The Japanese word for the business practice of building consensus and hearing people’s opinion before the decision or change is formally proposed.
And I don’t think I know the English parallel to that.
I’ve always told the GPs and founders I work with/have invested in that they should involve their investors in major decisions before they’re proposed and discussed. That no board meeting or LPAC (LP advisory committee) topics should ever be a surprise. It also shows that you’re not talking at people and you’re trying to involve them as a true partner for your business. Both LPs and VCs (to founders) highly prefer that. Conversations should never be out of convenience, but they should feel intentional. You also don’t have to be perfect, neither should you pretend to be with the people who’ve chosen to be with you long-term. Just as you shouldn’t hide any trauma, sentiment, and harbored feelings from your romantic partner and family.
The quarterly board meeting and the LPAC meeting are merely formalities. You should be able to trust your investors outside of those structured events. You may not need to bring up certain topics because it’s not written in the term sheet or limited partner agreement, but that doesn’t mean you shouldn’t. Partner struggles. Off-thesis investment opportunities. Major hires. Or layoffs.
There are a lot of VCs and LPs who would love to be true partners with you, but sometimes they don’t know how to help unless you ask for help before you make the decision. Have the conversation early on about how they would like to be involved in your business. And for those who do, go to them before you propose a decision or change.
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 most used lines in my diction is: “Your mileage may vary.”
Maybe because of what I’ve written historically about. Maybe ’cause of my previous life in investor relations. Or maybe, it’s because of the interesting node I sit at in the venture ecosystem. I often get asked by GPs and founders alike for fundraising advice. Now before you come to any conclusions, I don’t have a silver bullet. I’m not even sure if my advice when it comes to fundraising is any good. While I’m lucky to have heard back from a number of people I’ve shared my thoughts with on the result of their fundraise after employing my “advice,” I’m still not completely sure how much of it was the fundraiser themselves and how much of it was the advice. And how much the color of the jersey matters.
And so when I share what I’ve seen or done, I always caveat with that first line. That said, what I think is more useful than any advice I could give pre-mortem is listening to the feedback of the market. The people you’re pitching to. When someone says no, why do they say no? When someone says yes, why do they say yes?
Inspired by a conversation I had the previous week at a summit, getting feedback from someone who passed is tough. Through the archives of fundraising, you’re more likely to get no’s than yes’s. And when you do, do you know why? Very rarely do you get much feedback. Investors (LPs and VCs) are either too busy or have too much to go through to give feedback as intimately as you probably like. And so I’ve always found it useful to make it easy for people to give feedback. Naturally, it’s never guaranteed you’ll get a response, but usually, the below question I like to ask reaches less deaf ears than “Can you give me feedback?”
I know you’re busy, and you simply don’t have the time to give every pass a share of feedback. But if I could ask for 30 seconds of your time (no more than that), which number slide on my deck did you most notice (good or bad)?
Or… was there a particular slide in my deck that piqued your interest the most that led you to schedule our initial meeting?
The goal of this question is to triangulate attention and mindshare. When you get the answer, then you can come to your own (hopefully intellectually honest) conclusion about whether the message shared on that slide is strong or weak. Controversial or not.
Moreover, you’re not overstaying your welcome. The advice and feedback you’re asking for in pointed and doesn’t consume a lot of time for the other party to answer (yet will feel to them as if they’re doing you a favor and/or being helpful).
Only once you know why people say no can you actually iterate on the pitch. Of course, there are many different ways to ask for feedback, and… your mileage may vary. Usual fundraising advice gets you through the first 10 pitch meetings. After that, you need to course-correct based on the feedback you get back.
One thing I will note is that in the age of agentic venture firms and tools that can be built within hours that cover every stretch of the imagination. One thing an LP told me that a GP told them was that some founders are getting smart. Preparing two decks for investors: one for the human eye, the other for the agentic audience. The latter with more appendices than the former. I imagine that it’s only a matter of time before VCs do the same to LPs as LPs are building agentic deck readers. In that sense, asking for deck feedback may not hold as much weight as it used to. Who knows?
Nevertheless, if there’s one takeaway from this blogpost, it’s that if you want help, if you want feedback, make it specific, low friction, and direct.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. Itโs an inside scoop of what goes on in my nogginโ. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. Iโll let you decide which it falls under.
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.
Recently, I had three conversations about trust. So forgive me, but that’s the soup du jour today, as their comments are still swimming in my mind.
