Surprisingly, last week was the first week I’ve gone to multiple events for a given conference. Also I’m using the word “conference” very loosely here since I’m counting a tech week as one. What started off as ‘I’m going to support just one friend,’ ended up being a slippery slope, and supporting many friends, and catching up with friends in town. I mean, c’mon, how do you not at least say hi to a friend who’s flown from NYC or Miami? Perks of being bad at saying no.
That said, for the founder focused on getting to product-market fit, or actively fundraising, or the GP fundraising, your time is better spent elsewhere. But if you’re exploring and trying to increase the surface area for luck to stick, these events are great. So many fun, interesting ideas floating around.
Eight quick takeaways, before I go back and I let you go back to the rest of your week:
For VC/founder events, most attendees are founders. Smaller VCs went to the GP events. Bigger VCs just host their own.
For LP/GP events, most attendees are GPs. Went to an event of this type, and I kid you not, only met 2 LPs out of 15 people I chatted with. The rest were GPs. The folks you would like to show up at VC/founder events would rather pitch than to be pitched.
Interestingly enough, for the events that have a good proportion of LPs, most don’t seem to be investing in emerging managers. Anecdotally, have heard three of my friends who are individual LPs get turned down from LP events during SF Tech Week.
Smaller funds seem harder to raise than larger funds.
US large family office and institutional LP market is drying up. Most have overextended to buyouts and still need therapy for being burned in 2020 and 2021. For those that haven’t, they’re resorting to intros from friendlies.
Hosting your own events gives you better bang for your time than attending events.
And as one would suspect, AI dominates 70-80% of conversation.
Investing in unsexy industries is sexy. New moniker is to invest in industries where either 1/ people have scruffy beards or unkempt hair or 2/ meetings that require suit and tie.
Stay awesome, friends!
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Voila, the fourth installation of 99 soundbites I’ve been fortunate enough to collect over the past year. The first four of what I imagine of many more to come. Each of which fall under one of the ten categories below, along with how many pieces of advice for each category:
You can also find the first three installments of 99 pieces of advice for both founders and investors here. Totaling us to a total of 396 pieces of advice.
But without further ado…
Fundraising
1/ If you’re an early stage startup, expect fundraising to take at least 3-4 months to raise <$1M. If you’re on the fast side, it may take only 2 weeks. – Elizabeth Yin*timestamped April 2022
2/ If you’re going to raise a round over 6-12 months, it often doesn’t seem fair that your first commits have the same terms as those who commit 6 months later, since you’ve grown and most likely have more traction at the time. As such, reward your early investors with preferred terms. Say you’re raising a $1M round. Break the round up to $300K and $700K. Offer a lower cap on SAFEs for the $300K. “Tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs. And that the cap will most likely go up after that.” Why? It lets you test demand and the pricing on the cap – to see if you’re cap is too high or too low on the first tranche. – Elizabeth Yin
3/ As a startup in recessionary times, you have to grow your revenue faster than valuations are falling to make sure you raise your next round on a mark up. Inspired by David Sacks and Garry Tan. *timestamped April/May 2022
4/ There’s only going to be 1/3 the amount of capital in the markets than in 2020 and 2021. So plan accordingly. If you’re not a top 0.1% startup, plan for longer runways. Fund deployments have been 1-1.3 years over the past 1.5 years, and it’s highly likely we’re going to see funds return back to the 3-year deployment period as markets tighten. *timestamped May 2022
5/ B2B startups that have the below disqualifiers will find it hard to raise funding in a correcting venture market:
No to little growth. Good growth is at least doubling year-over-year.
Negative or low gross margins. Good margins start at 50%.
CAC payback periods are longer than one year.
Burn multiples greater than 2 (i.e. You’re burning $2 for every dollar you bring in). A good burn multiple is 1 or less. – David Sacks
6/ Beware of “dirty term sheets.” Even though you’re able to get the valuation multiple you want, read the fine print for PIK dividends, simple “blocks” on IPO/M&A, and 2-3x liquidation preferences. Inspired by Bill Gurley.
7/ “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.” – Sabeer Bhatia in Founders at Work
8/ In a bear market, public market multiples are the reference points, not outlier private market multiples. Why? Public market multiples are their exit prices – how they return the fund. It matters less so in bull markets. – David Sacks
9/ Don’t trust the “why”, trust the “no.” Investors don’t always give the most honest responses when they turn down a company.
10/ If you inflate your projections, the only investors you’ll attract are dumb investors. They’ll be with you when things are going well and make your life a living nightmare when things aren’t, will offer little to no sound advice, and may distract you from building what the market needs. By inflating your projections, you will only be optimizing for the battle, and may lose the war if you can’t meet or beat your projections.
