“Most references will not give a negative reference about someone, but you will have to understand and listen between the lines. What is a good or a bad reference? They might say, ‘I really like him as a person. He’s really nice.’ But this is a person that’s worked together with you in a team, and you’re not saying he’s great with founders or finding the best deals. Maybe he’s not that good.” – Raviv Sapir
Raviv Sapir is an early-stage investor at Vinthera, a fund of funds and venture firm with a hybrid strategy that combines VC fund investments with direct startup investments. With a background in tech and finance, an MBA from HEC Paris, and years of experience mentoring startups and supporting LPs, Raviv brings a sharp eye for high-conviction opportunities and a practical approach to venture. He previously held product roles at leading Israeli startups and served in a technological unit within the Israeli Defense Forces. His work across geographies, sectors, and investment stages gives him a uniquely holistic and global perspective on the venture ecosystem.
[00:00] Intro [03:31] Swimming since he was 7 [09:49] Breaking down each GP’s track record and dynamics in a partnership [11:25] Telltale signs that a partnership will last [12:50] An example of questionable GP dynamics [21:45] Virtual partnerships [25:43] GPs working out of coworking spaces [28:30] Commonly held LP assumptions [32:16] A big red flag GPs often say [34:27] What does Raviv look for during reference calls? [39:41] How does the diligence change for a Fund I/II vs Fund III/IV? [42:26] Qualitative traits Raviv likes to see in a Fund I GP vs Fund II+ GP [44:04] Ideal cadence of reporting and LP/GP touchpoints [46:03] Role of the LPAC across different funds [48:47] Diligence as a function of check size [54:37] What’s Raviv’s favorite episode of Venture Unlocked? [56:23] The podcasts that Raviv listens to
“Some of the small funds perform better but a lot of them–… they perform much worse because the variance in their performance is so big. You might have good odds of succeeding with a small fund but very high odds of performing way worse than the bigger funds.” – Raviv Sapir
“GPs are great at selling. ‘Every time is the best time to invest.’” – Raviv Sapir
“Most [references] will not give a negative reference about someone, but you will have to understand and listen between the lines. What is a good or a bad reference? They might say, ‘I really like him as a person. He’s really nice.’ But this is a person that’s worked together with you in a team, and you’re not saying he’s great with founders or finding the best deals. Maybe he’s not that good.” – Raviv Sapir
“‘Interesting’, especially in the US, is used in a negative way.” – Raviv Sapir
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.
“Get to 70% conviction. 90% means you’re too late. 50% means you haven’t done your homework.” Keith Rabois.
“Do half-ass two things; whole ass one thing.” Ron Swanson.
But the one that stands out the most is: “You either believe or you don’t.” Which I’ve heard many an LP tell me on the podcast. But also across VCs I’ve met over the years. And in full transparency, I struggle with that. Theoretically it makes sense. Building 99% of a car still means you don’t have a working car. There are a thesaurus of synonyms alongside, “I just don’t believe in you.” We’ve all heard it.
“You were an amazing candidate, but unfortunately, the talent pool was really competitive and we decided to move on with someone else. But please do apply again for a job that may be a better fit for you.”
“It’s not you; it’s me.”
“We’re just in different chapters of our lives. And we deserve to meet someone who is where we are.”
“You’re too early for us.”
“You’re out of scope.”
“I just have too much on my plate now, and I just don’t have the bandwidth to focus on this now.”
“Let me run this by my hiring/investment committee/leadership.”
All that just mean “I don’t believe in you.” (But it makes me feel like an asshole if I said it directly to your face. And I don’t want to be perceived as an asshole.) Ashamedly so, I’ve used a few of these myself.
In the investing world, I wonder if there are varying levels of conviction. Phenotypically expressed in varying check sizes. In fact, we have terminology for it now. Core checks. And access checks, or discovery checks, or simply, non-core checks. A core check is a substantial position. A meaningful percentage of the overall fund size. At least 1%. But depending on the portfolio construction, it varies from 1-5% of the fund. A discovery check, on the other hand, is smaller. Oftentimes, less than 0.5% of the fund size. Dipping one’s toes into the water so to speak, as opposed to a headfirst dive or a cannonball to extend the metaphor.
