather be with you than they are with the other company, because it’s too hard and too painful and they’re not making any money. So, ‘I’m going to join the winner instead of stick with delusion.'” And in Bezos’ words, “when the last person with good judgment gives up,” your team’s will has been broken.
Each team member leaving has a non-zero chance of creating this snowball effect. As the founder, maintaining culture and momentum is important. As Bob Iger once said, “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” In my experience, the first of the three is often far less obvious to first-time founders than the latter two.
So how does one maintain internal satisfaction?
The truth is there’s no one right answer. So, instead, I’ll share some tactics I’ve seen work well.
The last day for someone should be on Friday. It gives teammates the weekend to unwind and doesn’t affect their work ethic in the weekdays immediately after.
Set up 1:1 time with all their direct reports and who they reported to (if the latter person isn’t you) within the week after that person’s last day. While the obvious next steps may be to figure out the new chain of command and reporting structure, the first conversation you have with them should be about how they’re feeling and not about company goals. And have an honest, unfiltered conversation here. Which also means you need to share how you’re feeling as well. Don’t sugarcoat anything. Smart people see through lies very easily.
Offer each direct report to that person a mentor. Either internally in the company or externally. For the latter, there is immense value in helping your team member grow and getting an advisor or someone in your network you respect to get more involved in the company through monthly/quarterly mentorship.
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!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Surprisingly, last week was the first week I’ve gone to multiple events for a given conference. Also I’m using the word “conference” very loosely here since I’m counting a tech week as one. What started off as ‘I’m going to support just one friend,’ ended up being a slippery slope, and supporting many friends, and catching up with friends in town. I mean, c’mon, how do you not at least say hi to a friend who’s flown from NYC or Miami? Perks of being bad at saying no.
That said, for the founder focused on getting to product-market fit, or actively fundraising, or the GP fundraising, your time is better spent elsewhere. But if you’re exploring and trying to increase the surface area for luck to stick, these events are great. So many fun, interesting ideas floating around.
Eight quick takeaways, before I go back and I let you go back to the rest of your week:
For VC/founder events, most attendees are founders. Smaller VCs went to the GP events. Bigger VCs just host their own.
For LP/GP events, most attendees are GPs. Went to an event of this type, and I kid you not, only met 2 LPs out of 15 people I chatted with. The rest were GPs. The folks you would like to show up at VC/founder events would rather pitch than to be pitched.
Interestingly enough, for the events that have a good proportion of LPs, most don’t seem to be investing in emerging managers. Anecdotally, have heard three of my friends who are individual LPs get turned down from LP events during SF Tech Week.
Smaller funds seem harder to raise than larger funds.
US large family office and institutional LP market is drying up. Most have overextended to buyouts and still need therapy for being burned in 2020 and 2021. For those that haven’t, they’re resorting to intros from friendlies.
Hosting your own events gives you better bang for your time than attending events.
And as one would suspect, AI dominates 70-80% of conversation.
Investing in unsexy industries is sexy. New moniker is to invest in industries where either 1/ people have scruffy beards or unkempt hair or 2/ meetings that require suit and tie.
Stay awesome, friends!
#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!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Voila, the fourth installation of 99 soundbites I’ve been fortunate enough to collect over the past year. The first four of what I imagine of many more to come. Each of which fall under one of the ten categories below, along with how many pieces of advice for each category:
You can also find the first three installments of 99 pieces of advice for both founders and investors here. Totaling us to a total of 396 pieces of advice.
But without further ado…
Fundraising
1/ If you’re an early stage startup, expect fundraising to take at least 3-4 months to raise <$1M. If you’re on the fast side, it may take only 2 weeks. – Elizabeth Yin*timestamped April 2022
2/ If you’re going to raise a round over 6-12 months, it often doesn’t seem fair that your first commits have the same terms as those who commit 6 months later, since you’ve grown and most likely have more traction at the time. As such, reward your early investors with preferred terms. Say you’re raising a $1M round. Break the round up to $300K and $700K. Offer a lower cap on SAFEs for the $300K. “Tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs. And that the cap will most likely go up after that.” Why? It lets you test demand and the pricing on the cap – to see if you’re cap is too high or too low on the first tranche. – Elizabeth Yin
3/ As a startup in recessionary times, you have to grow your revenue faster than valuations are falling to make sure you raise your next round on a mark up. Inspired by David Sacks and Garry Tan. *timestamped April/May 2022
4/ There’s only going to be 1/3 the amount of capital in the markets than in 2020 and 2021. So plan accordingly. If you’re not a top 0.1% startup, plan for longer runways. Fund deployments have been 1-1.3 years over the past 1.5 years, and it’s highly likely we’re going to see funds return back to the 3-year deployment period as markets tighten. *timestamped May 2022
5/ B2B startups that have the below disqualifiers will find it hard to raise funding in a correcting venture market:
No to little growth. Good growth is at least doubling year-over-year.