11/ VCs will always want you to do more than you are pitching. So if you’re overpromising, they’re raising their expectations even more down the road.
12/ Five questions you should answer in a pitch deck:
If you had billboard, what 10 words describe what you do?
What insight development have you had that others have not?
How you acquire customers in a way others can’t?
Why you?
What you need to prove/disprove to raise next round? – Harry Stebbings
13/ The longer you’re on the market, the greater the differential between expectations and reality, and the harder it is over time to close your round. Debug early on in the fundraising process (or even before the fundraising process) by setting and defining expectations through:
Leveraging market comparables. You don’t have to be good at everything, but you have be really really amazing at one thing your competitors aren’t. It’s okay if they’re better than you in other parts.
14/ You should reserve 10% of your round to allocate to your most helpful existing investors. Reward investors for their help. – Zach Coelius
15/ If your next round’s investor is willing to screw over your earlier investors out of pro rata or otherwise. After they leave, the only one left to screw over is you. – Jason Calacanis
16/ “Nobody’s funding anything that needs another round after them.” – Ben Narasin quoting Scott Sandell
17/ “When a VC turns you down for market size, what they are really saying is: I don’t believe you as the founder has what it takes to move into adjacent and ancillary markets well.” – Harry Stebbings
18/ When raising from corporates, be mindful of corporate incentives, which may limit your business and exit opportunities. “I’ve often seen the structure just simply be a SAFE with no information rights. No Board seats. Check sizes that are worth < 5% ownership. No access to trade secrets.” – Elizabeth Yin
19/ LOIs mean little to many investors, unless there’s a deposit attached to it. A customer must want the product so much they’re willing to take the risk of putting money down before they get it. 1-5% deposit would be interesting, but if they pay the product in full, you would turn investor heads. – Jason Calacanis
20/ “The most popular software for writing fiction isn’t Word. It’s Excel.” – Brian Alvey
21/ “Ask [prospective investors] about a recent investment loss, where the company picked someone else. See how they describe those founders, the process, and what they learned. This tells you what that investor is like when things don’t go their way.” – Nikhil Basu Trivedi
22/ “Founders, please hang onto at least 60% of the company’s equity through your seed raise. Series A or B is the first time founder equity should dip below 50%. I’ve seen cap tables recently where investors took too much equity early on, creating financing risk down the road.” – Gale Wilkinson
23/ “One of the worst things you can say to a VC is ‘we’re not growing because we’re fundraising.’ There are no excuses in fundraising.” – Jason Lemkin. Fundraising is a full-time job, but when you’re competing in a saturated market of attention, it’s you who’s fundraising, but not growing, versus another founder who’s also fundraising and is growing.
25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):
Pre-seed: $750K-1.5M round
Valuation: $5-10M post (*She would not go over $7M)
Traction:
A working MVP
Indications of customer demand = have interviewed hundreds of potential customers or users
2-5 “Design Partners” (non-paying customers or users)
Seed: $2-5M round
Valuation: $12-25M post (*She would not go over $15M)
Traction:
$10-15K MRR, growing 10% MoM
6-12 customers who have been paying for ~6 months or more, a few that would serve as case studies and references
Hired first technical AE
Series A: $8-15M round
Valuation: “anyone’s guess”
Traction:
$1.5M in ARR is good, more like $2M
3x YoY growth minimum, but more like 3.5x • 12-20 customers, indications of ACV growth
Sales team in place to implement the repeatable sales playbook
26/ Don’t take on venture debt unless you have revenue AND an experienced CFO. – Jason Calacanis
27/ When you are choosing lead investor term sheets:
For small VC teams (team <10ppl): Make sure your sponsoring partner is your champion. Why does investing in you align with their personal thesis? Their life thesis? Which other teams do they spend time with? How much time do they spend with them? When things don’t go according to plan, how do they react? How do they best relay expectations and feedback to their portfolio founders?
For larger platform teams (team >10ppl): Ask to talk to the 3-5 best people at the firm. And when the investor asks you to define “best”, ask to talk to their team members who best represent the firm’s culture and thesis. Why? a/ This helps you best understand the firm’s culture and if there’s investor-founder fit. b/ You get to know the best people on the team. And will be easier to hit them up in the future.