But if conviction really is black and white, should there be varying levels of conviction? Is there such a thing as believing in someone, but only half as much? Or a third as much as someone else?
Moreover one of the greatest lessons we learn over time as investors is that we’re quite terrible, over large sample sizes, with predicting winners out of our portfolio. The three to five biggest winners that put you on the roadmap are often not our three to five “favorite” investments ex ante.
A really good friend of mine once told me (mind you, that both my male friend and I are heterosexual), “The conviction you have in someone to be your girlfriend is different from the conviction you have in someone who is to be your wife. You build that trust over time. And what you look for is different over time.”
So back to the original question: Is conviction black and white? Is there really only belief and disbelief? Is there such a thing as I kind of believe? Or I believe but…?
While I don’t have a black and white answer to this black and white question, I’m inclined to believe yes. It is black and white. It just depends where you put the bar. The bar for you to date someone is different from the bar for you to marry someone. The bar to approve an investment to return a $10M fund is different from the bar to return a $1B fund. And, the bar to invest in an asset in a power law-driven industry, like venture, is different from the bar to invest in an asset in a normally-distributed industry, like real estate or public markets. What’s black for one is white for another.
#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.
“A lot of family office principals, unless they’ve worked in finance – they should not be solely making the decision on which RIA to hire.” – Scott Saslow
Scott Saslow is the founder, CEO, and family office principal for ONE WORLD. He’s also the founder and CEO of The Institute of Executive Development, as well as the author of Building a Sustainable Family Office: An Insider’s Guide to What Works and What Doesn’t, which at the time of the podcast launch is the only book written for family office principals by a family office principal. Scott is also the host of the podcast Family Office Principals where he interviews principals on how families can be made to be more resilient. Prior, he’s also found independent success at both Microsoft and Seibel Systems.
[00:00] Intro [02:09] The significance of ‘ojos abiertos’ [05:49] Scott’s relationship with his dad [07:46] The irony of Scott’s first job [11:19] Family business vs family office [13:50] The corporate structure of a family office [17:39] From multi family office to single family office [18:54] The steps to pick a MFO to work with [22:37] The 3 main functions a family office has [31:00] Why Scott passed on SpaceX [36:07] Why Scott invested in Ulu Ventures [44:23] What makes Dan Morse special
“A lot of family office principals, unless they’ve worked in finance – they should not be solely making the decision on which RIA to hire.” – Scott Saslow
“The three main functions that family offices tend to have are investment management, accounting and taxes, and estate planning and legal.” – Scott Saslow
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.
In a previous era, in a more disconnected world, prior to social media and instant cellular connection, not everyone knew everyone. Information was traded in hushed rooms. And so, who you knew became the modicum of influence. The definition of being an insider.
Today who you know no longer matters. Networks overlap. There are tons of third places that bring people together for off-the-record discussions. And just knowing someone isn’t enough to exert influence. The network of who I know is just as large or small as the next person over. While people still use who you know as the proxy for being an insider, that definition has lost its luster. Because even if you didn’t know someone, almost everyone is one click, one message, or one email away.
It’s no longer about who you know, but about who trusts what you know. If two people were to send the same email forwardable to me, I’m more likely to take the email intro from the person I trust more.
It’s even more important when it comes to references and diligence. Most allocators who invest in the venture world aren’t as connected. For the most part, if this isn’t the only asset class they’re involved in, they don’t have to be. They’re paid to be generalists. And by function of that, when they do their on-list references, it’s hard to get the raw truth from the strangers they talk to. It’s different if you live and breathe this space. Then you need to know enough people well where either they can serve as the reference or vouch for you to a reference. That requires not only knowing the right people, but also maintaining a strong bond with them.