Negative or low gross margins. Good margins start at 50%.
CAC payback periods are longer than one year.
Burn multiples greater than 2 (i.e. You’re burning $2 for every dollar you bring in). A good burn multiple is 1 or less. – David Sacks
6/ Beware of “dirty term sheets.” Even though you’re able to get the valuation multiple you want, read the fine print for PIK dividends, simple “blocks” on IPO/M&A, and 2-3x liquidation preferences. Inspired by Bill Gurley.
7/ “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.” – Sabeer Bhatia in Founders at Work
8/ In a bear market, public market multiples are the reference points, not outlier private market multiples. Why? Public market multiples are their exit prices – how they return the fund. It matters less so in bull markets. – David Sacks
9/ Don’t trust the “why”, trust the “no.” Investors don’t always give the most honest responses when they turn down a company.
10/ If you inflate your projections, the only investors you’ll attract are dumb investors. They’ll be with you when things are going well and make your life a living nightmare when things aren’t, will offer little to no sound advice, and may distract you from building what the market needs. By inflating your projections, you will only be optimizing for the battle, and may lose the war if you can’t meet or beat your projections.
11/ VCs will always want you to do more than you are pitching. So if you’re overpromising, they’re raising their expectations even more down the road.
12/ Five questions you should answer in a pitch deck:
If you had billboard, what 10 words describe what you do?
What insight development have you had that others have not?
How you acquire customers in a way others can’t?
Why you?
What you need to prove/disprove to raise next round? – Harry Stebbings
13/ The longer you’re on the market, the greater the differential between expectations and reality, and the harder it is over time to close your round. Debug early on in the fundraising process (or even before the fundraising process) by setting and defining expectations through:
Leveraging market comparables. You don’t have to be good at everything, but you have be really really amazing at one thing your competitors aren’t. It’s okay if they’re better than you in other parts.
14/ You should reserve 10% of your round to allocate to your most helpful existing investors. Reward investors for their help. – Zach Coelius
15/ If your next round’s investor is willing to screw over your earlier investors out of pro rata or otherwise. After they leave, the only one left to screw over is you. – Jason Calacanis
16/ “Nobody’s funding anything that needs another round after them.” – Ben Narasin quoting Scott Sandell
17/ “When a VC turns you down for market size, what they are really saying is: I don’t believe you as the founder has what it takes to move into adjacent and ancillary markets well.” – Harry Stebbings
18/ When raising from corporates, be mindful of corporate incentives, which may limit your business and exit opportunities. “I’ve often seen the structure just simply be a SAFE with no information rights. No Board seats. Check sizes that are worth < 5% ownership. No access to trade secrets.” – Elizabeth Yin
19/ LOIs mean little to many investors, unless there’s a deposit attached to it. A customer must want the product so much they’re willing to take the risk of putting money down before they get it. 1-5% deposit would be interesting, but if they pay the product in full, you would turn investor heads. – Jason Calacanis
20/ “The most popular software for writing fiction isn’t Word. It’s Excel.” – Brian Alvey
21/ “Ask [prospective investors] about a recent investment loss, where the company picked someone else. See how they describe those founders, the process, and what they learned. This tells you what that investor is like when things don’t go their way.” – Nikhil Basu Trivedi
22/ “Founders, please hang onto at least 60% of the company’s equity through your seed raise. Series A or B is the first time founder equity should dip below 50%. I’ve seen cap tables recently where investors took too much equity early on, creating financing risk down the road.” – Gale Wilkinson
23/ “One of the worst things you can say to a VC is ‘we’re not growing because we’re fundraising.’ There are no excuses in fundraising.” – Jason Lemkin. Fundraising is a full-time job, but when you’re competing in a saturated market of attention, it’s you who’s fundraising, but not growing, versus another founder who’s also fundraising and is growing.