28/ “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” – Abhiraj Bhal
29/ “[Venture] debt typically has a 48-54 month term, as follows: 12 months of a draw period (ballooned to 18 months over the last few years), to which you can decide to use it or not 36 months to amortize it after that 12 months. The lender at this stage is primarily underwriting to venture risk, meaning they are relying on the venture investor syndicate to continue to fund through a subsequent round of financing.” This debt is likely to be paired with language that allow the fund to default if investors say they won’t fund anymore and/or just not to fund when asked. “They typically are getting 10bps-50bps of equity ownership through warrants. Loss rates must be <3-4% for the model to work.” If there’s less than 6 months of runway or cash dips below outstanding debt, then as a founder, expect a lot of distracting calls. – Samir Kaji
30/ The best way to ask for intros to investors is not by asking for intros, but by hosting an event and having friends invite investors to the event. There’s less friction in an event invite ask than an investor intro ask. The reality is that the biggest investors are inundated with intro requests all the time, if not just by cold email too.
Cash flow levers
31/ The bigger your customers’ checks are (i.e. enterprise vs. SMB vs consumer), the longer the sales pipeline. The longer the sales pipeline, the longer you, the founder, has to stay the Head of Sales. For enterprise, the best founders stay VP of Sales until $10M ARR. For SMB, that’s about $1-2M ARR, before you hire a VP of Sales. Inspired by Jason Lemkin.
32/ “‘I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.'” The sales playbook of David Beirne of Benchmark Capital fame, cited in eBoys.
33/ “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” – Bill Gurley
34/ If you were to double or triple the price of your product, what percent of customers would churn? If the answer is anything south of 50%, why aren’t you doing it?
35/ Getting big customers and raising capital is often a chicken-and-egg game. Sometimes, you need brand name customers, before you can raise. And other times, you need capital before you can build at the scale for brand name customers. So, when I read about Vinod Khosla’s advice for Joe Kraus: “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, ‘How do we bid $3 million? We only have $1 million in the bank.’ And he said, ‘Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.'”
36/ “Your ability to raise money is your strategy. If you’re great at it, build any business with network effects. If you’re bad at fundraising, it’s strategically better to build a subscription business with no network effects.” – Elizabeth Yin
37/ Be willing to fire certain customers (when things get tough or in an economic downturn). If they aren’t critical strategic partners or are loss making, figure out how to make them profitable. If you can, renegotiate contracts, like cheaper contracts for longer durations. If not, let them go. Make it easy to offboard.
38/ An average SaaS business, that doesn’t have product-led growth, is spending about 50% of revenue on sales and marketing. Those that are in hyper growth are spending 60%. – Jason Lemkin
39/ “The only thing worse than selling nothing is selling a few. If you sell nothing, you stick a bullet in it and move on. When you sell a few, you get hope. People keep funding even though it’s really not viable.” – Frank Slootman
40/ If your customer wants to cancel their auto-renew subscription to your product, you should refund them a 100% of their cost. – Jason Lemkin
41/ “Your price isn’t too high. Your perceived value is too low.” – Codie Sanchez
42/ “15-20% of IT spend is in the cloud.” And it’s likely to go up. – Alex Kayyal
43/ If your customers are willing to pay you way ahead of when your service is executed, you have an unfair and unparalleled cashflow advantage. – Harry Stebbings
44/ If you’re in the CPG business, it’s better to negotiate down the contract. “You buy 75, and you sell 60, they’re going to go, ‘Ah, I got 15,000 in inventory, it’s not a success.’ If you give them 40, and then they have to buy another 20, and they sell 60, they go, ‘Wow, we ordered 50 [(I think he meant 20)] more than our original order.’ You’re still at 60, but one, they’re disappointed, and one, they’re not. You’re still playing some weird mind games a little bit so that they feel good about whatever number was there.” – Todd McFarlane
45/ “If you are under 100 customer/users, get 20 of them in a Whatsapp Group. You will:
Get much higher quality feedback, faster, on the current product.
They will be WAY more proactive in suggesting future product ideas and helping you shape the product roadmap.
It will create a closer relationship between you and them and they will become champions of the product and company. People like to feel they had a hand in the creation process.” – Harry Stebbings
46/ Create multiple bank accounts with different banks to keep your cash, to hedge against the risk of a bank run. The risk is very unlikely to occur, but non-zero, especially in a recessionary market. Inspired by SVB on March 10, 2023. More context here, and what happened after here. Breakdowns here, here and here.
