“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel
We’re back with one of our crowd favorite formats, where we bring on one LP and one GP, and share why that LP invested in this GP. This time, we have Grady Buchanan, co-founder of NVNG, and Vijen Patel, founding partner of The 81 Collection.
Vijen Patel is an entrepreneur and investor. He founded The 81 Collection, a high growth equity firm in boring industries. Previously, he founded what is now known as Tide Cleaners. He bootstrapped what eventually became the largest dry cleaner in the country (1,200 locations) before selling to Procter & Gamble in 2018. Before Tide Cleaners, he worked in private equity, McKinsey & Company, and Goldman Sachs. He lives in Chicago with his wife and two kids.
Grady Buchanan is an institutional and risk-based asset allocation professional with a passion for bringing venture capital to those who have the interest. He founded NVNG in late 2019 and oversees investment strategies, the firm’s venture fund pipeline, manager sourcing, due diligence, and external events. Before launching NVNG, Grady worked with the Wisconsin Alumni Research Foundation’s (WARF) $3B investment portfolio, focused on private equity and venture capital initiatives, including fund diligence, investment strategy, and policy. Grady is based in Milwaukee, WI.
[00:00] Intro [02:41] The pressure of quitting a PE job for dry cleaning [05:09] Vijen’s self talk as a founder [06:50] How to overcome doubt [09:00] How Vijen learned customer success [10:35] What did Pressbox become? [12:41] The dichotomy between society’s needs and what gets funded [14:19] How did Grady go from selling pancakes to being an LP? [23:51] Why did Grady think he bombed the LP interview? [29:15] What is The 81 Collection? [32:22] How did Vijen meet Grady? [34:39] How is Vijen fluent in Spanish? [36:40] How did Grady meet Vijen? [42:21] How did Grady underwrite 81 Collection? [44:44] What about Vijen made Grady hesitate? [48:35] What’s one thing about 81 Collection that could’ve gone wrong? [50:33] The 3 things that create alpha [52:42] Why does NVNG have the coolest fund of funds’ names? [53:47] The legacy Grady plans to leave behind [56:06] The legacy Vijen plans to leave behind
“I wrote down everyone’s concerns, and I just sat on it. A lot of the founders we like to work with, the ones who we really love are the ones who take it in and listen, write it down, then take some time to synthesize everything and then they’ll act with conviction. ‘Why is this stupid? Tell me why. Let’s go deeper and deeper.’ And oftentimes these reasons are very rational and slowly over time, what if I derisk this by doing that?” – Vijen Patel
“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel
“There’s this crazy stat we recall often: the 50 richest families on Earth, who often build in this 81, they’ve held, on average, their business for 44 years.” – Vijen Patel
“We invest in only amazing managers; we will not invest in every amazing manager.” – Grady Buchanan
“Alpha’s three things: information asymmetry, access, and, actually, taxes.” – Vijen Patel
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.
Pattern Ventures’ John Felix joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.
Atria Ventures’ Chris Leiter asked about the common mistakes LPs make when underwriting solo GPs.
Garuda Ventures’ Arpan Punyani asked how quickly do most LPs get to conviction. First 10 minutes? First meeting?
Geek Ventures’ Ihar Mahaniok asked how LPs evaluate Fund IIs when the Fund I has no distributions.
John Felix is a General Partner and Head of Research at Pattern Ventures, a specialized fund of funds focused on backing the best small venture managers. Prior to Pattern, John served as the Head of Emerging Managers at Allocate where he was an early employee and helped to launch Allocate’s emerging manager platform. Prior to joining Allocate, John worked at Bowdoin College’s Office of Investments, helping to invest the $2.8 billion endowment across all asset classes, focusing on venture capital. Prior to Bowdoin, John worked at Edgehill Endowment Partners, a $2 billion boutique OCIO. At Edgehill, John was responsible for building out the firm’s venture capital portfolio, sourcing and leading all venture fund commitments. John started his career at Washington University’s Investment Management Company as a member of the small investment team responsible for managing the university’s now $13 billion endowment. John graduated from Washington University in St. Louis with a BSBA in Finance and Entrepreneurship.
[00:00] Intro [02:20] What’s changed for John since our last recording? [04:08] What is Pattern Ventures? [06:22] Why is Pattern’s cutoff for funds they’re interested in at $50M? [07:32] How does John define noise? [09:34] Do non-sexy industries require larger seed funds? [11:36] How does think about overlap in the underlying startup portfolio? [15:22] Enter Chris and Atria Ventures [18:03] Should solo GPs scale past themselves? [24:14] Partnerships have more risk than solo GPs [26:10] How does John think about spinouts from large VC firms? [27:53] The psychology of being a partner at a big firm versus your own [30:38] Enter Arpan and Garuda Ventures [31:26] Geoguessr [32:52] Garuda’s podcast, Brick by Brick [34:52] How quickly do LPs know they intuitively want to invest in a GP? [38:02] The analogy to what GPs do to founders [43:50] There are many ways to make money [44:57] Quantifying intuition as an investor [49:12] Enter Ihar and Geek Ventures [49:36] How do LPs evaluate Fund IIs when Fund I has no DPI? [53:01] How do you know if a GP did what they said they were going to do? [54:47] What if the key value driver is off-thesis, but everything else is on-thesis? [56:21] Is signing 1 uncapped SAFE per fund reasonable? [57:14] What is the allowable percentage of exceptions in a fund? [1:01:32] Good vs bad exceptions [1:06:06] Reminders that we are in the good old days [1:07:31] John’s last piece of advice to new allocators [1:09:00] David’s favorite moment from John’s last episode
“In life, it’s always easy to justify ‘why now’ is not the right time. I think it’s hard to justify ‘why now’ is the right time to do something.” – John Felix
“We love investing in things that are contrarian and non-consensus, but there has to be a path to becoming consensus because something can’t remain non-consensus forever. There has to be a catalyst that the market eventually realizes this or else the company’s not going to be able to raise venture capital. It’s not going to be able to sustain it and continue to grow and survive.” – John Felix
“The type of spinouts we want to back are the people who are successful in spite of working at the big brand, not because they worked at the big brand.” – John Felix
“You need to earn the right to start your new firm to do your own thing. I don’t think enough people realize that.” – John Felix
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 while back, my friend Augustine, CEO and founder of Digify, asked me to write something for his company, Digify’s blog, about how I think about maintaining relationships between fundraising cycles when I was still an investor relations professional. As such, I wrote a mini two-part series on the frameworks and tactics I use to maintain LP relationships. Been given the liberty to cross-post on this humble blog of mine, in hopes that it helps any emerging managers or IR professionals here.
Voila, two of two! The first one you can find here (also linked below).
Author’s note: My promise to you is that we’ll share advice you’ve likely never heard before. By the time you get to the end of this article, if you’re intimidated, then we’ll have done our job. Because that’s just how much it takes to fight in the same arena as people I’ve personally admired over the years and work to emulate and iterate daily. That said, this won’t be comprehensive, but a compilation of N of 1 practices that hopefully serve as tools in your toolkit. As such, we will be separating this piece into Part 1 and 2. The first of which is about overarching frameworks that govern how I think about managing relationships. The second of which focuses on tactical elements governed by the initial frameworks brought up.