25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):
Pre-seed: $750K-1.5M round
Valuation: $5-10M post (*She would not go over $7M)
Traction:
A working MVP
Indications of customer demand = have interviewed hundreds of potential customers or users
2-5 “Design Partners” (non-paying customers or users)
Seed: $2-5M round
Valuation: $12-25M post (*She would not go over $15M)
Traction:
$10-15K MRR, growing 10% MoM
6-12 customers who have been paying for ~6 months or more, a few that would serve as case studies and references
Hired first technical AE
Series A: $8-15M round
Valuation: “anyone’s guess”
Traction:
$1.5M in ARR is good, more like $2M
3x YoY growth minimum, but more like 3.5x • 12-20 customers, indications of ACV growth
Sales team in place to implement the repeatable sales playbook
26/ Don’t take on venture debt unless you have revenue AND an experienced CFO. – Jason Calacanis
27/ When you are choosing lead investor term sheets:
For small VC teams (team <10ppl): Make sure your sponsoring partner is your champion. Why does investing in you align with their personal thesis? Their life thesis? Which other teams do they spend time with? How much time do they spend with them? When things don’t go according to plan, how do they react? How do they best relay expectations and feedback to their portfolio founders?
For larger platform teams (team >10ppl): Ask to talk to the 3-5 best people at the firm. And when the investor asks you to define “best”, ask to talk to their team members who best represent the firm’s culture and thesis. Why? a/ This helps you best understand the firm’s culture and if there’s investor-founder fit. b/ You get to know the best people on the team. And will be easier to hit them up in the future.
28/ “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” – Abhiraj Bhal
29/ “[Venture] debt typically has a 48-54 month term, as follows: 12 months of a draw period (ballooned to 18 months over the last few years), to which you can decide to use it or not 36 months to amortize it after that 12 months. The lender at this stage is primarily underwriting to venture risk, meaning they are relying on the venture investor syndicate to continue to fund through a subsequent round of financing.” This debt is likely to be paired with language that allow the fund to default if investors say they won’t fund anymore and/or just not to fund when asked. “They typically are getting 10bps-50bps of equity ownership through warrants. Loss rates must be <3-4% for the model to work.” If there’s less than 6 months of runway or cash dips below outstanding debt, then as a founder, expect a lot of distracting calls. – Samir Kaji
30/ The best way to ask for intros to investors is not by asking for intros, but by hosting an event and having friends invite investors to the event. There’s less friction in an event invite ask than an investor intro ask. The reality is that the biggest investors are inundated with intro requests all the time, if not just by cold email too.
Cash flow levers
31/ The bigger your customers’ checks are (i.e. enterprise vs. SMB vs consumer), the longer the sales pipeline. The longer the sales pipeline, the longer you, the founder, has to stay the Head of Sales. For enterprise, the best founders stay VP of Sales until $10M ARR. For SMB, that’s about $1-2M ARR, before you hire a VP of Sales. Inspired by Jason Lemkin.
32/ “‘I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.'” The sales playbook of David Beirne of Benchmark Capital fame, cited in eBoys.
33/ “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” – Bill Gurley
34/ If you were to double or triple the price of your product, what percent of customers would churn? If the answer is anything south of 50%, why aren’t you doing it?
35/ Getting big customers and raising capital is often a chicken-and-egg game. Sometimes, you need brand name customers, before you can raise. And other times, you need capital before you can build at the scale for brand name customers. So, when I read about Vinod Khosla’s advice for Joe Kraus: “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, ‘How do we bid $3 million? We only have $1 million in the bank.’ And he said, ‘Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.'”
36/ “Your ability to raise money is your strategy. If you’re great at it, build any business with network effects. If you’re bad at fundraising, it’s strategically better to build a subscription business with no network effects.” – Elizabeth Yin
37/ Be willing to fire certain customers (when things get tough or in an economic downturn). If they aren’t critical strategic partners or are loss making, figure out how to make them profitable. If you can, renegotiate contracts, like cheaper contracts for longer durations. If not, let them go. Make it easy to offboard.