47/ “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for “excess cash” to be invested in safe, liquid options to generate slightly more income.” – A bunch of firms
48/ “Maintain an emergency line of credit. Obtain a line of credit from one of your core banks that can fund the company for 6 months. Do not touch it unless necessary.” – A bunch of firms
49/ In case of a bank run: “1/ Freeze outgoing payments, let vendors know you need 60 days, 2/ Figure out payroll & let your investors know exactly when cash out, 3/ Attempt emergency bridge with existing investors; hopefully reasonable terms or senior debt (but given valuation reset this is a HARD discussion for many), 4/ Figure out who can take deferred salary on management team, which will extend runway, 5/ Make sure you communicate reality to team honestly so they can make similar plan for their household, 6/ Make sure you talk to HR about legal issues around payroll shortfall — which hopefully this doesn’t come to, 7/ In future, keep cash in 3 different banks.” – Jason Calacanis
50/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff
51/ General reference points for ACV and time to close are: $1K in 1 week. $10K in 1 month. $100K in 3 months. $300K in 6 months. And $1M in 12 months. – Brian Murray
52/ A B2B salesperson’s script from Seth Godin. “Look, you’ve told me you have this big problem you need to solve. You have a five million assembly line that’s letting you down, blah blah. If we can solve this problem together, are you ready to install our system? Because if it’s not real, let’s not play. Don’t waste my time, I won’t waste yours. You’re not going to buy from me because I’m going to take you to the golf course. You’re not going to buy from me because our RFP is going to come in cheaper than somebody else’s. You want my valuable time? I’m going to engage with you, and tell you the truth and you’ll tell me the truth. You’re going to draw your org chart for me. You’re going to tell me other complicated products you’ve bought and why your company bought them. And I’m going to get you promoted by teaching you how to buy the thing that’s going to save your assembly line. Let’s get real or let’s not play.” – Seth Godin
53/ “The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.” – Charles Hudson
Culture
54/ Deliver (bad) news promptly. Keep to a schedule. The longer you delay, the more you lose your team’s confidence in you. For example, if your updates come out every other Friday, and you miss a few days, your team members notice. Your team is capable of taking the tough news. This is what they signed up for. Explain a stumble before it materially impacts your bottom line – revenue. Inspired by Jason Lemkin.
56/ “It’s easier, even fun, to do something hard when you believe you’re doing something that no one else can. It’s really hard to go to work every day to build the same thing, or an even worse version, of what others are already building. As a result, there was a huge talent drain from the company.” – Packy McCormick
57/ Lead your team with authenticity and transparency. “Employees have a ridiculously high bullshit detector, more so than anyone externally, because they know you better. They know the internal brand better.” So you have to be honest with them. “Here’s what we’re going to tell you. Here’s what we won’t, and here’s why.” Set clear expectations and leave nothing to doubt. – Nairi Hourdajian
58/ When someone ask Jeff Bezos, when does an internal experiment get killed? He says, “When the last person with good judgment gives up.” – Bill Gurley citing Jeff Bezos
59/ “Getting too high on a ‘yes’ can prepare you for an even bigger fall at the next ‘no.’ Maintaining your composure in the high moments can be just as important as not getting too down in the low moments.” – Amber Illig
60/ “Most have an unlimited policy paired with a results-driven culture. This means it’s up to the employee to manage their time appropriately. For example, no one bats an eye when the top performing sales person takes a 3 week vacation. But if someone is not pulling their weight and vacationing all the time, the perception is that they’re not cut out for a startup.” – Amber Illig
61/ “Whenever we’re dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we’re not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we’re taking, but it’s not going to be what we’re currently doing.” – Tobi Lutke
62/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan
63/ “Leadership is disappointing people at a rate they can absorb.” – Claire Hughes Johnson
64/ Page 19 Thinking: If you were to crowdsource the writing of a book, someone has to start inking the 19th page. And it’s gotta be good, but you can’t make it great on the first try. So you have to ask someone else to make it better, and they have to ask another to make their edits even better. And so on. Until page 19 looks like a real page 19. “Once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.” – Seth Godin
Hiring
65/ Hiring when your valuation is insanely high is really hard. Their options could very much be valueless, since they would depend on the next valuation being even higher, which either means you grow faster than valuations fall (market falls in a bear market) or you extend your runway before you need to fundraise again.
66/ It’s easier to retain great talent in a recession, but much harder to retain them during an expansionary market. Talent in a boom market have too many options. There’s more demand than there is supply of talent in a boom market.
67/ If you’re a company with low employee churn, you can afford to wait a while longer to find someone who is 20% better in the role. – Luis von Ahn
68/ “[Fractional CMOs and CROs often] want to be strategists. Tell you where to focus, and what to do better. But the thing is, what you almost always just need is a great full-time leader to implement all the ideas.” – Jason Lemkin. The only time it works is when the fractional exec owns the KPI and the function, where they work at least 60% of the time OR they work part-time and help you hire a full-time VP.