It’s easy to stay high-level and strategic. I won’t. I personally find it helpful to have tactical examples on how to execute frameworks on LP relationship management. As your mileage may vary, the below will hopefully serve as tools for the toolkit, as opposed to Commandments or the Constitution for investor relations practices.
Tactic 1: Co-create
In general, people who help create a product have more mental and emotional buy-in to the continued success of said product. It’s why influencers leverage their fanbase to generate new ideas for content. It’s why laws and propositions are voted on. It’s why your parents asked what you wanted for dinner. It’s why, if you’re a junior team member and want budget and resources for your project, you ask for feedback from leadership (often). While not every LP wants to be intimately involved in the day-to-day, and even if they don’t end up helping, it still goes a long way when you ask for their feedback and advice for major firm decisions, regardless of whether they’re on the LPAC or not. Building strong LP relationships requires making them feel like true partners in the decision-making process. They want to be involved in:
Hiring/promoting a new partner or GP
Pivoting or expanding fund strategy
Increasing the length of the deployment period or fund term
Generating early DPI
Breaking a partnership
LPs want to hear news before they become news. And if time and expertise allows, they’d like to write the press release with you.
In addition, if you have the bandwidth and resources, host events with them on topic areas they’re interested in. Even if it’s a small gathering of four to six people, it’s the intentionality and the willingness that counts.
Tactic 2: Follow up without asks, often and thoughtfully
I think a lot about Ebbinghaus’ Forgetting Curve. Effectively, how long does it take someone to forget new information and as a function, how often do you need to remind someone for them to retain memory of that new piece of information? Within an hour, the average person forgets half of what they learned. Within 24 hours, the average person forgets 70% of it. And within a week, they forget 90%. I won’t get too technical here, but if you are interested in learning more, I highly recommend reading this paper: Murre and Dros’ Replication and Analysis of Ebbinghaus’ Forgetting Curve.
And so, in theory, every time someone’s memory of you, of your thesis, or of your firm drops below 90% memory retention, you should remind them. Rough intervals of which are within minutes, within 2 hours, within a day, within a week, within 30 days, and so on. In practice, after you catch up with an LP, text them a note saying that you’ll follow up within the day. And yes, texts are often far more effective in maintaining relationships with LPs than emails. Emails are read by other team members and often lost in inboxes. The only exception to this rule is if you or your LP is an RIA, and requires all communication to be archived, including text.
Outside of scheduled catchups, spend a lot of time tracking people’s hobbies and interests in your CRM, and sending LPs an article, video, interview or insight that reminded you of them or that you think they’d genuinely appreciate; it goes a long way. Oh, and sending thank you notes more often than you think you need to, especially unprompted ones, really helps cement relationships. Over time, this will become a habit. Here’s an example of an email I send often:
Hey [name],
Read this article [link article] this morning as I was grabbing my morning coffee and it reminded me of our conversation half a year back on [insert topic you were talking about].
One of my favorite lines from the piece was [insert quote from the article] – something I thought you would really get a kick out of.
I know you’re busy, so there’s no need to reply to this email, but I want to send this your way in case it’s interesting for you, as well as send you good vibes on this beautiful Tuesday.
Keep staying awesome,
David
Two things here:
You do not have to write like me.
Telling people that they don’t have to reply is more likely to result in a reply. Works for me 80-90% of the time when sending to a warm connection. Though, your mileage may vary.
When I had Felipe Valencia from Veronorte on my podcast, he mentioned that he brought Colombian coffee for GPs whenever he visited the States. I also know of IR people and GPs who do the same for LPs. And vice versa from LPs to Heads of IR and GPs, especially from our Asian counterparts, where gifting culture is more common. Do note though that if your LP is from a public institution—sovereign wealth fund, pension, endowment, or sometimes, even a large corporation—individuals are not allowed to accept gifts more than $50, or sometimes none at all.
“Going to see accounts before budgets are set helps get your brand and your story in the mind of the budget setter. In the case of the US, budgets are set in January and July, depending on the fiscal year. In the case of Japan, budgets are set at the end of March, early April. To get into the budget for Tokyo, you gotta be working with the client in the fall to get them ready to do it for the next fiscal year. [For] Korea, the budgets are set in January, but they don’t really get executed until the first of April. So there’s time in there where you can work on those things. The same thing is true with Europe. A lot of budgets are mid-year. So you develop some understanding of patterns. You need to give yourself, for better or worse if you’re raising money, two to three years of relationship-building with clients.”
Knowing the timing of when to see who is important, especially these days when you’re required to meet and build relationships across the world. Strategic timing can make or break an LP relationship, particularly when it comes to securing allocations.
While the above are usually for pensions, corporates and sovereign wealth funds, endowments, foundations, and large family offices all have recurring cycles. And meeting a few months before the ball has to roll can mean the difference between you being a line item somewhere and being on top of the docket.
Tactic 4: The 11-star experiences
I first learned of this when tuning into a Reid Hoffman and Brian Chesky interview, which I highly recommend. It was further reinforced as I spent more time learning from people in the hospitality and culinary world.
To summarize, everyone knows what a 1- to 5-star experience looks and feels like. But when everyone is optimizing on a 5-point scale, to outcompete others, you must compete on a scale they have yet to conceptualize. And so a five out of five experience is one where you leave happy and content enough to leave a glowing review because all the boxes were checked. Everything in your ideal vacation, retreat, or dining experience was fulfilled. So… if that’s the new baseline, then what does a six out of five experience look like?
Maybe that’s sending a limo to pick someone up at the airport, so they don’t have to find their own way to the establishment. That could also be finding your guest’s favorite bottle of champagne and having it ready when they enter your premises.
So, if that’s a six out of five, what does a seven out of five look like? You’ve pre-booked everything your guest is interested in before they show up and without them having to lift a finger. Or you learned that on their entire NY trip, your diners never had the chance to try an original New York hot dog from a street vendor, so you replace one course of the menu just so that they can try it. (True story. Would highly recommend reading Will Guidara’s Unreasonable Hospitality.)
So, if that’s a seven-star experience, what does an eight look like? What about a nine-star? 10-star? 11-star?
At some point, the stakes get quite insane. Meeting their role model from the history books. Using time travel or teleportation devices. Meeting aliens. But trust me, if competitive sports taught me anything, it’s that it’s good to envision the impossible as possible. And, the most important part to envision in this entire exercise is the genuine, and unstoppable smile that appears.
So what does this look like in practice? I cannot list everything out there, because it’s 1. not possible, and 2. if I can spell out a true 7- or 8-star experience, it’s generalizable. And if it is, it won’t feel special. That said, let me list out some I’ve done in the past that hopefully serve as inspiration. Caveat, I’m a Bay Area native, and I still live in the Bay Area.
An LP tells me they’re coming to visit the Bay. I send them a suggested itinerary based on the number of days they’re here, which balances both work and some under-the-radar touristy things. On top of that, I send hotels I suggest, restaurants I recommend, and more. All of which I offer to call on their behalf because I know the staff there and I might be able to get them a discounted rate or an automatic upgrade.
If I recommend a restaurant, and they agree to host a meeting there or just to try it out, I call the restaurant, tell them that they’re really important people to me (can do so if I’m a regular patron there already), and on top of that, I ask them to give the guests a kitchen tour.
