This past week, my friends were sending me one of the latest Shark Tank episodes (apologies for not finding a better fidelity video), asking me: Would you have invested?
https://www.youtube.com/shorts/7Yf2BrfC_ww
If this link dies due to copyright issues (since I haven’t waited till ABC puts out their original version), just Google “Shark Tank Eyewris”
But I bring it up not because I’m here to share what my thoughts on the deal, but because of a powerful lesson shared on Shark Tank’s Season 14 finale.
The best thing you can get in life is often to have the best partners. That’s true in business. That’s true in romance. And that’s true in life.
And yes, it’s also true in venture. As a founder, it’s not about who gives you the most money. Or gives your business the greatest valuation. Unfortunately, both are often vanity metrics, underscored in the 2020 and 2021 bull era. It’s about partnering with the right partners who can take you to the next stage. Partners who will keep you honest. Partners who will call you out on your BS. And partners who will tell you the things you don’t want to hear, who will have you do the things you don’t wanna do, so that you can be the founder you were meant to be.
In careers, it’s no less true. I’ve always looked at careers from the perspective of who can I learn the most from. It hasn’t always been the highest paying or the biggest brand. Frankly, it was easy to turn down both of the before if I didn’t feel like I would spending the next few years working with the best. Not only in terms of acumen, but also in how much they cared.
Over 8 yrs ago someone singlehandedly pulled me out of poverty. Knew him because I trained with his wife who is a professional athlete. He was leading a group at Citi and I desperately wanted to be an analyst. Didnt have the resume for a fancy banking job but grew up in public… pic.twitter.com/K8aZoUcrVA
To think that one doesn’t need others to succeed, that’s foolish.
#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.
Somehow do a better job of massaging the current data, which is challenging; or you have to
Be better at making qualitative judgments; or you have to
Be better at figuring out what the future holds.”
And while I go in length why the above are true in a former piece… today, I want to postulate a fourth.
Be better at listening to the silence.
Let me elaborate.
Facts and opinions
If I were to ask you, what day’s your birthday? I bet you could answer pretty quickly.
And the same would be true, if I asked you the color of the sky. Or what you ate for breakfast in the morning. Questions on facts have factual answers. There is either one immediate answer, or an answer you know exactly how to find, and at the very end, still a definitive answer. An example of the latter would be, What is the temperature right now?
On the other hand, if I were to ask you, what do you think about your life partner? The answer varies. You might say she or he is reliable. Or caring. And kind. And if I follow up with silence, you might spend some time thinking and filling the void with more words. Those words… are powerful. They simmer all of your life experiences and your stories — all your trials and tribulations, years, months, weeks, days, hours and minutes — onto a neatly organized platter for the other person. Those words that summarize it all are powerful. But what’s even more interesting to investor is the time it takes to come up with those words. That precious time, as your life is playing out like a flipbook, spends its precious milliseconds hugging silence.
No matter how miniscule those gaps are, they exist. And our goal as investors, and even more so for startup investors or emerging fund investors, with very little data to go on, is to create new datasets. In essence, to ask questions where the answers don’t just fill the air with vibrations, but to find answers that are dotted with tranquil stillness.
Great investors read between the lines. Listen to the pauses — the spaces between words. They look for the quiet thing out loud.
That silence is often more telling than anything you could put on a pitch deck or in a templated answer of “Tell me about your company.”
In closing
I know in this side of the world, we talk a lot about 10-year overnight successes. But let’s focus on the first two words of that phrase first. Ten-year. Startup journeys are long. They’re arduous. More things will go wrong than right. In the words of a serial founder with a few 9-figure exits under his belt, he once told me, “This shit sucks.” It’s tough. And if anyone discounts that — be it founder, operator, investor, friend or family — they don’t get it.
But that’s the very reason why investors look for grit, passion, and for me, obsession. But it’s also not a question we can really ask without getting a gift-wrapped, carefully-prepared answer. And so pushing the boundaries of questions is our job as investors. Why? Because even if for a moment, it sheds light into who we’re truly talking to.
And if there’s evidence of grit, passion, or obsession there, there might be something special.
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 few days ago, I caught up with an old friend from college. Amidst our conversation on how I was spending my time, he asked me, “Wouldn’t your time be more valuable helping the winners in your portfolio than the others?”
And I told him, albeit a bit more defensively than I would have liked, “Our brand is determined by our winners. Our reputation is earned by helping everyone else.” One of my better ad hoc lines, if I say so myself.
But more so, and I might be naïve in saying so, I may not get the most number of hours for sleep a night, but I will say, when I hit the bunk, I have the best sleep out of anyone you might know. And I do so because I know I’ve meaningfully touched someone else’s life. And by extension of them, indirectly, a few others.
Just because most startups fail doesn’t make each of their endeavors any less important.
Malia Obama once asked her dad, our former president what’s the point in working on climate change if the difference is so miniscule. That the world is burning. And what can one person do?
To which, Obama said, “We may not be able to cap temperature rise to two degrees Centigrade. But here’s the thing. If we work really hard, we may be able to cap it at two and a half, instead of three. Or three instead of three and a half. That extra Centigrade… that might mean the difference between whether Bangladesh is underwater. It might make the difference as to whether 100 million people have to migrate or only a few.”