38/ An average SaaS business, that doesn’t have product-led growth, is spending about 50% of revenue on sales and marketing. Those that are in hyper growth are spending 60%. – Jason Lemkin
39/ “The only thing worse than selling nothing is selling a few. If you sell nothing, you stick a bullet in it and move on. When you sell a few, you get hope. People keep funding even though it’s really not viable.” – Frank Slootman
40/ If your customer wants to cancel their auto-renew subscription to your product, you should refund them a 100% of their cost. – Jason Lemkin
41/ “Your price isn’t too high. Your perceived value is too low.” – Codie Sanchez
42/ “15-20% of IT spend is in the cloud.” And it’s likely to go up. – Alex Kayyal
43/ If your customers are willing to pay you way ahead of when your service is executed, you have an unfair and unparalleled cashflow advantage. – Harry Stebbings
44/ If you’re in the CPG business, it’s better to negotiate down the contract. “You buy 75, and you sell 60, they’re going to go, ‘Ah, I got 15,000 in inventory, it’s not a success.’ If you give them 40, and then they have to buy another 20, and they sell 60, they go, ‘Wow, we ordered 50 [(I think he meant 20)] more than our original order.’ You’re still at 60, but one, they’re disappointed, and one, they’re not. You’re still playing some weird mind games a little bit so that they feel good about whatever number was there.” – Todd McFarlane
45/ “If you are under 100 customer/users, get 20 of them in a Whatsapp Group. You will:
Get much higher quality feedback, faster, on the current product.
They will be WAY more proactive in suggesting future product ideas and helping you shape the product roadmap.
It will create a closer relationship between you and them and they will become champions of the product and company. People like to feel they had a hand in the creation process.” – Harry Stebbings
46/ Create multiple bank accounts with different banks to keep your cash, to hedge against the risk of a bank run. The risk is very unlikely to occur, but non-zero, especially in a recessionary market. Inspired by SVB on March 10, 2023. More context here, and what happened after here. Breakdowns here, here and here.
47/ “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for “excess cash” to be invested in safe, liquid options to generate slightly more income.” – A bunch of firms
48/ “Maintain an emergency line of credit. Obtain a line of credit from one of your core banks that can fund the company for 6 months. Do not touch it unless necessary.” – A bunch of firms
49/ In case of a bank run: “1/ Freeze outgoing payments, let vendors know you need 60 days, 2/ Figure out payroll & let your investors know exactly when cash out, 3/ Attempt emergency bridge with existing investors; hopefully reasonable terms or senior debt (but given valuation reset this is a HARD discussion for many), 4/ Figure out who can take deferred salary on management team, which will extend runway, 5/ Make sure you communicate reality to team honestly so they can make similar plan for their household, 6/ Make sure you talk to HR about legal issues around payroll shortfall — which hopefully this doesn’t come to, 7/ In future, keep cash in 3 different banks.” – Jason Calacanis
50/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff
51/ General reference points for ACV and time to close are: $1K in 1 week. $10K in 1 month. $100K in 3 months. $300K in 6 months. And $1M in 12 months. – Brian Murray
52/ A B2B salesperson’s script from Seth Godin. “Look, you’ve told me you have this big problem you need to solve. You have a five million assembly line that’s letting you down, blah blah. If we can solve this problem together, are you ready to install our system? Because if it’s not real, let’s not play. Don’t waste my time, I won’t waste yours. You’re not going to buy from me because I’m going to take you to the golf course. You’re not going to buy from me because our RFP is going to come in cheaper than somebody else’s. You want my valuable time? I’m going to engage with you, and tell you the truth and you’ll tell me the truth. You’re going to draw your org chart for me. You’re going to tell me other complicated products you’ve bought and why your company bought them. And I’m going to get you promoted by teaching you how to buy the thing that’s going to save your assembly line. Let’s get real or let’s not play.” – Seth Godin
53/ “The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.” – Charles Hudson
Culture
54/ Deliver (bad) news promptly. Keep to a schedule. The longer you delay, the more you lose your team’s confidence in you. For example, if your updates come out every other Friday, and you miss a few days, your team members notice. Your team is capable of taking the tough news. This is what they signed up for. Explain a stumble before it materially impacts your bottom line – revenue. Inspired by Jason Lemkin.