I ask a local chocolatier to custom make some bonbons for me that are inspired by the individuals visiting, that I give to the LPs when I meet them in person.
If it’s a rush order, I call one of the long-established fortune cookie shops in San Francisco for them to do a custom order and write custom fortunes inside each fortune cookie. And inside each fortune is a fun fact about each person I’ve introduced them to meet while they’re here.
When it comes to intros, 70% of my intros will be relevant to their business interests. Startups. VCs. Other LPs. 20% of my intros are my recommendation of who they should meet but might not know they should. 10% are 1-2 people I think extremely highly of who are outside of technology and startups, but will offer a fascinating perspective to the world. A YouTuber with millions of subscribers. A legendary restaurateur. A lead game designer. An author. A Nobel prize winning professor. Naturally, I do the last selectively. My job is also to protect their bandwidth. For the last set of intros, I also don’t take intro requests.
All-in-all, LPs, like the rest of us, are human. We’re emotional creatures. We love stories. We are naturally curious. We love wonder. Their job doesn’t always allow for them to be, especially with tons of back-to-back diligence meetings, conversations with stakeholders, and so on. So it makes me personally really happy when I can balance suspense and surprise when I help them craft trips to the Bay.
In closing
These are just a few strategies and tactics among many. The goal with this piece was never to be exhaustive, but to inspire possibilities and your favorite practices. And if you’re willing, I, as well as the Digify team, are always all ears about practices you’ve come to appreciate and build into your own routine. Until the next time, keep staying awesome!
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
A while back, my friend Augustine, CEO and founder of Digify, asked me to write something for his company, Digify’s blog, about how I think about maintaining relationships between fundraising cycles when I was still an investor relations professional. As such, I wrote a mini two-part series on the frameworks and tactics I use to maintain LP relationships. Been given the liberty to cross-post on this humble blog of mine, in hopes that it helps any emerging managers or IR professionals here.
Voila, the first of two!
Author’s note [aka me]: My promise to you is that we’ll share advice you’ve likely never heard before. By the time you get to the end of this article, if you’re intimidated, then we’ll have done our job. Because that’s just how much it takes to fight in the same arena as people I’ve personally admired over the years and work to emulate and iterate daily. That said, this won’t be comprehensive, but a compilation of N of 1 practices that hopefully serve as tools in your toolkit. As such, we will be separating this piece into Part 1 and 2. The first of which is about overarching frameworks that govern how I think about managing relationships. The second of which focuses on tactical elements governed by the initial frameworks brought up.
One of the best pieces of advice I got when I started as an investor relations professional was that you never want your first conversation with an allocator to be an ask. To be fair, this piece of advice extends to all areas of life. You never want your long-anticipated catch up with a childhood friend to be about asking for a job. You never want the first interaction with an event sponsor to be one where they force you to subscribe to their product. Similarly, you never want your first meeting with an LP to be one where you ask for money.
And in my years of being both an allocator and the Head of IR (as well as in co-building a community of IR professionals), this extends across regions, across asset classes, and across archetypes of LPs.
So, this begs the question, how do you build and, more importantly, retain rapport with LPs outside of fundraising cycles? The foundation of any successful LP relationship lies in consistent engagement beyond capital asks.
To set the context and before we get into the tactics (i.e. what structured variables to track in your CRM, how often to engage LPs, AGM best practices, etc.), let’s start with two frameworks:
Three hats on the ball
Scientists, celebrities, and magicians
“Three hats on the ball”
This is something I learned from Rick Zullo, founding partner of Equal Ventures. The saying itself takes its origin from American football. (Yes, I get it; I’m an Americano). And I also realize that football means something completely different for everyone based outside of our stars and stripes. The sport I’m talking about is the one where big muscular dudes run at each other at full force, fighting over a ball shaped like an olive pit. And in this sport, the one thing you learn is that the play isn’t dead unless you have at least three people over the person running the ball. One isn’t enough. Two leaves things to chance. Three is the gamechanger.
The same is true when building relationships with LPs. You should always know at least three people at the institutions that are backing you. You never know when your primary champion will retire, switch roles, go on maternity leave, leave on sabbatical, or get stung by a bee and go into anaphylactic shock. Yes, all the above have happened to people I know. Plus, having more people rooting for you is always good.
Institutions often have high employee turnover rates. CIOs and Heads of Investment cycle through every 7-8 years, if not less. And even if the headcount doesn’t change, LPs, by definition, are generalists. They need to play in multiple asset classes. And venture is the smallest of the small asset classes. It often gets the least attention.
So, having multiple champions root for you and remind each other of something forgotten outside of the deal room helps immensely. Your brand is what people say about you when you’re not in the room. Remind people why they love you. And remind as many as possible, as often as possible. This multi-touch approach is essential for nurturing a robust LP relationship strategy.
Scientists, celebrities, and magicians
My buddy Ian Park told me this when I first became an IR professional. “In IR, there are product specialists and there are relationship managers. Figure out which you’re better at and lean into it.” Since then, he’s luckily also put it into writing. In essence, as an IR professional, you’re either really good at building and maintaining relationships or can teach people about the firm, the craft, the thesis, the portfolio, and the decisions behind them.
To caveat ‘relationship managers,’ I believe there are two kinds: sales and customer success. Sales is really capital formation. How do you build (as opposed to maintain) relationships? How do you win strangers over? This is a topic for another day. For now, we’ll focus on ‘customer success’ later in this piece.
There’s also this equation that I hear a number of Heads of IR and Chief Development Officers use.
track record X differentiation / complexity
I don’t know the origin, but I first heard it from my friends at General Catalyst, so I’ll give them the kudos here.
Everyone at the firm should play a key role influencing at least one of these variables. The operations and portfolio support team should focus on differentiation. The investment partners focus on the track record. Us IR folks focus on complexity. And yes, everyone does help everyone else with their variables as well.
That said, to transpose Ian’s framework to this function, the relationship managers primarily focus on reducing the size of the denominator. Help LPs understand what could be complex about your firm through regular catchups—these touchpoints are crucial for maintaining a strong LP relationship:
Why are you increasing the fund size?
Why are you diversifying the thesis?
How do you address key person risk?
Why are you expanding to new asset classes?
Are you on an American or European waterfall distribution structure?
Why are you missing an independent management company?
Who will be the GP if the current one gets hit by a bus?
The product specialists split time between the numerator and the denominator. They spend intimate time in the partnership meetings, and might potentially be involved in the investment committee. Oftentimes, I see product specialists either actively building their own angel track record and/or working their way to become full-time investment partners.
One of my favorite laws of magic by one of my favorite authors, Brandon Sanderson, is his first law: “An author’s ability to solve conflict with magic is directly proportional to how well the reader understands said magic.”
In turn, an IR professional’s ability to get an LP to re-up is directly proportional to how well the LP understands said magic at the firm.
My friend and former Broadway playwright, Michael Roderick, once said, the modern professional specializes in three ways:
The scientist is wired for process. The subject-matter expert. They thrive on the details, the small nuances most others would overlook. They will discover things that revolutionize how the industry works. The passionately curious.
The celebrity. They thrive on building and maintaining relationships. And their superpower is that they can make others feel like celebrities.