I spent some time with the Head of Investor Relations at a high nine-figure AUM firm. And he said something that echoed much of the reality of fundraising these days. “Fundraising is all about trust. It’s not about the performance metrics. It’s about who believes in you.”
Then, immediately after, I caught up with an LP friend, who said, “Investor relations is a wasted job title in VC. They’re glorified note takers and relationship managers. I won’t invest in any fund where I haven’t met the GP.” Only to later share how much we both admired a certain Head of IR at a large multi-stage fund.
At first glance, the irony is blinding. The funny thing is that both are equally as true. GPs have a bank account where they can deposit trust. They withdraw trust every time they make an ask. Whether it’s for capital or special terms on the term sheet or for a certain ownerships target or for a guest speaker for an event they’re hosting. Before a GP starts a firm, they need to bank a lot of trust. They should give more than they take. And to run a firm, there are three types of primary customers you need to bank trust with:
Founders,
Co-investors,
And LPs.
You also can’t take a loan on trust (in other words, outsource trust) before you’ve deposited enough trust in your own bank account. Or else, you’ll be in debt. If you’re in too much debt (i.e. have a negative balance), your reputation takes a hit. But when you’ve banked enough trust, you can have a separately managed trust account managed by others. An IR professional who manages the trust account with LPs. A community/platform person with co-investors and talent. And so on.
Having others manage these accounts too early in the firm lifecycle means taking debt and impacting reputation. So when my buddy who’s the LPs says he doesn’t like most IR folks, it’s because before the IR person was hired, the GP didn’t bank enough trust.
And the truth is trust is built not in grand gestures and one-off deals. It’s in the small interactions. How fast do you respond? Even when you’re busy, do you make time for people important to you? Do you remember what you talked about last time? Do you close the loop on advice you get from LPsโwhether you use it or not? Do you remember their answer to ‘What did you do last weekend’ 15 weekends ago? Do you follow through with what you promiseโeven if it’s a restaurant recommendation you mentioned in the call?
In a conversation with a Fund I GP yesterday who successfully raised his 8-figure fund in 8 weeks (and yes, part of that duration was over the holidays), he said something I really liked: “Every LP is looking for returns. That’s a given. But every LP is also looking for returns plus X. Your job during the fundraising process is to find out what X is, and it may be less obvious than you think it is.” For some, X is undoing boredom. For others, it’s the front row seat to learn. Others still, it’s the prospect of social capital that will come with making an investment. And you can’t find any of these out, if you don’t spend the time to build trust with the other party.
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.
Five years ago, I wrote a piece about the third leg of the race. From my time as a competitive swimmer, the lesson our coach always had for us was if you’re swimming anything more than two laps, the most important part of every race is the third leg. Everyone’s tired. Everyone’s gasping for air. Yet everyone wants to win. The question is who wants it more. And by the time you get to a decently high level, everyone’s athleticism is about the same. All that matters is the mentality you have on that third segment of four of each race.
We often say, that starting a company or a fund is a marathon, not a sprint. True in a lot of ways. But also, it’s a series of sprints within a marathon.
We put out an episode last week with the amazing Ben Choi, which I really can’t stop recommending. Just because I learn something new every time I talk with Ben, and this time especially so. But that’s my own bias, and I get it. But more interestingly, he said something that I couldn’t get out of my mind since we recorded. “The first three fundsโnot just the first two, the first threeโare that ‘working-out’ process. Most pragmatically, there’s very little performance to be seen by Fund III. So it’s actually Fund IV for us to hold up the manager as no longer emerging and now needs to earn its own place in the portfolio.” The timestamp is at 16:21 if you’re curious.
And it got me thinking… is Fund III that third leg of the race?
When most GPs raise Fund III, they’re usually four, maybe five years, out from their Fund I. And that’s assuming they started deploying as soon as they raised their fund. And within five years, not that much changes. Usually, that’s two funding rounds after your first investments. But lemons ripen early, so only a small, small subset move to Series A or B. Most have raised one or less subsequent round since the GP committed capital.
Even accounting for two funding rounds later, that’s usually too early to consider selling into the next round. And if one does (unless it’s a heavily diversified portfolio and the GP has no information rights, and somehow is so far removed from the company that no one at the company talks to the GP anymore), then there’s signaling risk. Because:
No matter what portfolio strategy you run, not staying in touch with your best performing companies is a cardinal sin. Not only can you not use those companies as references (which LPs do look for), you also can’t say your deal flow increased meaningfully over time. No senior executive or early employee knows who you are. So if they leave the company and start their own, they wouldn’t pitch you. Your network doesn’t get better over time. See my gratitude essay for more depth here.