56/ “It’s easier, even fun, to do something hard when you believe you’re doing something that no one else can. It’s really hard to go to work every day to build the same thing, or an even worse version, of what others are already building. As a result, there was a huge talent drain from the company.” – Packy McCormick
57/ Lead your team with authenticity and transparency. “Employees have a ridiculously high bullshit detector, more so than anyone externally, because they know you better. They know the internal brand better.” So you have to be honest with them. “Here’s what we’re going to tell you. Here’s what we won’t, and here’s why.” Set clear expectations and leave nothing to doubt. – Nairi Hourdajian
58/ When someone ask Jeff Bezos, when does an internal experiment get killed? He says, “When the last person with good judgment gives up.” – Bill Gurley citing Jeff Bezos
59/ “Getting too high on a ‘yes’ can prepare you for an even bigger fall at the next ‘no.’ Maintaining your composure in the high moments can be just as important as not getting too down in the low moments.” – Amber Illig
60/ “Most have an unlimited policy paired with a results-driven culture. This means it’s up to the employee to manage their time appropriately. For example, no one bats an eye when the top performing sales person takes a 3 week vacation. But if someone is not pulling their weight and vacationing all the time, the perception is that they’re not cut out for a startup.” – Amber Illig
61/ “Whenever we’re dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we’re not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we’re taking, but it’s not going to be what we’re currently doing.” – Tobi Lutke
62/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan
63/ “Leadership is disappointing people at a rate they can absorb.” – Claire Hughes Johnson
64/ Page 19 Thinking: If you were to crowdsource the writing of a book, someone has to start inking the 19th page. And it’s gotta be good, but you can’t make it great on the first try. So you have to ask someone else to make it better, and they have to ask another to make their edits even better. And so on. Until page 19 looks like a real page 19. “Once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.” – Seth Godin
Hiring
65/ Hiring when your valuation is insanely high is really hard. Their options could very much be valueless, since they would depend on the next valuation being even higher, which either means you grow faster than valuations fall (market falls in a bear market) or you extend your runway before you need to fundraise again.
66/ It’s easier to retain great talent in a recession, but much harder to retain them during an expansionary market. Talent in a boom market have too many options. There’s more demand than there is supply of talent in a boom market.
67/ If you’re a company with low employee churn, you can afford to wait a while longer to find someone who is 20% better in the role. – Luis von Ahn
68/ “[Fractional CMOs and CROs often] want to be strategists. Tell you where to focus, and what to do better. But the thing is, what you almost always just need is a great full-time leader to implement all the ideas.” – Jason Lemkin. The only time it works is when the fractional exec owns the KPI and the function, where they work at least 60% of the time OR they work part-time and help you hire a full-time VP.
69/ Hire your first full-time comms person after you hit product-market fit, when you are no longer finding your first customers, but looking to grow your customer base. – Nairi Hourdajian
70/ “Ask [a high-performing hire] if there’s someone senior in her career that’s been a great manager, and if so, bring them on as an equity-compensated advisor to your company. If there’s someone in industry she really admires but doesn’t yet know, reach out to them on her behalf.” Give her an advisor equity budget, so they can bring on a mentor or someone they really respect in the industry. As a founder, create a safe space for both of them. Monthly 1:1s and as-needed tactical advice, introductions, and so on. And don’t ask that mentor to give performance feedback “because if so it’s less likely they’ll have honest, open conversations.” – Hunter Walk
71/ Hire talent over experience for marketing and product. “In marketing and product I prefer people with less experience and a lot of talent so we can teach them how we do things. They don’t have to unlearn anything about how they already work. We teach them how we work. For developers it might be different because it takes a lot of time to be a really good developer, and it’s relatively easy moving from one environment to another.” – Avishai Abrahami
72/ If you’re going to use an executive search firm to hire an exec, ask the firm three questions: “1/ Walk me through your hardest search? 2/ Walk me through a failed search? 3/ Why did it fail? 4/ How do you assess whether an exec is a good fit?” You should be interviewing the firm as much as the candidate. Watch out for “a firm with a history of candidates leaving in a short timeframe. Avoid firms that recycle the same execs.” – Yin Wu
73/ Before signing with any recruiting agency, ask “What happens if the person hired is a bad fit? (Many firms will restart the search to align incentives.) Is there a time limit for the search? (Some firms cap the search at 6 months. We’ve worked with firms without caps.)” – Yin Wu
Governance
74/ “The higher the frequency and quality of a young startup’s investor update, the more likely they are to succeed in the long run.” – Niko Bonatsos
75/ Five metrics you should include in your monthly investor updates:
Monthly revenue and burn, in a chart, for the whole year
Cash in the bank, at a specific date, and runway based on that
Quarterly performance for the past 8 quarters, in a chart
Target for the quarter AND year and how you are trending toward it
76/ Another reason to send great, consistent investor updates is that when prospective investors backchannel, you want to set your earlier investors up for success on how they pitch you.