69/ Hire your first full-time comms person after you hit product-market fit, when you are no longer finding your first customers, but looking to grow your customer base. – Nairi Hourdajian
70/ “Ask [a high-performing hire] if there’s someone senior in her career that’s been a great manager, and if so, bring them on as an equity-compensated advisor to your company. If there’s someone in industry she really admires but doesn’t yet know, reach out to them on her behalf.” Give her an advisor equity budget, so they can bring on a mentor or someone they really respect in the industry. As a founder, create a safe space for both of them. Monthly 1:1s and as-needed tactical advice, introductions, and so on. And don’t ask that mentor to give performance feedback “because if so it’s less likely they’ll have honest, open conversations.” – Hunter Walk
71/ Hire talent over experience for marketing and product. “In marketing and product I prefer people with less experience and a lot of talent so we can teach them how we do things. They don’t have to unlearn anything about how they already work. We teach them how we work. For developers it might be different because it takes a lot of time to be a really good developer, and it’s relatively easy moving from one environment to another.” – Avishai Abrahami
72/ If you’re going to use an executive search firm to hire an exec, ask the firm three questions: “1/ Walk me through your hardest search? 2/ Walk me through a failed search? 3/ Why did it fail? 4/ How do you assess whether an exec is a good fit?” You should be interviewing the firm as much as the candidate. Watch out for “a firm with a history of candidates leaving in a short timeframe. Avoid firms that recycle the same execs.” – Yin Wu
73/ Before signing with any recruiting agency, ask “What happens if the person hired is a bad fit? (Many firms will restart the search to align incentives.) Is there a time limit for the search? (Some firms cap the search at 6 months. We’ve worked with firms without caps.)” – Yin Wu
Governance
74/ “The higher the frequency and quality of a young startup’s investor update, the more likely they are to succeed in the long run.” – Niko Bonatsos
75/ Five metrics you should include in your monthly investor updates:
Monthly revenue and burn, in a chart, for the whole year
Cash in the bank, at a specific date, and runway based on that
Quarterly performance for the past 8 quarters, in a chart
Target for the quarter AND year and how you are trending toward it
76/ Another reason to send great, consistent investor updates is that when prospective investors backchannel, you want to set your earlier investors up for success on how they pitch you.
77/ If you don’t have a board yet, still have an “investor meeting.” “Create investor meetings where you invite all your investors to do an in-person + Google Hangout’ed review every 60 days. They don’t have to come. But they can.” – Jason Lemkin
78/ “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” – Bob Iger
79/ “Entrepreneurs have control when things work; VCs have control when they don’t.” – Fred Wilson
80/ If an investor really wants their money back (usually when VCs have buyer’s remorse), there are times when they force you to sell or shut down your companies. Instead, ask them, “What would it take to get you off my cap table?” – Chris Neumann
Product
81/ “The ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” – Bruce Dunlevie, cited in eBoys
82/ Once you launch, you’re going to be measured against how quickly you can ramp up to $1M ARR. One year is good. Nine months is great.
83/ The more layers of friction in the onboarding process (i.e. SSN, email address, phone number, survey questions), the better you know your user, but the higher the dropoff rate. For PayPal, for every step a user had to take to sign up, there was a dropoff rate of 30%. – Max Levchin in Founders at Work
84/ “Product-market fit can be thought of as progressively eliminating all Herbies until there are no more Herbies. Then, you’re in a mode where you can invest in growth because it’s frictionless.” – Mike Maples Jr. (In the book, The Goal, the trek is often delayed by a large kid called Herbie. As you can imagine, the group only moves as quickly as their weakest link.)
85/ “There’s a ruthlessness in the way Dylan finds sources, uses them and moves on.” – No Direction Home. Be ruthless about how knowledgeable you can be about your customers, about your problem space, and about your product. The knowledge compounds.
Competition
86/ “If you patent [software], you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.” – Max Levchin in Founders at Work
87/ If you know you’re building in a hot space, and your competitors are being bought by private equity firms, share that with your (prospective) investors. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
88/ “As a startup, you always want to compete against someone who has ‘managed dissatisfaction at the heart of their business model.” – Marc Randolph
89/ “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” – Ayrton Senna. It’s easier to overtake your competitors in tough markets than great markets.
90/ “Having a real, large competitor is better than having none at all!” – Anna Khan
Brand/Marketing/GTM
91/ If you’re a consumer product, your goal should be to become next year’s hottest Halloween costume. Your goal shouldn’t be fit into a social trend, but to define one.
92/ Don’t be married to the name of your company. 40% of NFX‘s early stage investments change their names after they invest in the seed.