I can’t speak for other industries as much, though I imagine it may be quite synonymous with venture. But in venture, most people trade favors. It’s a relationship-driven business for a reason. The problem is most people only make withdrawals from their karmic bank account. Many of whom are in karmic debt. Rather than karmic surplus. VCs especially.
There’s this tweet Brian Halligan of Hubspot fame wrote that I stumbled upon yet I quite like.
VC's are good at making withdrawals from favor banks.
VC's could be better at making deposits into favor banks.
The humble truth is that some people say I’m an insider. Yet, I don’t think I am. I know a certain few people really, really well. I know many people kind of well. And I know jack shit about the vast majority of people in our industry. I’ve always thought that my number one priority is to do right by the people I do know. I’ve also been blessed they’ve been kind enough to let me and have vouched for me.
There was a line that RXBAR’s Peter Rahal said recently that really stuck with me. “Strategy is choosing what not to do.” To analogize that to an insider, in my experience, a true insider is an insider because they choose who not to spend a disproportionate amount of time with. An insider is often not cavalier with how they spend their time and who they spend their time with. They’ve either learned from scar tissue or model the ability of others who are insiders.
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.
The ideal situation for a GP is that you have a single close. All LPs who are interested all confirm their participation by the same deadline. And all wires for the first capital call come in at the same time. It’s the utopia. Unfortunately, reality isn’t as picturesque. The truth is the vast majority of LPs wait till the final close, and as long as you have multiple closes, there is no urgency to commit by a certain date.
In fact, it’s almost always better to commit as late as you can if there are multiple closes. Investing in funds is investing in a blind pool of human potential. The blindness scares and humbles many allocators. It is in our interest to invest in the least blind pool of potential possible. And usually, when there are multiple closes, the GP(s) start deploying before the fund closes. So if you come in at the end, you at least get to see 10-20% of the portfolio. Sometimes more, as most LPA clauses stipulate that the final close must happen within 12-18 months from initial close. Of course, you can always move that date via LP votes or just not having that clause in the LPA in the first place.
Single Close
Multiple Closes
LP Network
Robust
Weak
LP Check Size
Large
Small
# of Checks
Few (most of the time)
Many (first close is usually existing LPs/friends and/or anchor)
Deployment
Deploys after the close
Can deploy after the first close (while still fundraising for the rest of the fund)
With single closes, while it helps to get it all one and done, you can’t deploy until you’ve closed. If your network with LPs and your trust with those respective LPs isn’t great, it’s more risky to go for a single close. Many LPs also have different timelines. So, instituting a single close means you need to be firm and align LPs on your timeline. It helps if you have a few large chunks that cover more than 50% of the fund before you set a close date.
With multiple closes, the good news is that you leave the door open for LPs who run processes on their own timelines. And that you can deploy as you’re still fundraising, as long as you get past the first close. The downside is that there’s no urgency for anyone to come in before the final close. It’s better if you don’t have a network of strong LPs, which pertains to the vast majority of first-time fund managers.
So, what to do?
Let’s get the single close strategy out of the way first. First of all, to do this, you need to come from a place of privilege. You must have a large amount of market pull. LPs who are dying to give you money. And for better or worse, not that you have to take them, people who would give you a blank check. Although, as a footnote, beware of the blank checks. More often than not, they’re easily disappointed.
You must have a strict process. And LPs need to self-select themselves in or out of the process very early in the process. Most important part of this, which is often a really hard thing to do for a lot of first-time GPs, you need to be intellectually honest with yourself if an LP is a fit for you or not. Your job is to figure that out before the LPs figure it out. And as soon as you do, you need to “fire” that prospective LP before they tell you no.
For that, even though you may lose the potential of a transaction, in my experience, you often win their respect.
Assuming what the LP invests in is what you are offering, manage your drip campaign well. Do your best to throttle opportunistic asks that deviate from your process. But do so with grace. And I can’t underscore grace enough.
Some things I’ve seen in the past for funds who can close a fund in a single close (none of the below are the Bible, but hopefully tools for the toolkit):
The deck is never sent out before the first meeting.