77/ If you don’t have a board yet, still have an “investor meeting.” “Create investor meetings where you invite all your investors to do an in-person + Google Hangout’ed review every 60 days. They don’t have to come. But they can.” – Jason Lemkin
78/ “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” – Bob Iger
79/ “Entrepreneurs have control when things work; VCs have control when they don’t.” – Fred Wilson
80/ If an investor really wants their money back (usually when VCs have buyer’s remorse), there are times when they force you to sell or shut down your companies. Instead, ask them, “What would it take to get you off my cap table?” – Chris Neumann
Product
81/ “The ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” – Bruce Dunlevie, cited in eBoys
82/ Once you launch, you’re going to be measured against how quickly you can ramp up to $1M ARR. One year is good. Nine months is great.
83/ The more layers of friction in the onboarding process (i.e. SSN, email address, phone number, survey questions), the better you know your user, but the higher the dropoff rate. For PayPal, for every step a user had to take to sign up, there was a dropoff rate of 30%. – Max Levchin in Founders at Work
84/ “Product-market fit can be thought of as progressively eliminating all Herbies until there are no more Herbies. Then, you’re in a mode where you can invest in growth because it’s frictionless.” – Mike Maples Jr. (In the book, The Goal, the trek is often delayed by a large kid called Herbie. As you can imagine, the group only moves as quickly as their weakest link.)
85/ “There’s a ruthlessness in the way Dylan finds sources, uses them and moves on.” – No Direction Home. Be ruthless about how knowledgeable you can be about your customers, about your problem space, and about your product. The knowledge compounds.
Competition
86/ “If you patent [software], you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.” – Max Levchin in Founders at Work
87/ If you know you’re building in a hot space, and your competitors are being bought by private equity firms, share that with your (prospective) investors. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
88/ “As a startup, you always want to compete against someone who has ‘managed dissatisfaction at the heart of their business model.” – Marc Randolph
89/ “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” – Ayrton Senna. It’s easier to overtake your competitors in tough markets than great markets.
90/ “Having a real, large competitor is better than having none at all!” – Anna Khan
Brand/Marketing/GTM
91/ If you’re a consumer product, your goal should be to become next year’s hottest Halloween costume. Your goal shouldn’t be fit into a social trend, but to define one.
92/ Don’t be married to the name of your company. 40% of NFX‘s early stage investments change their names after they invest in the seed.
93/ The viral factor doesn’t take into account the time factor of virality. In other words, how long it takes for users to bring on non-users. Might be better instead to use an exponential formula. “Think of a basic exponential equation: X to the Y power. X is the branching factor, in each cycle how many new people do you spread to. Y is the number of cycles you can execute in a given time period. The path to success is typically the combination of a high branching factor combined with a fast cycle time.” – Adam Nash
94/ In a down market, you may not need as big of a marketing budget as you thought. Your competitors are likely not spending as much, if at all, to win the same keywords as before.
Legal
95/ “Nothing is more expensive than a cheap lawyer.” – Nolan Church
The hard questions
96/ “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.” – Andy Rachleff, cited in eBoys
97/ “Inexperienced founders are usually too slow to fire bad people. Here’s a trick that may help. Have all the cofounders separately think of someone who should probably be fired, then compare notes. If they all thought of the same person…” – Paul Graham
98/ When you’re in crisis, find your OAR. Overcorrect, action, retreat. Overcorrect, do more than you think you need to. For instance, lay off more than you think you need to. Actions can’t only be with words. Words are cheap after all. And retreat, know when it’s time to take a step back. “Sometimes you just have to do your time in the barrel. When you’re in the barrel, you stay in the barrel. And then you slowly come out of it.” – Nairi Hourdajian
99/ “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.” – Tom Loverro
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