93/ The viral factor doesn’t take into account the time factor of virality. In other words, how long it takes for users to bring on non-users. Might be better instead to use an exponential formula. “Think of a basic exponential equation: X to the Y power. X is the branching factor, in each cycle how many new people do you spread to. Y is the number of cycles you can execute in a given time period. The path to success is typically the combination of a high branching factor combined with a fast cycle time.” – Adam Nash
94/ In a down market, you may not need as big of a marketing budget as you thought. Your competitors are likely not spending as much, if at all, to win the same keywords as before.
Legal
95/ “Nothing is more expensive than a cheap lawyer.” – Nolan Church
The hard questions
96/ “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.” – Andy Rachleff, cited in eBoys
97/ “Inexperienced founders are usually too slow to fire bad people. Here’s a trick that may help. Have all the cofounders separately think of someone who should probably be fired, then compare notes. If they all thought of the same person…” – Paul Graham
98/ When you’re in crisis, find your OAR. Overcorrect, action, retreat. Overcorrect, do more than you think you need to. For instance, lay off more than you think you need to. Actions can’t only be with words. Words are cheap after all. And retreat, know when it’s time to take a step back. “Sometimes you just have to do your time in the barrel. When you’re in the barrel, you stay in the barrel. And then you slowly come out of it.” – Nairi Hourdajian
99/ “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.” – Tom Loverro
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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 can’t always be the fastest or the brightest or the most talented. For the most part, anything that can be measured with a metric, or put on a business card or a baseball card — anything with an absolute ranking — is not something you can always control. You can be the fastest 100-meter dasher in the world today. But tomorrow, there will always be someone who’s faster. Today, you can be the youngest founder who’s raised venture capital. But tomorrow, someone will outdo you. Today, you can sell the most Girl Scout cookies. But tomorrow, someone will outsell you. The Guinness World Records is proof of that. You get the point. Because you’ll be in fashion one day, and out the next.
But if there’s anything I learned from hanging around the dragons and phoenixes — all pen names for perpetually and persistently world-class individuals, it’s that there’s gravity in being a voracious consumer of content. In being a voracious curator of what one feeds their brain. Information diet or fitness as one of my friends calls it. Being the most knowledgeable — or the pursuit thereof — has a longer shelf life and a half life than all other phenotypical isotopes. Or my fancy schmancy way of saying, all the other titles one can earn in their short lives.
It also happens to be closest pursuit where one unit of input roughly equals one unit if not more of output. For instance, to be the fastest sprinter, one extra hour of practice doesn’t consistently yield one second off your personal best. But if you’re regulating your content intake algorithm, for instance reading books, and not doomscrolling on TikTok, one extra page read is more often one more unit of knowledge you can apply in the future. Or if you’re asking good questions, one more coffee chat yields you another year or two saved of mistakes you could have made in your craft. As such, one should spend time reading, listening, watching and asking.
I spent the past weekend tuning into one of my favorite talks by Bill Gurley. (I knowww……. It really took me this long to actually write this essay.) In it, he shared that one should always “strive to know more than everyone else about your particular craft.” He goes on, “That can be in a subgroup. What do I mean by that?
“Let’s say you love E-sports. Let’s just say you’ve decided multiplayer gaming E-sports, like, this is it for you. You grew up gaming, “I love it.” All right? Within the first six months of being in this program you should be the most knowledgeable person at McCombs in E-sports. That’s doable. You should be able to do that. Then, by the end of your first year you should be top five of all MBA students, and, hopefully, when you exit your second year you’re number one of any MBA student out there. It doesn’t mean you’re the best E-sports person in the world, but you’ve separated yourself from everyone else that’s out there. I can’t make you the smartest or the brightest, but it’s quite doable to be the most knowledgeable. It’s possible to gather more information than somebody else, especially today.”
It so happens to be why VCs ask about your previous experience before starting the company. It’s why they look for passion. It’s why VCs ask for you to show that you have spent time in the idea maze. And it’s why the goal of a pitch meeting or any meeting with someone you hope to impress is to teach them something new. They’re all proxies for a founder’s rate of learning. The rate that one acquires knowledge is often directly proportional to the rate of iteration.
At some point later in the same talk Bill Gurley does above, he says, “Information is freely available on the internet. That’s the good news. The bad news is you have zero excuse for not being the most knowledgeable in any subject you want because it’s right there at your fingertip, and it’s free, which is excellent.”
It’s true. There’s a lot of things out there on the internet. But with anything that is known for its volume, there is much more noise than there is signal. And sometimes the best approach is to find the smartest people or most referenced and most peer reviewed sources. So while there is a world out there behind covers and a .com address, sometimes the best thing to do is ask.