Not having any information rights and/or visibility is another problem. Do the founders not trust you? Do you have major investor’s rights? How are you managing follow-on investment decision makingโwhether that’s through reserves or SPVs? Are the blind leading the blind?
And if you do run a diversified portfolio, where optically selling early may not be as reputationally harmful to the company, you are losing out on the power law. And for a diversified portfolio, say a 50-company portfolio. You need a 50X on an individual investment to return the fund. 150X if you want to 3X the fund. As opposed to a concentrated 20-company portfolio, where you only need 20X to return the fund and 60X to 3X. As such, selling too early meaningfully caps your upside for an asset class that is one of the few power law-driven ones. As Jamie Rhode once said, โIf youโre compounding at 25% for 12 years, that turns into a 14.9X. If youโre compounding at 14%, thatโs a 5. And the public market which is 11% gets you a 3.5X. [โฆ] If the asset is compounding at a venture-like CAGR, donโt sell out early because youโre missing out on a huge part of that ultimate multiple. For us, weโre taxable investors. I have to go pay taxes on that asset you sold out of early and go find another asset compounding at 25%.โ Taking it a step further, assuming 12-year fund cycles, and 25% IRR, โthe last 20% of time produces 46% of that return.โ And that’s just the last three years of a fund, much less sooner.
Finally, any early DPI you do get up to Fund I t+5 years is negligible. Anything under 0.5X, and for some LPs, anything sub-1X, isn’t any more inspiring to invest in than if you had absolutely no DPI.
Yet despite all of the above, the only thing you can prove to LPs are the inputs. Not the outputs. You can prove that you invested in the same number of companies as you promised. You can prove that you’re pacing in the same manner as you promised. And you can prove that founders take the same check size and offer the same ownership to you as you promised. And that is always good. As you raise from friends and family and early believers in Fund I, Fund III’s raise usually inches towards smaller institutions, but larger checks than you likely had in Fund I.
Fund-of-funds care about legibility. Logos. Outliers. Realistically, if you didn’t have any before Fund I, the likelihood of you having any while raising Fund III is slim. They need to tell a story to their LPs. A story of access and getting in on gems that no one else has heard of, but if everyone knew, they’d fight to get in.
Any person you pitch to who has any string of three to four letters (or is hired to be a professional manager) attached to their name (i.e. MBA, CAIA, CFA, CPA, etc.) has a job. For many, their incentive unless their track record speaks for itself (likely not, given how long venture funds take to fully return capital) is to “not get fired for buying IBM.” Some of their year-end bonuses are attached to that. Some lack the bandwidth and the team members to fully immerse themselves in the true craft of emerging manager investing. Many times, the incentive structure is outside of their immediate hands. For every bet they make that isn’t obvious, they risk career suicide. At least within that institution.
I’m obviously generalizing. While this may be true for 90%+ of LPs who fit in these categories, there are obviously outliers. Never judge a book by its cover. But it’s often helpful to set your expectations realistically.
As such, despite not much changing from your investment side, from the eyes of most LPs, you are graduating to larger and larger LP checks. Usually because of the need to provide more proof points towards the ultimate fund strategy you would like to deploy when you’re ‘established.’ But to each new set of LPs, prior to an institutional 8-year track record, you’re still new. On top of that, as your fund size likely grows a bit in size from Fund I, to some LPs, you are drifting from your initial strategy by no longer being participatory and now leading and co-leading. You also might have added a new partner, like Ben talks about in the afore-mentioned episode. And a new strategy and a new team requires new proof points related to on-thesis investments. So, Fund III is where you begin to need to whether the storm. For some, that may start from Fund II. Altos Ventures took four years to raise their Fund II. Many others I know struggled to do the same. But if you really want to be in VC long term, this is the third leg of the race.
And this is when a lot of GPs start tapping out. Will you?
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.
Ben Choi from Next Legacy joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on 3 GPs at VC funds to ask 3 different questions.
Gilgamesh Ventures’ Miguel Armaza, also host of the incredible Fintech Leaders podcast, asks Ben what is the timing of when a GP should consider raising a Fund III.
Similarly, but not the same, Strange Ventures’ Tara Tan asks when an LP backs a Fund I, how do they know that this Fund I GP will last till Fund III.