The magician thrives on novelty. Looking at old things in new ways – new perspectives. The translator. They’re great at making things click. Turning arcane, esoteric knowledge into something your grandma gets.
The product specialists are the scientists. The relationship managers are the celebrities. But every IR professional, especially as you grow, needs to be a magician.
Going back to the fact that most LPs are generalists, and that most venture firms look extremely similar to each other, you need to be able to describe the magic and your firm’s ‘rules’ for said magic to your grandma.
For the next half, I’ll share some individual tactics I’ve worked into my rotation. Most are not original in nature, but borrowed, inspired, and co-created with fellow IR professionals.
This post was first shared on Digify’s blog, which you can find here.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
You know that feeling when you enjoy something so much, you have to do it again. That’s exactly what happened with my buddy Ben Ehrlich. There’s a line I really like by the amazing Penn and Teller. “Magic is just spending more time on a trick that anyone would ever expect to be worth it.”
Ben is exactly that. He’s a magician with how he thinks about underwriting, arguably, the riskiest class of emerging managers. This piece originated opportunistically from another series of intellectual sparring matches between the two of us. Both learning the lens of how the other thinks. It was pure joy to be able to put this piece together, just like our last. Selfishly, hopefully, two of many more.
You can find the same blogpost under his blog, which I highly recommend also checking out.
Venture is a game of outliers. We invest in outlier managers, who invest in outlier companies, capitalizing on outlier opportunities.
Angel investments have excelled at catching and generating outlier outcomes. However, in recent years, angel checks are not just a critical piece of the capital stack for startups, they are also a way where amazing people can learn and grow into spectacular investors. In the past 20 years, angel activity has gone from a niche subsection, to a robust industry with angel groups all over the world, and the emergence of platforms to facilitate their growth.
As LPs, we see this every day. A common story that we diligence is the angel turned institutional VC. This process is what allows aspiring GPs who come from all walks of life, with often quite esoteric track records, to raise funds and prove they can be exceptional venture capitalists. These people are often the outliers at the fund level. The non-obvious investors who are taking their angel investing experience and turning it into elite cornerstones of the venture ecosystem. For example:
Arthur Rock, having done a few years of angel investments, goes to raise his first $5M fund that returns $90M in 1968. Then goes on to invest $2.5M for 50% of the company two guys with no business plan started. By the way, that became Intel.
Each of these angels-turned-investors returned their earliest believers many times over. And these are far from the only examples.
So, as an allocator, it is logical to want to pattern match to the angel investor turned GP as a way to assess how good a manager might be in building their firm. However, with more venture firms than there have ever been, and more ways to access angel-investing, differentiating signal from noise has never been harder. The hardest being where the track record is too young, too limited, and there’s not enough to go on. So it begs the question: How the hell do you underwrite an angel track record that’s still in its infancy?
The simple answer is you don’t. At least not completely. You look for other clues. Telltale signs.
So, our hope with this piece is to share what we each look for – most of which is beyond the numbers. The beauty of this piece is that even while writing it, Ben and David have learned from each other Socratically on how to better underwrite managers. This is one that can be pretty controversial, and we don’t agree on everything. So, let us know what you think….
Understanding the returns
Every pitch deck we look at has a track record slide. Usually this is some amalgamation of previous funds (if they have any), advisor relationships, and angel investing track record. Angel investing track record is usually the largest number in terms of TVPI or IRR. However it also has the least clear implications, so we need to be careful in understanding what it means. Here are the steps we take in understanding the track record.
Step 1: Filtering the Track Record
First, we get aggressive with filtering the track record the GP shows you. Not the select investments track record on the deck, but the entire track record including advisor shares, SPVs, funds, and any other equity stake. We do this as angel track records are usually the result of opportunistic or inbound access over a long period of time. The companies in their angel portfolio don’t necessarily relate to their thesis or plan for their fund. So cutting the data by asset type and starting with thesis vs off thesis investments is a helpful starting point.
Next, it’s helpful to understand the timeframe. Funds have fixed lifespans1, and strict deployment time periods, which we call vintages. In order to understand the performance, we break down the time periods of their investments including entry date, exit date, values relative to median at that time, and average hold period. Naturally, also, we do note entry valuation, entry round, exit valuation, and ideally if they have it price per share. Having the afore-mentioned will help you filter returns, especially if a GP is pitching you a pre-seed/seed fund, but the bulk of their returns come from one company they got into at the Series B.
Lastly, it’s helpful to group investments into quartiles. Without sounding like a broken record, it’s important to remember that venture is fundamentally outlier-driven. Grouping the investments, understanding them at the company specific level vs aggregate is critical to the next phase, which is understanding the drivers of the track record.
Also, it’s important to note that some vintages will perform better than others. And as an LP, it’s important to consider vintage diversification (since no one can time the market) and what the public market equivalent is. For a number of vintages, even top-quartile venture underperforms the QQQ, SPY, and NASDAQ. A longer discussion for another post. Cash, or a low-cost index is just as valid of a position as a venture fund.
Step 2: Understanding the Drivers
Once you have broken down the data, we want to understand the real drivers behind the returns from the track record. We tend to start by asking these questions:
Are there other outliers in the off-thesis investments?
What are the most successful on-thesis investments?
Has any money actually been delivered, or is it entirely paper markups?
For the on-thesis investments that returned less than 10X the check size, what did this individual learn? How will that impact how this GP makes decisions going forward?
How much of a GP’s track record is attributed to luck?
And simply, do the founders in the GP’s supposed track record even know that the GP exists?4
With respect to the second-to-last question, if their on-thesis track record has more than 10 investments, we take out the top performer and the bottom performer, is their MOIC still interesting enough? While there is no consistency of returns in venture, it gives a good sense of how much luck impacts the GP’s portfolio.
The last question is extremely prescient, since the goal of a GP trying to build an institution – a platform – is that they need the surface area for serendipity to stick to compound. Yesterday’s source of deal flow needs to be worse than today’s. And today’s should be eclipsed by tomorrow’s. As LPs, we want the GPs to be intimately involved in the success of their outliers not because attribution of value add matters, but because great companies bring together great teams. Great teams aggregate and spawn other ambitious people. Ambitious people will often leave to start new ventures. And we want the GP to be the first call. More on that in the next section.
Step 3: Transferability to a Fund
Lastly, the analysis will need to shift from purely quantitative to qualitative guided by the quantitative. We are moving from the realm of backward-looking data, into forward projection. The main question here is how do all the data points we have point to the success of the fund and the differences in running a fund versus an angel portfolio such as:
Fixed deployment periods
Weighted portfolio risks
Correlation risk between underlying portfolio companies
Information rights and regulatory requirements
Angel check size vs fund’s target check size
One heuristic that we use is that of finding the “hyper learner.” The idea is basically, how fast is this person growing, learning and adding it into their decision-making around investing. Do they have real time feedback loops that influence their process, and can they take those feedback loops to the next level with their fund? Essentially, understanding that what matters with emerging VCs is the slope, not y-intercept, so can you see how their decisions will get better?
While everyone learns differently, some of the useful thought experiments to go through include:
What is the GP’s information diet? Where are they consuming information through channels not well-documented or read by their peers?
How are they consuming and synthesizing information in ways others are not?