Page 19 thinking
Seth Godinshared something recently I wish I had heard sooner — page 19 thinking. It was in the context of compiling an almanac — a compilation of world’s greatest thinkers about the climate crisis. When Seth and the team first started off with a blank page, they knew that “in the future there will be a page 19. [They] know that it will come from this group, but [they also knew] there [was] not anyone here who [was] qualified.” So, to resolve that dilemma, someone had to ink the first paragraph of page 19. Then, that person would ask someone else to make it better. And then, that someone else would ask another. And it would go on and on until page 19 looked like a real page 19.
What made this approach special was that ego was checked at the door, and people were empowered to co-create the best version of that work. Seth went on to share, “But once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.”
In the world on Twitter, the above goes by another name — build in public.
One of the greatest blessings in writing this blog is that I get to ask really smart people a lot of questions. While a lot of knowledge exists behind two cardboard slabs, or these days, in a six-letter, two-syllable word that starts with ‘K’ and ends in ‘E,’ the richest concentrations of insight exist in gray matter.
If you’re a founder or someone who’s embarking on a new project, there’s a saying I love, “If you want money, ask for advice. If you want advice, ask for money.” Ask people to pay you or to invest in you. You’re gonna get a plethora of feedback. Feedback that comes in flavors of noise and signal. But it’s up to you to figure out which is which. Nevertheless, that rate of learning, assuming you’re out asking, building, asking, and building some more, compounds.
In closing
I’m not saying you should only read books or only talk to experts. I’m saying you should do both. Be relentless in your pursuit to learn. As Kevin Kellyonce said, “Being enthusiastic is worth 25 IQ points.”
Luckily, knowledge also happens to be one of the few things in life that no one can take from you.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
A while back, I stumbled across this question by Siqi Chen while doomscrolling through Twitter, and I couldn’t help but do a double take on it. It’s something I often worry that I miss when founders or GPs pitch me, but also when I hostfireside chats. I worry in my myopia with hitting an agenda of questions, I may miss the most important part about the person sitting across from me. In any interview setting, interviewers always have a pre-destination in mind. And often it’s the onus of the interviewee to alter that flow if a dam is restricting the power of the torrent. In other words, your strength. It’s why I ask, “Are there any questions you have yet to be asked, but wish someone were to ask you?” But I like Siqi’s way of asking it a lot more.
After 20 years of interviewing candidates, I've found this to be the single most useful interview question:
"What is your greatest strength … that you are most worried about not coming across in an interview setting?"
Take ambition as a strength, for example. Really hard to tell by just looking at a resume, especially one who says they are and someone who actually is.
At the same time, there’s a beautiful line that the late Ingvar Kamprad, best known for founding IKEA, once wrote. “Making mistakes is the privilege of the active — of those who can correct their mistakes and put them right.” And that’s okay, in fact heavily encouraged for anyone who has ambitions. Because in order to achieve the extraordinary, you cannot pursue the ordinary. You have to tread where no one has treaded before. And a lagging indicator of that is the number of mistakes and scar tissue you’ve collected over the years. So, in an interview, to best illustrate your ambition, you have to talk about the lessons you’ve learned to get here. The greater the mistake, the more risk you took. And often times, the greater the ambition.
Kevin Kellyalso said recently, “I’d like to give a little story of a car, and you need to have brakes on the car to steer the car. But the engine is actually the more important element, and so there are people and there are organizations, and there are methods that are going to be doing the braking, and I think they’re essential. I want brakes in the car, but I just feel that the brake can overwhelm and cause stagnation, and that we also wanted to remember to focus on making the engine even stronger, and so I emphasized the engine.”
In an interview, it’s the difference between promotion and prevention questions. As Dana Kanzeonce shared, ““A promotion focus is concerned with gains and emphasizes hopes, accomplishments, and advancement needs, while a prevention focus is concern with losses and emphasizes safety, responsibility, and security needs.” As such, in an interview, you want to channel your energy to being asked at least one promotion question that highlights your strength.
Conversely, as I’m writing this right after reading Chris Neumann‘s most recent post on fake FOMO, creating a fake sense of urgency is one of the best ways to ensure your greatest strength won’t come out during the interview.
Today’s just a short blogpost. Just to say I’m a fan of Siqi, one of the greatest masters of storytelling, and this question. In case, you’re looking for more Siqi content, check out here and here.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
In an industry that is heavily apprenticeship-driven, the more tactical advice one gets, the faster they grow. Historically, that meant a senior partner taking you under their wing. Or maybe 2-3. While I’ve been lucky to work and learn alongside some of the world’s most exceptional minds in the funding landscape, I’ve always found it helpful to have multiple teachers. Some in the form of books. Others in the form of shorter form content. Tweets. Social posts. Podcasts. And of course, from the insightful conversations that I have weekly. At the same time, in hopes of supporting the growth of others in this industry (such a small world, but it just isn’t helpful enough), this blog has been and will continue to be my vehicle for stewarding information and insights from the best.