Arkane Capital’s Arkady Kulik asks how one should think about building an LP community, especially as he brings in new and different LP archetypes into Arkane’s ecosystem.
Ben manages over $3.5B investments with premier venture capital firms as well as directly in early stage startups. He brings to Next Legacy a distinguished track record spanning three decades in the technology ecosystem.
Benโs love for technology products formed the basis for his successful venture track record, including pre-PMF investments in Marketo (acquired for $4.75B) and CourseHero (last valued at $3.6B). He previously ran product for Adobeโs Creative Cloud offerings and founded CoffeeTable, where he raised venture capital financing, built a team, and ultimately sold the company.
Ben is an alum and Board Member of the Society of Kauffman Fellows (venture capital leadership) and has also served his community on the Board of Directors for the San Francisco Chinese Culture Center, Childrenโs Health Council, Church of the Pioneers Foundation, and IVCF.
Ben studied Computer Science at Harvard University before Mark Zuckerberg made it cool and received his MBA from Columbia Business School. Born in Peoria, raised in San Francisco, and educated in Cambridge, Ben now lives in Los Altos with his wife, Lydia, three very active sons, and a ball python.
[00:00] Intro [05:05] Ben’s 2025 Halloween costume [06:44] Jensen Huang’s leather jackets [07:24] Jensen Huang’s answer to Ben’s one question [10:05] Enter Miguel, Gilgamesh Ventures, Fintech Leaders [14:43] What are good signals an LP looks for before a GP raises a Fund III? [22:35] Why does Ben say ‘established’ starts at Fund IV? [25:08] Who’s the audience for Miguel’s podcast? [27:52] In case you want more like this… [28:32] Enter Tara and Strange Ventures [32:46] How does Ben know a Fund I will become a Fund III? [36:53] How does Ben know if a GP will want to build an enduring career? [40:58] How does Tara share a future GP she’d like to work with to Ben? [42:43] Marriage and divorce rates in America [43:34] What should a Fund I do to institutionalize? [46:28] Should you share LP updates to current or prospective LPs? [48:57] Enter Arkady and Arkane Capital [51:09] How does one think through LP-community fit? [1:01:31] What’s Arkady’s favorite board game? [1:03:08] Ben’s last piece of advice to GPs [1:09:50] My favorite Ben moment on Superclusters
โThe dance of fundraising is when you do have [your thesis], the LP has to figure out is this a rationalization of the past or is it actually what happened? Was this known at the time? Because if it was, we can have some confidence in the future going forward. But if it was just a rationalization of some randomness, then itโs hard to know if Fund IV or V or VI will benefit from the same pattern.โ โ Ben Choi
On solo GPs bringing in future partners by Fund IIIโฆ โThe future unidentified partner is the largest risk that we have to decide to accept. So there actually isnโt a moment where we decide this GP is going to be around for Fund III. Itโs actually the dominating risk we look at and we get there, but itโs a preponderance of other things that we need to build our conviction so high that weโre willing to take that risk.โ โ Ben Choi
โItโs brutal. Itโs a 30-year journey. For any GP who raises a single dollar from external LPs, itโs a 30-year journey.โ โ Tara Tan
โI donโt think anyone goes into this business to raise capital, but your ability to raise capital is ultimately what allows you to be in this business.โ โ Ben Choi
On communityโฆ โYour core question is how much diversityโin the technical term of diversityโcan you tolerate before you lose the sense of community.โ โ Ben Choi
โMost letters from a parent contain a parent’s own lost dreams disguised as good advice.โ โ Kurt Vonnegut
โFundraising is a journey of finding investors who want what you have to offer; itโs not convincing somebody to do something.โ โ Ben Choi
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 talking to an emerging manager raising a $10M fund recently. He shared a comment, likely off-the-cuff, but something I’ve heard many other emerging managers echo. “This year, most of the dollars deployed into venture has concentrated in only a few big funds.”
Not this manager in particular, but I’ve heard so many other Fund I or Fund II GPs say that. Blaming their struggle with fundraising on the world. It’s not me, but the world is conspiring against me. Or frankly, woe is me. But there is no LP who ever wants to hear that. Building a firm is hard. Building a startup, likely harder. No one said it’ll be easy. So let’s not pretend it’ll be all sunshine and rainbows. If you thought so, you’re deeply misinformed. If you’re going to be an entrepreneur of any kind, you need to take matters into your own hands. You cannot change the world (at least not yet). But you can change how you approach it.