If the deck is sent out before the first meeting, it is either only a teaser deck (less than five slides) or the GP/IR team says something along the lines of: “If we don’t hear back from you within three days, we will assume our fund is out of scope, and will prioritize our time with other investors.”
The data room opens up on a very specific date. None get access to it before (except for existing LPAC members, and sometimes existing LPs who’ve indicated early interest).
The data room closes on a very specific date. No one will get access to it after. The sub docs need to all be signed within a week or two after.
No additional calls with LPs unless they can commit a meaningful check to the fund. Usually double digit percentage of the fund size.
LPs get little to no additional asks. No side letters.
Communication from the GP/IR team throughout every step of the way is paramount.
Again, a single close is a privilege. And a power. And with great power comes great responsibility, as a wise old uncle once told a budding superhero.
Ok, multiple closes. I often treat Fund I’s different from the other funds. One of the few major differences is that you don’t have existing LPs. Instead, you have friends and family and people who’ve believed in you before. Nevertheless, early momentum is always a good thing to have before you officially open up the fundraise.
The first close is ideally the minimum viable fund size for you to deploy your strategy and/or the fund size you need to prove out the minimum viable assumption before you raise your next fund. It’s helpful to assume you won’t be able to raise anymore after the first close. While usually not true, but nevertheless, a useful mentality. Most GPs close too small of a first close that still constrains them from truly deploying their strategy. For instance, for Costanoa Ventures Fund I in 2012, the first close was at $40-50M on June 7th, 2012, but ended up at $100M at the final close.
For each of the closes, I generally wouldn’t recommend different economic terms, like reduced fees for earlier LPs. I get the incentives. But two reasons:
LPs talk. It’s usually not a good look among LPs if they know that other people at your AGM got better terms than they did.
You’re discounting your value. If you’re investing in an asset class that’s truly transformative and you truly have better access than others, don’t short sell yourself.
That said, I do believe you should reward early believers. Either for those that come in via Fund I or first or second closes. Or both.
Many LPs especially high net-worth individuals (HNWIs), family offices and corporates love co-investment opportunities. Realistically, these will be 90-100% of your Fund I LPs. Leverage that. For instance, first-close LPs get unfiltered access to SPVs/co-investment opportunities. Maybe, opportunistic intros to portfolio companies as well. Second-close LPs get access to all SPVs, but are capped on allocation, assuming the opportunity is oversubscribed. Final-close LPs get last pick.
If you’re raising a Fund II+, first-close LPs can be given SPV access to deals coming out of earlier funds as well. Although, use this strategically so that your Fund I LPs won’t feel slighted.
As you might surmise already, there is no one right answer. Oftentimes, it’s a function of who you know, how quickly they commit, and how obvious you are to them. “Obviousness” is a product of track record, your brand, the quality of your reference checks, and obviously, how complex your story is.
4/13/2025 Edit: Example of Costanoa Ventures’ first close
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.
Backs turned against the stage. And facing the audience, suspended in anticipation of who’ll walk out on stage.
A lone individual slowly walks out and as she does, the melody starts.
1… 2… 3… in a bellowing, deep yet clear vocal, “OHHHHHHHHHHH~”
Boom. Boom! Boom!! Boom!!!
All four chairs turn. And the crowd goes wild.
As a kid, The Voice was one of those guilty pleasures I had. The centerpiece in a Venn diagram of music, showmanship, and raw talent. Each contestant was judged on nothing more than the raw horsepower their vocals carried. Quite literally, sometimes. For the judges, the call-to-action was quite simple. You had to cast your vote before the song ended. In other words, you must show you wanted to bring a contestant on your team, trusting instinct and years of experience before you saw what they looked like or how they presented themselves. And that… that was awesome!
A decade and a half later, now sitting in the world of private market investments, I find the same parallels in startup and GP pitch decks.
I’m specifically referring to decks you send investors before you have a chance to talk to them. Whether it’s via the cold outreach, a submission on their website, or attached in a warm intro.
A teaser deck is not meant to be finished.