How does each iteration of their pitch deck vary between themselves?5
Do you learn something new every conversation you have with the GP?
Overall, this is more a bet on the person learning how to be a great fund manager, and can’t all drive from just pure angel investing track record.
The details the numbers can’t tell you:
“We spend all our time talking about attributes because we can easily measure them. ‘Therefore, this is all that matters.’ And that’s a lie. It’s important but it’s partial truth.” — Jony Ive
Angel track records can point to how serious the potential GP is about the business of investing. At the same time, there are factors outside of raw numbers that also offer perspective to how fund-ready a GP is. Looking through the details, it is important to ask in the lead-up to making the decision to run a fund, how have they spent their time meaningfully? For example:
What advisory roles have they taken? What impact did they deliver in each? For those companies and firms, who else was in the running? And why did they ultimately go with this individual?
Have they taken independent board seats? Why? What was the relationship of the founder and board member prior to the official role?
If they’re a venture partner or advisor to another VC firm, what is their role in that firm? When do they get a call from the GPs or partners of that firm?
Is the angel/advisor part of non-redundant, unique networks?
Does the angel/advisor have a unique knowledge arbitrage that founders want access to?
Does the GP’s skillset match the strategy they’re proposing?
Money isn’t the only valuable asset. Time, effort, experience, and network are others. Especially if an angel has little capital to deploy (i.e. tied up in company stock, younger in their career, saving up for a life-impacting major purchase like a house), the others are leading indicators to how a network may compound for the angel-turned-GP over time.
Anti-portfolio
Lastly, one of the hardest parts of understanding angel investing track record is the anti-portfolio as popularized by BVP. As picking is such an important aspect of a GP’s job, understanding how the person has previously made investment decisions based on the opportunities they are pursuing and what they missed out on is critical.
The stopwatch really starts counting when the angel decides that she wants to be a full-time investor one day. The truth is no third party will really know when that ticker starts, outside of the GP’s own words. And maybe her immediate friends and family. While helpful to reference check, it’s her words against her own.
Instead, we find their first angel check or their first advisory role as a proxy for that data point. The outcome of that check isn’t important. The rationale behind that check also matters less than the memos of the more recent checks. Nevertheless, it is helpful to understand how much the GP has grown.
But what’s more helpful is to come up with a list of anti-portfolio companies. Companies within the investor’s thesis that rose to prominence during the time when that individual started to deploy. And within good reason, that individual may have come across during their time angel investing or advising. In particular, if the angel has not been able to be in the pre-seed. More often than not, folks investing in that round are friends and family. If they are in the seed round, the questions that pop up are:
Did she not see it?
Did she not pick it?
Or, did she not win it?
For the latter two questions, how much has she changed the way she invests based on those decisions? And are those adjustments to decision-making scalable to a firm? In other words, how much will that scar tissue impact how she trains other team members to identify great companies?
Contradictions
One of the most important truths in venture is that to deliver exceptional returns, you have to be non-consensus and right. This ultimately derives from someone being contradictory, with purpose throughout their life.
There is beauty in the resume and the LinkedIn profile. But it often only offers a snapshot into a person’s career, much less their life. So we usually spend the first meeting only on the GP’s life. Where did she grow up? How did she choose her extracurriculars? Why the college she chose? Why the career? Why the different career inflection points?
We look for contradictions. What does this GP end up choosing that the normal, rational person would not? And why?
More importantly, is there any part of their past the GP does not want us to know? Why? How will that piece of hidden knowledge affect how she makes decisions going forward?
Naturally, to have such a dialogue, the LP, who more often than not are in a position of power in that exchange, needs to create a safe, non-judgmental space. Failure to do so will prevent candid discussions.
In Closing
It is extremely easy to over-intellectualize this exercise. There are always going to be more unknowns to you, as an LP, than there are knowns. Your goal isn’t to uncover everything. Your time may be better spent investing in other asset classes, if that’s the case. Your goal, at least with respect to underwriting emerging managers, is to find the minimum number of risks you can stomach before having the conviction to make an investment decision.
And if you’re not sure where to start with evaluating risks, the last piece (Ben’s blog, cross-posted on this blog) we wrote together on the many risks of investing in emerging managers may be a good starting point.
We are choosing to ignore evergreen funds for the purpose of this article, but we know they exist. ↩︎
Beware of GPs who count SAFEs as mark ups. While we do believe most aren’t doing so with deception in mind, many GPs are just not experienced enough in venture to know that only priced rounds count as marks. ↩︎
Separately, is the GP holding 2020-early 2022 marks at the last round valuation (LRV)? Most companies that raised during that time are not worth anything near their peak. Are they also discounting any revenue multiples north of 10-20X? How a GP thinks here will help you differentiate between who’s an investor and who’s a fund manager. ↩︎
This may seem callous, but we have come across the instance multiple times where an aspiring GP over states (or in one case, lied) their position on the cap table. Founder reference checks are a must! ↩︎
David sometimes asks GPs to send every version of their current fund’s pitch deck to him, as an indicator on how the GP’s thinking has evolved over time. Even better if they’re on a Fund II+ because you can see earlier funds’ pitches. Shoutout to Eric Friedman who first inspired David to do 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.
“Buying junk at a discount is still junk.” – Abe Finkelstein
Abe Finkelstein, Managing Partner at Vintage, has been leading fund, secondary, and growth stage investments focused on fintech, gaming, and SMB software, among others, leading growth stage and secondary investments for Vintage in companies like Monday.com, Minute Media, Payoneer, MoonActive and Honeybook.
Prior to joining Vintage in 2003, Abe was an equity analyst with Goldman Sachs, covering Israel-based technology companies in a wide variety of sectors, including software, telecom equipment, networking, semiconductors, and satellite communications. While at Goldman Sachs, Abe, and the Israel team were highly ranked by both Thomson Extel and Institutional Investor. Prior to Goldman Sachs, Abe was Vice-President at U.S. Bancorp Piper Jaffray, where he helped launch and led the firm’s Israel technology shares institutional sales effort. Before joining Piper, he was an Associate at Brown Brothers Harriman, covering the enterprise software and internet sectors. Abe began his career at Josephthal, Lyon, and Ross, joining one of the first research teams focused exclusively on Israel-based companies.
Abe graduated Magna Cum Laude from the Wharton School at the University of Pennsylvania with a BS in Economics and a concentration in Finance.
Vintage Investment Partners is a global venture platform managing ~$4 billion across venture Fund of Funds, Secondary Funds, and Growth-Stage Funds focused on venture in the U.S., Europe, Israel, and Canada. Vintage is invested in many of the world’s leading venture funds and growth-stage tech startups striving to make a lasting impact on the world and has exposure directly and indirectly to over 6,000 technology companies.
[00:00] Intro [03:18] Abe’s first investment [06:19] The definition of quality secondaries in 2003 [09:37] How did Abe know there would be capital to follow? [15:45] Valuation methodology in the 2000s [22:28] Minimum meaningful ownership for secondaries [26:17] Why did founders take Vintage’s call in Fund I? [30:41] The old-school way of tracking deal memos [32:06] Our job is to play the optimist [32:31] The headwinds of raising Vintage Fund I [36:32] Moving Vintage’s physical books to the cloud [39:06] How does Abe assign discounts to secondaries? [42:23] Proactive outreach vs reactive deal flow [46:18] What does Vintage do to stay top of mind? [49:49] What’s changed in the secondaries market since 2000? [55:32] Founder paranoia [57:56] What does Abe want his legacy look like?