That said, the mega funds who are raising billions of dollars are raising from institutions whose minimum check size is in the tens, if not hundreds of millions. These same institutions would never invest in an emerging manager. Their team, their strategy, and their institution isn’t built for it. When they have to deploy hundreds of millions, if not billions, a year into “venture” with a team of four or less, you’re not their target audience. So as an emerging manager, those mega funds are not your competition at least when it comes to LP capital.
You’re competing against all the other funds (likely emerging managers) at your fund size. Who can take the same check size you can take. That’s who you’re competing with. So whether you like it or not, billions going to the mega funds has, from a fundraising perspective, nothing to do with you.
If you are looking for reasons to fail, you will find one.
As the great Henry Ford once said, “Whether you think you can, or you think you can’t, you’re right.”
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. Itโs not designed to go down smoothly like the best cup of cappuccino youโve ever had (although hereโs 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.
I was chatting with a GP last week about the highlights and lowlights of having a multi-stage fund or just a VC fund as an LP via their fund-of-funds. The obvious synergies of access to downstream capital and branding, especially if the individual running the fund-of-funds is known for their institutional track record as an LP. As well as access to the GPs at those funds for mentorship reasons.
But the downsides also exist. You’re one of many of other GPs who have access to the same team. More often than not, there’s no institutional diligence. And the investment happens largely for strategic purposes. Same is true for multi-stage GPs investing through their own family office. But you also have to think through the tough conversations you need to have when you take checks from more than one of these funds. Assuming all else equal, and they write the same check size, when your portfolio companies are outperforming, do you pass them to Big Fund A or Big Fund B? Equally as true for any LP who wants co-investment opportunities. Family offices. Fund-of-funds. The classic question of: Do you like Mom or Dad more?
And there’s one more. Consider a multi-stage fund who’s an LP in your fund. You share one of your stellar portfolio companies with them, and they loved the deal so much they also invested. Not only invested, but led the following round at a much, much higher valuation. For the sake of this thought experiment, let’s say the Series A valuation is a solid nine figures. As such, they take a board seat. A year later, your portfolio company has the opportunity to exit for $800M. A phenomenal exit for everyone on the cap table, including yourself, your other co-investors, the founders, and the employees. And for you in particular, this would return meaningful multiples of your fund. But not your Series A lead, who is also your LP. The math isn’t inspiring for them. $800M would only be a shy 4-8X on their initial investment.
So, the Series A lead/your LP blocks the acquisition deal and pushes the founders to go for more. You push back on the motion as everyone else’s incentive, including the founders, is the same as yours. Whether the deal happens or not at this point is irrelevant. This Series A lead, who’s also your LP, ends up telling a number of other LPs that you’re difficult to work with. To the effect that they would also no longer re-up in your next vintage. And that makes your fundraise for the next fund even harder than you expected.
You’ve not only lost a $500-2M check (on average), but worse, you’re likely to have a tarnished reputation with prospective LPs. If they like you already, they may look beneath the surface. If they haven’t gotten to know you, they’ll likely surmise on limited information that the juice isn’t worth the squeeze.
Before you dismiss this as just a hypothetical case study, note that this is a true story.
As my buddy Thoronce told me, โCapital formation is a design principle. Fundraising is a sales process. Without true design around a customer base and a product, you will fail eventually.โ
Capital formation is thinking through the types of conversations you want to have when you’re in Fund n+1 and n+2, 5-6 years from now. As Adam Marchickonce said, “The bulk of your conversations with an LP happen negative 6 months to time of investment. The most important conversations you have with an LP are Year 2 through 6 of your investment.” These are the conversations about extending recycling periods, early distributions, fund extensions, and so on. Many of which revolve around the return incentives of your LP base (if decisions are made by majority approval) or by LPAC approval. A family office who has no immediate liquidity needs might not want early distributions and wants you to hold out. Another who’s starting a new business line or pulling completely out of venture (because they were misinformed or set the wrong expectations initially) will want early liquidity and/or someone to buy their stake. An institution with a high leadership turnover rate will likely have a new CIO who’ll want to redo the whole portfolio. So what used to be obvious re-up decisions will need to be re-underwritten altogether.