‘Cause if they do, you’ve lost them before you had a chance to talk to them. There is no glory in an investor flipping through every page. There is no glory in finally seeing the call-to-action at the very end of the deck. Usually an email or a how much you’re raising.
While it’s in the title, let me re-underscore. Investors should never read a deck from beginning to end. Each slide should, in theory, give the investor the activation energy to book a call or meeting with you. The sooner in the slide deck you can convince someone to book a meeting, the better. The longer you take to convince an investor, be it VC or LP, the less likely they’ll take that first meeting. The purpose of a viewing deck is to get to the first meeting, not the investment decision. There is nothing a deck can single-handedly do to convince an investor to invest. If the brief can, the fiduciary is not doing their job.
Instead, what a deck should have, in my humble opinion… as early as possible:
Your fund’s greatest highlight — It could be your 10X DPI across 8 years of investing. Could be the fact that you literally built the modern large language model infrastructure. Or that you took your last company public. Or that every. single. CISO. In the Fortune 50 list is an LP. It must deliver the wow factor. The surprise. Something people don’t expect. The primary reason an LP has to talk to you.
Your biggest elephant in the room — In a world where 75% of funds say they’re top quartile, you need to stop being the salesperson, and start being the honest businessperson. There are, undeniably, risks of getting in business with you. To think otherwise is stupid. The question here with a capital Q, is are you self-aware enough to know your biggest flaw? Or can you not recognize your own blind side? Admittedly, this second one is a selfish desire to see more funds with this. Because 99.9% of funds don’t share this. And LPs are tired of overly-promotional decks.
Of course, there are other reasons an LP will take the first meeting.
The person introducing you is a person the LP deeply trusts.
Your outreach is highly personalized. I’d like to stress the word highly.
The LP typically doesn’t receive that much deal flow.
The LP is in learning mode / revamping the portfolio. Likely, but not always, a new CIO.
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.
One of my favorite equations that I’ve come across over the last few years is:
(track record) X (differentiation) / (complexity) = fund size
I’ve heard from friends in two organizations independently (Cendana Capital and General Catalyst), but I don’t know who the attribution traces back to. Just something about the simplicity of it. That said, ironically, for the purpose of this blogpost, I want to expand on the complexity portion of the equation. Arguably, for many LPs, the hardest part of venture capital as an asset class, much less emerging managers, to underwrite. Much of which is inspired by Brandon Sanderson’s latest series of creative writing lectures.
Separately, if you’re curious about the process I use to underwrite risks, here‘s the closest thing I have to a playbook.
A flaw is something a GP needs to overcome within the next 3-5 years to become more established, or “obvious” to an LP. These are often skillsets and/or traits that are desirable in a fund manager. For instance, they’re not a team player, bad at marketing, struggle to maintain relationships with others, inexperienced on exit strategies, have a limited network, or struggle to win >5% allocation on the cap table at the early stage.
Restrictions, on the other hand, are self-imposed. Something a GP needs to overcome but chooses not to. These are often elements of a fund manager LPs have to get to conviction on to independent of the quality of the GP. For example, the GP plans to forever stay a solo GP even with $300M+ AUM. Or the thesis is too niche. Or they only bet on certain demographics. Hell, they may not work on weekends. Or invest in a heavily diversified portfolio.
Limitations are imposed by others or by the macro environment, often against their own will. GPs don’t have to fix this, but must overcome the stigma. Often via returns. Limitations are not limited to, but include the GPs are too young or too old. They went to the “wrong” schools. There are no fancy logos on their resume. They’re co-GPs with their life partner or sibling or parent. As a founder, they never exited their company for at least 9-figures. Or they were never a founder in the first place.
To break down differentiation:
f(differentiation) = motivation + value + platform
Easy to remember too, f(differentiation) = MVP. In many ways, as you scale your firm and become more established, differentiation, while still important, matters less. More important when you’re the pirate than the navy.
Motivation is what many LPs call, GP-thesis fit. To expand on that…
Why are you starting this fund?
Why continue? Are you in it to win it? Are you in it for the long run?