“Buying junk at a discount is still junk.” – Abe Finkelstein
“Everything that’s going on in the market today, I actually feel people are overreacting to it because there are these ups and downs. Hopefully this current situation doesn’t get people too freaked out because these are the times you want to be investing in. People just don’t think that way. They see the blood on the streets and they run from it first, instead of going in.” – Abe Finkelstein
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
This is my third iteration of the 99 series for founders. You can find the first two here and here. The premise for this series was simple. The best, most insightful, unsuspecting lessons are hidden in the deepest, darkest corners of the internet. Hell, many more are hidden in rooms behind closed doors. The goal of this 99 series is to unveil those. Advice you’ve likely never thought about, and most likely have never heard of.
While you don’t need to read all the below at once, it’s helpful to keep the below at your fingertips for when you do need them. As always, unless the advice is not cited, all advice has been backlinked to its source, in case you want the longer, sometimes more nuanced version.
To make it easier for you, I’ve also pooled the advice in categories, depending on your needs:
P.S. Have I started the next one in the 99 series for founders? Yes, I have. Stay tuned!
Fundraising
1/ “Once you take venture capital, the venture capitalist’s business model is your business model. You’ve got to get liquid at a number that makes sense for them. High valuations are good because you take less dilution. Et Cetera. But the reality is that when you have a high valuation, that starts to eliminate your options. ” — Chris Douvos
2/ The employee option pool is easier to negotiate than asking an investor to take less ownership. The pool at the time of term sheet comes out of founder/team’s equity. If the pool becomes completely allocated post-investment, you need to go back to the board and ask for a larger pool, and everyone (you and VCs) gets diluted then.
3/ Beware of the “senior pari-passu,” which means that that investor gets paid paid back before everyone else on the preference stack AND they get equal footing with all the other investors. The thing to watch out for isn’t necessarily for the mechanics of the term itself, but the fact that if you let one investor have that in this round, every subsequent round, investors then will ask for that as well.
4/ Repeat founders often ask for co-sale right immunity (usually 15%) when putting together term sheets. Co-sale rights are usually provisions investors add in to prevent you, the founder, from liquidating before a liquidity event. The rights dictate the when you want to sell your equity, the investor has first dibs to buy your equity AND if not, they can also sell their equity alongside you. Because there are additional provisions, most buyers may not want to put in all the work to diligence just to have an existing investor buy your equity. And also, if your existing investors are also selling, it sends a negative signal to potential buyers.
5/ If any corporates own more than 19.5% of a company, they have to write you off as a subsidiary of the corporate and report your losses as their losses. So they’re less valuation sensitive and care less for ownership.
6/ You’re likely not the only one in market with your solution. If a competitor raises a massive round, that’s market validation. And not a reason to change your pitch. You should only change your pitch if your customers are opting for your competitor, but not if VCs are talking about your competitor. If VCs ask about your well-funded competitor, say “My customers don’t bring this up with me. But rather they bring up incumbents and this is why we’re tackling this space in full force.”
7/ “Once you have $500k+ raised, spend 2/3 of your time on funds, 1/3 on small checks.” — Ash Rust
8/ Beware of SAFE overhangs. You probably don’t want to raise more than 25% on SAFEs in comparison to the next priced round. — Martin Tobias
9/ Don’t say “The market is so large, there are room for many winners.” To a VC, that’s code for “This founder is getting their ass handed to them by competition.” — Harry Stebbings
10/ If a large number of your employee base do not have the experience of being in a startup, “make a choice about how/when/if to be transparent about the things that are happening (good and bad) and the level of startup experience within the group will be a critical factor in whether the decision to be transparent turns out to be a good one.” — Javier Soltero
11/ To fundraise, even if your last X number of months sucked, you need to show just three months of great growth prior to the fundraise. — Jason Lemkin
12/ Rough benchmarks for enterprise revenue growth for things to be interesting to VCs (— Jason Lemkin):
Before $1M ARR, growing 10%-15% a month
Around $1M ARR, growing 8%-10% a month or so
Around $10M ARR, ideally doubling
13/ “An investor is an employee you can’t fire.” — Vinod Khosla
14/ “Things that break the rules have a bigger threshold to overcome to grab the reader’s attention, but once they do, they tend to have a stronger, and more dedicated following. Blandness tends to get fewer dedicated followers.” — Brandon Sanderson on creative writing, but applies just as well to pitches
15/ “Great worldbuilding with bad characters and a bad plot is an encyclopedia. Great characters and a great plot with bad worldbuilding is still often an excellent book. […] The fact that time turners break the entire universe of Harry Potter wide open does not prevent that from being the strongest book in the entire series.” — Brandon Sanderson on story plots, but also applies to markets and founding teams. Replace worldbuilding with market. Replace characters with team, and plot with product-market fit or founder-market fit.
16/ In all great stories, the protagonist (in the case of a pitch, you) is proactive, capable, and relatable. Your pitch needs to show all three, but at the minimum two out of the three. — Brandon Sanderson
17/ “Data rooms are where fund-raising processes go to die.” Prioritize in-person and live conversations. When your investor asks you for documents, ask for 15 minutes on their calendar so you can “best prepare” the information they want. If they aren’t willing to give you that 15 minutes, you’ve lost the deal already. — Mark Suster
18/ “Second conversation with a serious investor is usually around what are you trying to prove and who are you trying to prove that to.” — Fund III GP
19/ “Set your own agenda or someone else will.” — Melinda Gates
20/ “The ‘raise very little’ strategy only works if you’re in a market that most people believe (incorrectly) is tiny or unimportant. If other people are paying attention, you have to beat the next guy.” — Parker Conrad
21/ Beware of stacking SAFEs. And be sure to model out that you as the founder(s), won’t dip below 50% ownership before the Series A. This is a more common problem than most founders think. Inspired by Itamar Novick.
22/ “Before you send a single email or take your first call, you should have a fully-researched pipeline CRM with a minimum number of qualified target investors.” — Chris Neumann
Pre-Seed: 100 – 150 qualified target investors (a mix of angel investors and VCs)
Series A: 60 – 80 qualified target investors (all VCs)
Series B: 40 – 60 qualified target investors (all VCs)
Governance
23/ Find your independent board member before shit hits the fan (usually when your investor representation and you the founders disagree). Because by the time you find an independent board member when things go south, your investor will recommend someone who’ll most likely take their side. Board members recommended by VCs usually have long standing relationships with investors and are likely to sit or have sat on other boards with that investor previously. And because they have a longer standing relationship with that VC, they will likely side with the VC when there’s a disagreement.