So I’m not here to say, “Don’t take LP checks from fund-of-funds whose core business is being a VC.” I just want to remind you to consider the incentives of each LP you have on your cap table. Ideally, your LP base’s incentives are homogenous. Not only to themselves, but also to yours. Realistically, for the average emerging manager, it won’t be. But if you know it won’t be, prepare guardrails for future conversations. Don’t walk in blind.
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.
You are not all top quartile. Only 25% of you are.
You are not all top decile. Only 10% of you are.
I refuse to believe that I’m somehow seeing only the best in market. I’m not famous or lucky enough to have that fortune. Even the best known LPs I know are not so.
If your marks include companies held at last round valuation (LRV) for longer than two years, please consider proactive re-marks. This includes your angel portfolio.
SAFE rounds are not mark-ups. Do not conflate real marks with hypothetical marks.
If the founder doesn’t know who you are AND if you don’t know the company’s updates in the last two quarters, you don’t know the founder. Do not pretend you do. Your investment is not accretive to your future network. I dare say if I went to those founders right now, and asked them who their top five favorite investors are, you won’t come up. You’re forgettable. And that’s a cardinal sin of firm-building.
Let me caveat that firm-building means you plan to grow the firm. That where you are today is not where you want to stay forever as a GP. This matters far less if this is a one-and-done fund. That is okay. You don’t have to love venture forever. You don’t have to pretend you do.
Do not believe you are that special if you have a multi-stage GP as an LP. Many of the notable multi-stage GPs have invested in many. Some have invested in multiple dozens. Others hundreds. A handful we see in almost every deck. It is their job to see everything Or at least attempt to. The cardinal sin for a multi-stage GP is to not see the deal, worse than not picking or winning it.
Assume all your LPs will be passive LPs. I don’t care about their profile, how referenceable they are, how much they love you, how much they want to help. Give it a few months, a year at best, they will become passive. Human interest is fleeting. Especially since venture is the smallest bucket in our allocation (excluding funds-of-funds). And yes, they have day jobs. There are exceptions. For instance, someone who wants to start their own VC fund or someone who wants to be a VC themselves. That is not everyone.
When modeling, it is bold of you to assume that more than 10% of your portfolio will be outliers. It is bold of you to assume that more than 5% of your portfolio will be outliers. We are in a power law industry.
You will get diluted. More than you think. With how much longer companies are staying private, and how much capital is available in the later growth stages, you will get diluted. 80% is safe to assume if you have no reserves. Down to 65% depending on how much you have. There are very, very few cases you only have 50% dilution. Yet I see many GPs model their portfolio that way.
Pro rata is a legal right no successful capital will grant without a fight. If you get it without a fight down the road on a great company, ask yourself why you’re so lucky. And never forget to ask yourself that question.
In a market of exceptions, you are all more normal than you think. It sucks. In any other industry, most of you will have fairly little competition for greatness, but you chose one of the few industries where your competition is all exceptions.
How you react to a ‘no’ from an LP is a sobering fact and a great telltale sign of the strength of your relationships. I love chatting with other LPs who’ve passed on you. Not because I need to hear their whyโmost of our interests and mandates are different, but because I almost always ask how you react to their ‘no.’ And I am not alone here. Usually, LPs volunteer that information up quite readily. Of note, different LPs say ‘no’ differently. Most don’t. A fact I am aware of.
Many of us who do this as our primary job love you. We love venture. We love the romanticism that comes with this space. Do not play the hopeless romantic back. We need the truth.
There’s a great line that Elizabeth Gilbert credits her wife Rayya Elias. “The truth has legs. It always stands. When everything else in the room has blown up or dissolved away, the only thing left standing will always be the truth. Since thatโs where youโre gonna end up anyway, you might as well just start there.”
The best time to share the truth is in person. And immediately. The second best is a 1:1 call. If it’s not urgent, save it for the AGM. If it is, call us.
We should not learn about you or your portfolio for the first time via the news. If we are, you’ve lost our trust. Shit happens. We get it. How you respond and communicate shit is what makes or breaks a relationship.
Many of my colleagues try to be helpful even if they can’t invest. Understand because they’re human they can’t be so for everyone. So when they are, don’t take it for granted.
If you conflate any of the above, you’re either lying to yourself or you’re lying to us. The former means you’re never going to make it in this industry. The latter means we’re just not going to be good partners for you.
This is not a Bible. Do not swear by it. Do not pray to it by the bedside every night.
This is just a morning wake-up call. Some of you have already woken up. Many of you may not have.