What about your past makes this thesis painfully obvious for you? What past key decisions influence you today?
What makes your thesis special?
How much of the fund is you? And how much of it is an extension of you or originates with you but expands?
What do you want to have written on your epitaph?
What do you not want me or other people to know about you? How does that inform the decisions you make?
What failure will you never repeat?
In references, does this current chapter obvious to your previous employers?
And simply, does your vision for the world get me really excited? Do I come out of our conversations with more energy than what I went in with?
As you can probably guess, I spend a lot of time here. Sometimes you can find the answers in conversations with the GPs. Other times, via references or market research.
Value is the value-add and the support you bring to your portfolio companies. Why do people seek your help? Is your value proactive or reactive? Why do co-investors, LPs, and founders keep you in their orbit?
Platform is how your value scales over time and across multiple funds, companies, LPs, and people in the network. This piece matters more if you plan to build an institutional firm. Less so if you plan to stay boutique. What does your investment process look like? How do people keep you top of mind?
Of course, track record, to many of you reading this, is probably most obvious. Easiest to assess. While past performance isn’t an indicator of future results, one thing worth noting is something my friend Asheronce told me, “TVPI hides good portfolio construction. When I do portfolio diligence, I don’t just look at the multiples, but I look at how well the portfolio companies are doing. I take the top performer and bottom performer out and look at how performance stacks up in the middle. How have they constructed their portfolio? Do the GPs know how to invest in good businesses?” Is the manager a one-hit wonder, or is there more substance behind the veil?
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.
As part of a new project I’m working on with a friend, I’ve spent the last few months doing a lot of research into the history of technology and Silicon Valley, and talking to a lot of primary and secondary sources. One of the rabbit holes I went down last week led me to a really interesting story on deal dynamics back in 1968.
For the historian reading this, you may already know that was the year of the Apollo 8 mission. The assassination of both Martin Luther King Jr. and Robert F Kennedy. The Tet Offensive in Vietnam is launched. Also, the year the Beatles’ Magical Mystery Tour album tops music charts and stays there for eight straight weeks. And their White Album goes to number one on December 28th that year too. 2001: A Space Odyssey premieres. Legendary skateboarder Tony Hawk is born.
For the tech historian, that’s the year Intel was founded.
“They came to me with no business plan.” — Arthur Rock
The last two of the Traitorous 8. Gordon Moore and Bob Noyce. Bob Noyce co-invented the integrated circuit. And Gordon Moore coined a term many technologists are familiar with. Moore’s Law. That the number of transistors on a chip double every two years. In 1968, the two last bastions finally left. Instead of promoting Bob to be CEO, the team at Fairchild chose to hire externally. And that was the straw that broke the camel’s back.
The first investor the two went to was Arthur Rock to start a new semiconductor company, with no business plan. Although, eventually, they wrote a single-paged, double-spaced business plan.
Around the same time, Pitch Johnson from Draper and Johnson (Draper comes from Bill Draper’s name) had just sold his portfolio at D&J to Sutter Hill, and Bill himself had joined Sutter Hill right after. Pitch was catching up with Bob, who he had known for a long time having been on the board of Coherent together. Their families had met each other several times. And planes have always been a fascination for both of them. After all, both of them were pilots.
Bob said, “I’m starting a company making integrated circuits, I hope you’ll be interested.”
Pitch responded with an offer of “a couple hundred K”, said that Bill may also be interested, and, “Well, anything you’re doing, Bob, of course I’d be interested.”
As Arthur Rock was putting together that deal, Bob asked Pitch to call Arthur. Pitch reaches out to Arthur, and Arthur tells him to “call [him] back next week.”
Next week comes by. Pitch calls again. And Arthur says, “I’ve done the deal, and you’re not in it.”
Dejected, Pitch picks up the phone to call Bob back, “Art doesn’t want me in the deal.”
Surprised, Bob calls Arthur and Arthur, in the tough, but honest Arthur way, responds, “Am I going to do the deal, or is Pitch going to do the deal?”