24/ “Board members can’t make companies but they can destroy companies.” — Brian Chesky
25/ Ask your prospective investors how long they plan to be at their firm. The worst thing that can happen is you bring on a board member and they switch firms after a year, then you’re left with a someone you didn’t pick. It’s probably also a good idea to let the investor have their board seat, contingent on them working at that firm. — Joseph Floyd
26/ Consider incorporating the company in Nevada or Texas, as Delaware courts are becoming more judiciously activist. Especially consider this if you are either politically exposed or you want more leeway and protection as a founder. — Elad Gil
27/ “When you build with other people’s money, you don’t just owe them outcomes—you owe them truth. And selling your cash to a zombie isn’t a strategy. It’s a story you tell yourself to avoid facing the music.” — Lloyed Lobo
Hiring/Team/Culture
28/ “If you raise a lot of money, do a hiring freeze and don’t hire anybody for 90 days. Money’s not going to solve your problems. You are going to solve them.” — Ryan Petersen
29/ “If you had to hire everyone based only on you knowing how good they are at a certain video game, what video game would you pick?” — Patrick O’Shaughnessy. People’s choices can be quite revealing. You can likely ask the same question for any activity/sport/topic of choice.
30/ “I hate surprises. Can you tell me something that might go wrong now so that I’m not surprised when it happens?” — Simon Sinek. A great question on how to ask weaknesses without candidates giving you a non-answer.
31/ Beware of candidates who can’t stick to a job for at least 18 months. — Jason Lemkin.
32/ Beware of candidates who love what’s on their resume. You want to be sure you’d hire them even if they didn’t have those logos/titles. — Jason Lemkin.
33/ Beware of candidates who don’t have good reasons to leave their last job. Or any job for that matter. Also watch out for candidates that leave because of salary. — Jason Lemkin.
34/ As soon as you raise capital, you should move out of a coworking space. Because as long as you are there, you cannot shape your company’s culture when the culture of the rest of the coworking space is more prevalent. — A VC who was the first institutional check into 5+ unicorns
35/ “First time founders brag about how many employees they have. Second time founders brag about how few employees they have.” — Dan Siroker.
36/ 20 years of experience is more impressive than 20 one-year experiences for deeply technical problems.
37/ 20 one-year experiences is more impressive than 20 years of experience for cultural (consumer) problems.
38/ Great founders don’t delegate understanding. Senior execs aren’t hired until founders themselves prove out the playbook.
39/ Inspired by Marc Randolph. Set boundaries around your work. Ask yourself, do you want to be starting your 7th startup and their 7th wife/husband? If not, be uncompromising with boundaries around work and life. Usually, I see most founders not have that versus most tech employees, who set boundaries almost in the opposite direction.
40/ “My two rules of thumb for CEOs (and all leaders) are:
‘if you feel like a broken record, you’re probably doing something right’ and
‘always craft your comms for the person who just started this week.'” — Molly Graham
41/ At Starbucks, no matter what seniority you are, every employee has lowercase titles. And it isn’t a typo.
42/ If you don’t know how to hire a 10/10 CTO looks like, find a world-class CTO then have them help you interview CTO candidates. It’s important to nail this right in the beginning no matter how long that takes. — Jason Lemkin
43/ “People duck as a natural reflex when something is hurled at them. Similarly, the excellence reflex is a natural reaction to fix something that isn’t right, or to improve something that could be better. The excellence reflex is rooted in instinct and upbringing, and then constantly honed through awareness, caring, and practice. The overarching concern to do the right thing well is something we can’t train for. Either it’s there or it isn’t. So we need to train how to hire for it.” — Danny Meyer
44/ Prioritize references over interviewing when hiring. “Executives have more experience bullshitting you than you have experience detecting their bullshit. So it’s like an asymmetric game where you’re a white belt fighting a black belt and they’re just going to punch you in the face repeatedly.” — Brian Chesky
45/ At the end of a candidate interview process, try to convince them out of joining the company. If you only paint them the rosy picture of joining, even if they join, they’ll joined disillusioned and with expectations that this job will be a country club, which it shouldn’t be.
46/ One of the best job ads out there by Ernest Shackleton, a 19th/20th century Antarctic explorer: “Men wanted for hazardous journey, small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful, honor and recognition in case of success.”
47/ “The health of an organization is the relationship between engineering and marketing. Or in enterprise, the relationship between engineering and sales.” — Brian Chesky
48/ “Great leadership is presence, not absence.” — Brian Chesky
49/ “I want the guy who understands his limitations instead of the guy who doesn’t. On the other hand, I’ve learned something terribly important in life. I learned that from Howard Owens. And you know what he used to say? Never underestimate the man who overestimates himself.” — Charlie Munger
50/ “If you pay great people internally, you can push back on the external fees. If you don’t pay great people internally, then you’re a price taker.” — Ashby Monk
51/ “Expect 60% of your VPs to work out — and that’s if you do it right.” — Dev Ittycheria
52/ Be generous with startup equity for your first 10 employees, “as much as leaving 30% of the pool to non-founders.” Be willing to give your early engineers 3-5% of equity, as opposed to only 50-100 basis points. — Vinod Khosla
53/ “A company becomes the people it hires. […] Experience has shown me that successful startups seldom follow their original plans. The early team not only determines how the usual risks are handled but also evolves the plans to better utilize their opportunities and to address and redefine their risks continuously.” — Vinod Khosla
54/ “I often tell pensions you should pay people at the 49th percentile. So, just a bit less than average. So that the people going and working there also share the mission. They love the mission ‘cause that actually is, in my experience, the magic of the culture in these organizations that you don’t want to lose.” — Ashby Monk
55/ “Innovation everywhere, but especially in the land of pensions, endowments, and foundations, is a function of courage and crisis.” — Ashby Monk
56/ “You stay obstinate about your vision; you stay really flexible about your tactics. […] Nobody ever got to Mount Everest by charting a straight path to the peak.” — Vinod Khosla
What criteria would you use to hire someone to do this job if you were in my seat?
How would your spouse or sibling describe you with ten adjectives?
I think we’re aligned in wanting this to be a good fit, you don’t want us to counsel you out in six months and neither do we. Let’s take the perspective of ourselves in six months and it didn’t work. What’s your best guess of what was going on that made it not work?
What are the names of your last five managers, and how would they each rate your overall performance on a 1-100?
What are you most torn about right now in your professional life?
How did you prepare for this interview?
How do you feel this interview is going?
58/ Empower your entire team to be owners in the success of your company. “Take ownership and don’t give your project a chance to fail. Dumping your bottleneck on someone and then just walking away until it’s done is lazy and it gives room for error and I want you to have a mindset that God himself couldn’t stop you from making this video on time. Check. In. Daily. Leave. No. Room. For. Error.” — Jimmy Donaldson “Mr. Beast”
59/ “CEOs are pinch hitters. We should be working on the things that nobody else can or nobody else is.” — Jensen Huang
60/ It’s only after you’ve seen excellence first hand do you no longer need to outsource the recognition of excellence to others (brands, titles, other references).