In the world of startups, which isn’t exclusive to our world by any means, there’s a saying that people love quoting. Aim for the stars; land on the moon. And regardless if you hit the stars or not, aiming for it gets you the escape velocity to be extraterrestrial. In other words, it’s not always about whether you hit your goals or not, but rather… it’s the pursuit of lofty goals that gets you further than if you didn’t try in the first place.
I’m reminded of a great line by Dr. Rick Rigsby quoting his dad. “Boys, I won’t have a problem if you aim high and miss, but I’m gonna have a real issue if you aim low and hit.”
So, in this week’s short dose of optimism, don’t aim low and hit. Stay awesome!
#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.
VCs win upon liquidity event. And that happens either via M&A or via going public. After that, the shares are transferred to the hands of the LPs and they choose how they’d like to liquidate or keep. To date, we have neither seen a trillion dollar acquisition nor a trillion dollar IPO. I’m not saying it’ll never happen. I’m sure it will, at some point. A combination of inflation and companies finding more liquidity when private markets are bullish.
As Charles Hudson suggests in his one of his latest posts, the venture world has been changing. What was once a cottage industry gave way to multi billion dollar funds. While there are still many small sub-$100M funds, LPs have started evaluating venture capital not as just one big industry, but segmenting it by size of fund. Small funds, sub-$100M. Medium-sized funds, $100-500M. And big funds, funds north of $500M assets under management (AUM for short). And as the Mike Maples dictum goes, your fund size is your strategy.
Returning a billion-dollar fund requires different kinds of investments and math for it to work compared to returning a $50M fund. And one day, as large funds continue to expand into multiple stages, check size, but also eventually into public markets, we might see them start to bet on trillion-dollar outcomes. Because to return a 11- or 12-figure fund, you need to do just that. But given the market we’re in now, I imagine that won’t be in the near future.
The 10,000-foot view
So the thing you have to gain conviction around, as a macroeconomist, is not how big a venture fund should be. Nor the debate on how many VC funds is too many. The number nor the size truly matter in the grand scheme of things.
For an illiquid asset class like venture, where you’re betting on the size of the home runs, not one’s batting average, what you have to gain conviction around is:
How many truly great companies are there every year
How much capital is needed to get these companies to billion dollar outcomes
For the latter, there are two main ways to get to billion dollar exits: going public or getting acquired. And while there are outliers, the best way is for these businesses to get to $100M of recurring revenue.
And everything else is downstream of that.
As an LP once told me, “In the 1990s, it took $7 million to get to first revenue. In the 2000s and into the early 2010s, it took $700K. Now it takes $70K.” With each era and each wave of technological development, founders become more capital efficient. There are less barriers to get to market. Now with AI, it might just be $7K to get to first revenue, if not sooner.
The question is how much capital is needed to get to $1M ARR. If we take a decent burn multiple of 1.5x, then we underwrite an assumption that it’ll take $1.5M to get to $1M ARR. And possibly $4.5M to get to $3M ARR. And somewhere in there, that founder will find product-market fit and turn on the growth engine. CAC (customer acquisition cost) falls. And lifetime value increases. Payback periods shorten. And if all goes well, founders may find themselves with a sub-one burn multiple. And after they hit $1M ARR, and they triple the first two years, double the next three, they’re at $100M ARR. Of course, I’m illustrating the above all in broad strokes. The best case scenario. But most things don’t go according to plan.
Then an investor has to figure out if one should only make net new investments or re-capitalize a select few of their existing investments.
Then as LPs, what is the minimum ownership percentages that can return funds at each differentiated stage and fund sizes? And due for possibly another blogpost altogether, how does a 7-8x multiple on forward-looking ARR impact round sizes and valuations across bull and bear markets?
All this admittedly is both art and science. But I will admit that larger fund sizes and playing the AUM game may not be the answer.
In closing
My friend recently sent me this letter that Sam Hinkie wrote when he retired as GM of the 76ers. In it, he quoted the great Sage of Omaha when he closed down Buffett Partnership. “I am not attuned to this environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.” And it’s for that same reason, Sam stepped down. The same reason Jerry Seinfield turned down $110 million to do another season of Seinfeld. Even though the sequel business does quite well.
There is no shame in knowing when to hang up the cleats. And there is great power in being disciplined. In fact, it’s one of the most sought-after traits in fund managers. If not, the most sought-after.
In VC, it comes in all sizes, ranging from:
Fund size discipline. There a lot of GPs out there who have gone on to raise 9- to 10-figure early stage funds. A mathematical equation that becomes increasingly harder to prove true, given outputs need to reflect inputs. In other words, larger funds are harder to return. There are a lot of VCs who would rather play the AUM (assets under management) game than stay disciplined on returns. Not just paper returns, but real cold hard cash. In the words of my friend Chris Douvos, “moolah in da coolah.” To quote another line from Chris, “OPM (other people’s money) is like opium. It’s addicting.” Something one too many investors have gotten addicted to.
Thesis discipline. As a friend who’s been a VC across multiple economic cycles once told me, it’s much better to turn down an off-thesis hot deal led by a top tier firm than to take it.
Career discipline. To echo the words of Sam Hinkie above.
And of course, knowing that we underwrite billion dollar outcomes, rather than trillion dollar ones. Then again, that’s just a subset of fund size and portfolio construction.
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.