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 would highly recommend watching the full video. Only two and a half minutes. But in case you choose not to, the story goes… there was a former Under Secretary of Defense giving a speech at a large conference who interrupts his own remarks while drinking out of Styrofoam cup. He smiles as he looks down and he shares an anecdote.
Last year, when he was still the Under Secretary, they flew him there business class, picked him up in a car from the airport, checked him into his hotel for him, escorted him to his room. And the next morning, there was another car waiting to pick him up from the hotel that drove him to the venue, showed him through the back entrance, then green room. In the green room, there was someone waiting for him with a hot cup of coffee in a ceramic mug.
The following year he went (the year he was giving the above speech), he was no longer the Under Secretary. He flew to the city on coach, took a taxi from the airport to the hotel, checked himself in, took another taxi to the venue the next morning, found his own way backstage after arriving at the front door. When he asked where he could get coffee, someone pointed him towards the coffee machine in the back corner and told him to serve himself in a Styrofoam cup.
The intended lesson here is that the ceramic cup was never meant for him, but the position in which he holds. He deserved the Styrofoam cups, everyone does. And that no matter how far you go in life with all the perks that come with promotions and status and power, never forget that that will last only for as long as you hold that position.
There are obviously rare exceptions. But that is also the question that us as LPs ask. Hell, I’m sure it’s what a lot of VCs ask themselves about the founders they could back. Were you successful because or in spite of your last firm/company?
For founders and founding GPs, the attribution and causation is clearer than if you were an operator or other team member at a VC firm. We begin to peel the onion with questions like: What did you do in your last job title that no one else with that job title has ever done? For operators, did you create something and meaningfully lead something that created mass societal value and/or independently change the course of the company? For non-founding GPs at VC firms, did you individually drive disproportionate returns for the overall fund at your last firm? Attribution is often harder than one would think at prior institutions since many institutions succeed as teams, as opposed to individuals. So if success came as being a core member of the team, how much of your last team are you bringing with you? If not, how can you ramp up quickly to be a top performer?
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. Itโs an inside scoop of what goes on in my nogginโ. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. Iโll let you decide which it falls under.
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.
Recently, I met an LP who told me an interesting framework, derived from something Warren Buffett once said. “Every pitch needs to have energy, intelligence, and integrity. And without the last, the first two can lead bad outcomes for the LP.”
Energy โ Why now for the world? Why now for your LPs? Why is now the time for you? Why do you have to do this and nothing else? Can your pitch get people really excited about the opportunity? About you? When they wake up the next morning, are they still thinking about your conversation, or have they moved on with their morning to focus on sending the kids to school or what their schedule looks like for the day?
Intelligence โ Do you know what you’re talking about? Have you done so much research and have so much lived experience here that you are the one of the world’s foremost experts here? Are you a thoughtful and intentional person around all aspects of your life?
Integrity โ Can I trust you? Why should I trust you? Do you have a track record of maintaining long friendships? What’s the longest friendship you’ve maintained? Do you have an strong moral compass? How is it exhibited in even the smallest actions you take? If your and my interests ever clash, what is your course of action? Where do you sit in the Maslow’s Hierarchy of Needs? What set of needs are you primarily motivated by?
Interestingly enough, just a few hours later, I was catching up with a good old friend who’s putting together a pitch for his new venture. And he was telling me one of the pieces of feedback that he got was that there wasn’t enough dopamine induced from his pitch. Which was an interesting piece of commentary. The person giving him that piece of feedback believed that all pitches should induce three types of hormones:
Dopamine โ known for joy, excitement, and motivation. To draw a parallel, “energy” under Warren Buffett’s framework.
Oxytocin โ known for building trust and empathy. Or “integrity.”
Serotonin โ known for calmness, well-being, but in the context here: optimism. I’m not sure if this draws a strict line of correlation to Warren Buffett’s framework, but nevertheless, something useful to think about. Why will the world tomorrow be better than the one today? What can I look forward to?
In my buddy’s pitch, he included a lot of facts and research, promoting oxytocin in the reader. But the pitch lacked excitement and an urgency to take action. In other words, dopamine.
Most decks charting new territory and betting in the non-obvious carry too much oxytocin, responsible for creating trust (i.e. data, information, synthesis of market trends, why the GP is legible, testimonials, track record, etc.). So much to prove factually why this should exist. A very left brain approach.
Most decks betting on a hot topic, industry or idea index heavily on dopamine. Why this is exciting? Why we have to do this now?
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.