61/ “When you’re speaking with backchannel references, you know that some of these are also mentors to the candidate, and accordingly will have influence. They’ll likely call the candidate right after your call anyway to tell them how you’re thinking about them. So ask the pointed questions you need to, but then take 10 mins at the end to also tell this person what you’re building, why it could be a special company, the momentum you have in the market and why you’re particularly excited about the candidate for this role. Get the reference excited about this opportunity for the candidate.” — Nakul Mandan
62/ “Every meeting with a great candidate is a buy-and-sell meeting, and you want to build their excitement about you to its peak right before you make the offer. Making the offer too early—before they’re fully sold—can be just as bad as losing momentum by moving too slow on someone you know you want.” — Samantha Price
63/ On co-founders being in the same boat with no Plan B… “We actually wrote this in the shareholder’s agreement and it lived there all the way until the IPO. If one of us took another job or a side hustle or took any income from any other source, we should have to give up our shares. We wanted to be fully committed. If we’re going to fail, we’re not going to fail for lack of effort.” — Olivier Bernhard
64/ “You have made a mis-hire if your Customer Success leader doesn’t understand the pains, needs, and desires of your customers as well as you do within 90 days.” — John Gleeson
65/ Ask a candidate to explain a technical challenge and to talk through how they’d approach it. Then ask them to think through how they’d do it again – but in half the time.” — Keller Rinaudo Cliffton / Sarah Guo
66/ “Your org chart either accelerates or impedes your velocity. Conway’s Law inevitably shapes output—teams structured for pace will produce systems designed for pace.” — Sarah Guo
67/ “Just look at ARR per Employee. It’s the canary in the unicorn coal mine.” — Lloyed Lobo
68/ While your co-founders should excel in areas you lack and love growing further on that wavelength, they must also at some point in their career want to grow in the area you excel in. Otherwise, they’ll never truly appreciate the work you do. And unspoken expectations lead to quiet resentments.
69/ “I find most meetings are best scheduled for 15-20 minutes, or 2 hours. The default of 1 hour is usually wrong, and leads to a lot of wasted time.” — Sam Altman
70/ “Strategy is choosing what not to do.” — Peter Rahal
71/ When hiring talent, ask yourself: Are this candidate’s best days ahead of her or behind her?
Product/Customers
72/ The best way to slow a project down is to add more people to it.
73/ “Never delegate understanding.” — Charles and Ray Eames
74/ There’s this great line in a book I was recently gifted by a founder. “There is only one boss — the customer. And he can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else.”
75/ A community or 1000 true fans built without big brands and logos is far more impressive than a community built by leveraging someone else’s brands.
76/ If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good. A compelling value prop is a comment on high operating margins. You shouldn’t need to spend a lot on sales and marketing. So the metrics to highlight would be good new ARR/S&M, LTV:CAC ratios, payback periods, or percent of organic to paid growth. — Pat Grady
77/ “If we don’t create the thing that kills Facebook, someone else will.” — Mark Zuckerberg, via a red book titled Facebook Was Not Originally Created to Be a Company, given to every employee pre-IPO
78/ The best sales people are often those who communicate the most with the engineers and product team. They tend to understand the product the best. Rule of thumb should be 80% inside, 20% outside. — Former founder with a 9-figure exit
79/ “Concentration of force is the first principal strategy. Spreading yourself too thin means not concentrating resources on the sales you could win because you are spreading time on lower quality prospects. Doing 90% of what it takes to win doesn’t result in 90% of the revenue, it results in zero. You must pick the battles you can win and win the battles you pick.” — Rick Page
80/ “One of our clients said this about a large defense contractor with multiple subsidiaries: ‘having business at one business unit not only doesn’t help me at the next one, it actually hurt me. They hate each other so much that if one business unit is for me, the other ones are against me. But they are all united in one value: they hate corporate. So the potential for working my way to the corporate offices and coming down as their worldwide standard is impossible in an account like this.” — Rick Page
81/ “Pain doesn’t come from the business problem, it comes from the political embarrassment of the business problem. If the pain or lost opportunity is not visible, then it’s not embarrassing and it will not drive business buying activity to a close.” — Rick Page
82/ “Mr. Prospect, we’ve announced a 6% price increase. We’d hate to see you buy the same proposal later at a higher price, so we really need to get this business in by the end of the quarter to secure this price. — Not only is this technique predictable, but after months of building value for your solution, you have now commoditized yourself. You have turned it from value to price on order to close business at the end of the quarter. Once you have offered a discount, you have announced what kind of vendor you are and the only question now is the price. Let the games begin.” — Rick Page
83/ “You must refocus off the imagined political benefit of a lower price, and on the longer term benefits of the overall project. ‘Mr. Prospect, how are you measured and what you will be remembered for three years from now won’t be the price, it will be the success of the project. If this goes well, the cost will be a detail. If the project goes poorly, no one will say ‘well at least we got a bargain.”” — Rick Page
84/ “Try not to take no from a person who can’t say yes.” — Rick Page
85/ Stacking the bricks, a Steve Jobs’ concept. If you have a pile of bricks and lay them on the ground, then no one will notice the ground. If you stack them up vertically, you create a tower; and everyone will notice the tower. Consider this when you have product features, launches and fixes.
86/ As of Q4 2024, it takes about 70 days to close a $100K contract for enterprise customers. Use that as your benchmark. If you’re faster, brag about it. If you’re slower than that, figure out how to close faster. — Gong State of Revenue Growth 2025 report
87/ Beware of “annual curiosity revenue.” “AI companies with quick early ARR growth can lead to false positives as many are seeing massive churn rates.” — Samir Kaji
88/ Your job is to get to innovation retention before your incumbents get to innovation.
89/ If you didn’t help create the proposal with your customer, you’ve already lost.
90/ People don’t change when they’ve made a mistake. People change when there’s a public embarrassment of them making a mistake.
91/ Know your customers intimately. Go visit your customers as often as you can. In fact, get as many passes / office keys to their offices as possible, and spend time with them.
92/ “Every other week, we have a customer join for the first 30 minutes of our management team meeting: they share their candid feedback, and ~40 leaders from across Stripe listen. Even though we already have a lot of customer feedback mechanisms, it somehow always spurs new thoughts and investigations.” — Patrick Collison
93/ “I see a lot of b2b startups moving to multiyear pricing from monthly or annual. I think this is usually a bad idea. It hides customer delight issues. It lengthens sales cycles. Overall, it just reduces the signal startups need.” — Brian Halligan
94/ Customers will still highly rate your customer service even if they didn’t get what they wanted if you show you care. That you care for their plight, and you really try to help them get what they want. — Simon Sinek
Competition
95/ “When you get outreach from multiple VC associates out of nowhere, your competitor is out raising and they’re just doing their homework.” — Siqi Chen
Legal
96/ “If you’re selling the business, tell as few people as possible and do everything you can to make sure past employees or former business associates do not find out.” Beware of moths who can start lawsuits. — Sammy Abdullah
97/ When you’re working with boutique investment banks, to protect yourself in case the banker sues when you choose to go with a different buyer… “Make sure the banker contract says they only get paid on intros they make directly and have a 6 month tail. Terminate any banker agreement as soon as they’re no longer working and the process is over; do not let these agreements linger.” — Sammy Abdullah
Expenses
98/ “Never buy a SaaS product owned by private equity unless you have to. Main exception: if founder is still CEO. Why: Impossible to cancel, Price increases out of the blue, Lose any real customer success, Innovation slows down or even ends, Support usually terrible” — Jason Lemkin
Secondaries
99/ If you’re planning to sell founder secondaries, beware of signaling risk. Sometimes, you do have a major life event that needs capital (i.e. buying a home, having a baby, hospital bills, etc.). If you are to sell, don’t sell until the Series B. “And even then I’d suggest titrating up… 2% at A, 5% at B, 10% at >=C.” — Hari Raghavan
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.