Inevitably, Pitch and Bill lost out on investing in Intel. Intel ended up raising $2.5M for 50% of the company.
At the end of last year, I was catching up with a senior partner at a large multi-stage fund. At one point in the conversation, he asked me, “Wanna see how lead investors work with each other?”
Before I could even reply, although I would have said “Yes” regardless, he pulls out his phone and shows me a text thread he has with another Series A lead investor.
The text starts: “Looking at [redacted company]. Any thoughts?”
The other guy responds back: “We are too.”
And the thread ends after one single exchange.
As much as VC has evolved and became a little more mainstream, deal dynamics with lead investors, or at least perceived-to-be lead investors, seem to hold. Of course, as a caveat, not every interaction is like this.
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.
My family and friends have always enjoyed local restaurants and never found that higher end culinary flair ever satisfied the beast within. Also, having been a swimmer in a prior lifetime, I also ate like a vacuum cleaner. Food was inhaled rather than chewed.
In 2015, my mentor brought me to my first fine dining experience. One with a Michelin star at that. It was a multi-course meal, filled with words I knew the definitions of, but the permutation of which left me perplexed. Palate cleanser. Salad forks and dinner forks. Kitchen tours. And more.
I remember one distinct course where they had served us clams with the shells attached in a bowl. And another ornate bowl after we de-shell. The messiest part of the dinner, to be fair. After we were all done, they cleaned the table and brought us a glass bowl of water. With slices of lemon and grapefruit, adorned with flower petals.
Thinking it was a complementary drink, I took a swig. It was akin to spa water. Cool, and rather refreshing. Contrary to the calming effect of the drink, I saw, out of the corner of my eye, our waiter run across the room faster than any Olympian. After zigs and zags between tables, he stopped abruptly at our table. Now the whole restaurant stared curiously at what would happen next. Between lengthy exhales, he said, “Sir, this bowl is for washing your hands.” Embarrassed, I apologized profusely. To which, he consoled me profusely back. He took the bowl to get us a new one.
As I looked over at my dining mate, he said, “Man, I’m glad you took that bullet for us. I would have done the same.”
Nowadays, especially if I’m in a fine dining establishment, I almost always ask, “How would you recommend us to eat this?”
Most fund managers start the meeting off, almost immediately with the pitch. Most founders do the same too. I was at a virtual conference last week, where I was matched with 8 GPs on a 15-minute speed date, 6 out of 8 jumped straight into, “Let me tell you about my fund.” I get the urgency, but the first meeting should always be an opportunity to get to know the person you are talking to. As Simon Sinek says, start with the why. Then the how. Then the what. Most flip the order when they’re in pitch mode. Hell, some may not ever get into the ‘why.’
Most LPs do not invest in venture full-time. In fact, it’s the asset class they know least well. And within their smallest bucket of allocation, aka venture, emerging managers are the smallest of the smallest bucket in their larger portfolio. So if amount of capital equated to depth of understanding, most LPs know bar none about venture. At least, compared to you, the GP, who is pitching. Some may think they know a lot. They may even want to invest directly in early-stage companies themselves. And while they may not admit it to you, a number of LPs think your job, as a venture capital GP, is easy.
You, I, and every investor who has spent meaningful time in venture and is not deluding themselves, know that this is the exact opposite of any easy job that anyone can do well. Do note, raising capital easily and deploying capital easily and supporting entrepreneurs easily are all different things.
Nevertheless, depending on the LP’s proficiency level, you need to remind them:
On venture and its risks (why the asset class) — Compare the asset class to others. Buyout. Real estate. Credit. And so on. Set expectations explicitly. If you yourself are not capable of comparing and contrasting between the asset classes, you should learn about the others yourself.
Why emerging managers (Big multi stage fund vs you the Fund I) — You are not Andreessen, GC, Redpoint, Emergence, IVP, Industry, you name it. Neither should you at a Fund I or II. The risks of betting on emerging managers is present. If an LP indexes the emerging manager venture asset class, they’ll be disappointed. The mean is great, but the median is horrible. At least, compared to other asset classes they could be investing in. Do not pitch them, “emerging managers are more likely to outperform.” Inform them of the real risks at play.
Why vertical/industry — Many emerging funds are specialists. For good reason. Based on your past experience, you’re likely to have more scar tissue but also real learnings than in other industries you did not have exposure to. Just like the first two, set the stage. How does your industry compare to others?
Why you — Why the strategy? Why do you have GP-thesis fit? Why have all your previous experiences culminated to this one point in time to start this fund? And is your interest in running a firm enduring? If not, it’s also okay, but be explicit about it.
Why they loved you — This is for the venture-literate LP AND if they’ve previously invested in you. Now they’re deciding if they should re-up. Were you true to your word? Have you stayed focused enough that your bets are still largely uncorrelated to the other bets in the LP’s portfolio? Why are you as awesome, but ideally more awesome compared to the last time you’ve chatted?
In that order. Starting from (1) to (5). Do not skip (1), (2), and (3).
If you jump straight to (4), that LP will consume that information within their own biases. Something you may not be able to control. And that will either make a fool out of them. Or a fool out of you. Just like I was at my first fine dining meal.
No one wants to be a fool. Don’t give anyone a chance to be one.
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.
I was reading Chris Neumann’s latest post earlier this week, “Fundraising Sucks. Get Over It.” True to its name, it does. In all the ways possible. Especially if you’re an outsider. In it, there is a truism, among many others:
“If investors are repeatedly telling you that the market is too small or the opportunity isn’t big enough, what they might be saying is, ‘the market is too small for VCs,’ not that it’s a bad idea.”
Which reminded me of a post I wrote late last year. To which, I thought I’d elaborate on. As a founder, how do you know if a market is too small for a VC?
Or when a VC tells you, your market is too small, what do they mean?
Spoiler alert: What’s small for one may not be small for another. Let me elaborate.
If a fund has reserves — in other words, they write follow-on checks —, assume 50-60% dilution between entry to exit ownership. If they don’t, expect 75-80% dilution on their ownership. Of course, these may be on the higher end. Sometimes, there’s less dilution. You, the founder, need fewer rounds to get to profitability, or better yet, an exit.
Tactically, what that means is if a first-check only seed investor wants to invest in your company for 10%, by exit, they’ll have around 2%. Say they’re a $50M fund. Investors are always looking for fund returners, knowing that most of their investments will strike out and they’re really better on each company’s potential to be that one great, truly transformative company. And so… to return the fund or break even on the fund, you need to be at least a $2.5B company. In other words, 2% of $2.5B is $50M.
Of course, seed stage funds are usually underwritten to a 4-5X net. Roughly 5-6X gross return. Usually 50-70% of the returns come from one investment. So, to have a 5X gross on a $50M seed fund, they need to have a portfolio whose enterprise value is $12.5B. A single investment should exit between $6 and $9B, roughly.
So… if a VC cannot seeing you exiting for that amount, they’ll tell you your market is too small. Maybe it’s due to historical exits in your industry. Maybe it’s due to a lack of strategic acquirers who’d buy you at that price. Or maybe it’s that you’re too cash intensive that you need to raise more rounds to get to an exit that is meaningful. And in the process of which, take on a hefty preference stack. Fancy schmancy term for all those investors who collectively include a larger than 1X liquidation preference in their term sheet. Aka downside protection.
That said, let’s take another example. $50M seed fund, concentrated portfolio fund. They like to come in for 20% and will invest in at least 1-2 rounds after. By exit, they might dilute down to 10%. To return the fund, they only need a $500M exit. To 5X gross the fund, they’ll need only $2.5B of enterprise value. Half of which will come from a single company. Meaning instead of needing to be almost a decacorn at exit to impress the VC, you only need to be a unicorn. Still impressive, but let’s be real. Unicorn exits are easier to achieve than decacorn exits.
Next time, you’re about to have a VC pitch meeting, do your homework. And try not to spend too much time with investors who may give you the feedback of “your market is too small.”
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.