Just like in both of my initial pieces of 99 pieces of advice for investors and founders I wrote in April 2022, this will be a continuation and an evolution of the last. While this will cover more of the same topics as last time, like startup investing, pitching to LPs, and fund strategy, I’m personally really excited about the some new categories, like succession planning, tax, and how to think about exiting positions.
And while I do write long form posts most of the time, and have been guilty of well… longerrrrrr form essays (and maybe one day with even more r’s), like this or this… I digress. While I do enjoy long form expositions, some things are best shared without superfluousness.
Most of the advice below captures the essence of a TikTok or Instagram Reel or a YouTube short. Choose your fancy. Many of which answers the age-old podcast question: “If you were to share one piece of advice with your [insert age]-year old self, what would it be?” Or “What advice would you give someone starting their first fund today?“
And now with “new and improved UI” (don’t get too excited, just number count of soundbites in each category), each fall in one of ten categories:
1/ You can’t be in every good deal, but every deal you’re in better be good.
2/ “You’re not defined by your worst investment. All angels will have failures in their portfolio. It’s part of the process.” – Brian Rumao
3/ “The weird thing is when late stage went from the hardest part of venture to the easiest. And that should have been the flag to everybody.” – Jason Lemkin*timestamped May 2022
4/ “The older you get, the younger your mentors should be.” – Samir Kaji
5/ “Your brand is what people say about you when you’re not in the room. It’s their first reaction when they see an email from you in their inbox. You build that brand — or not — with every interaction.” – Chris Fralic
6/ “Never let a good crisis go to waste.” – Winston Churchill
7/ When there’s risk involved, don’t let the outcome determine the quality of your decision. – Andy Rachleff
Investing — Deal flow, theses, diligence
8/ When assessing startups against their incumbents, consider their incumbents’ ability to hire top talent. For instance, if the incumbents are banks that are known for slower logistical and bureaucratic procedures, it’s easy to hire the best talent out there. On the other hand, if the incumbents are Coinbase, that’s still a fairly young, sexy company that’s innovating quickly, hiring top (technical) talent is more challenging. Shared by a former executive and founder with 2 exits, turned fund manager with 2 funds.
9/ If you’re not getting a call from a founder when they’re in trouble, you’re probably not getting a call from a founder when they’re raising their next big round. – Zach Coelius
10/ Pick great market inflection points to bet on. “The founder is the surfer. The product is the surfboard. The market is the wave. The wave matters most.” If you bet on a good surfer on a bad wave, they’re not going to get you the returns you want. Some Sequoia partner.
11/ Ask for investor updates (before investing). Before you invest, ask for the most recent investor updates. Helps you understand how founders think and communicate. – Brian Rumao
12/ Align with the founders, but also employees on valuations and dilution. – Nikhil Basu Trivedi
13/ The earlier you invest and the more you care about ownership, the more active role you’re expected to take in your portfolio company. You can’t expect to take large ownerships, and not actively help anymore. If you want to be a hands-off investor, you don’t have a right to fight for ownership. In a bull market, founders get picky about who’s on their cap table (as they should be). Focus on your check size to helpfulness (CS:H) ratio. Inspired by Jason Lemkin.
14/ “We have no fear. If we could find God’s phone number, we’d call him.” – David Beirne of Benchmark Capital fame, cited in eBoys. You are never too good to cold-call.
15/ Create a list of your favorite builders (i.e. engineers, community managers, executives, etc.). Then scrape Delaware incorporation docs regularly to see if any on the former list pop up in the search. If so, reach out to them early.
16/ Ask the founders to see different versions of the pitch deck. While we always say, “investors invest in lines, not dots”, oftentimes it’s hard to measure the slope (rather than y-intercept) when you’re meeting only with a founder at the beginning of their fundraise and not sooner. But one way to see is watch how much the pitch decks changed over time (and how quickly the founders incorporated feedback).
17/ Invest in companies that will be timeless. Where there will still be customers in a recession.
18/ If the competitors of the startup are being bought by private equity firms, then it may be a lucrative space to invest into. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
19/ There is a superpower to be speaking the same native language as the founders you back (and for them to their customers). Try to understand them for their position of strength.
20/ “The market you’re exiting in is not the one you’re funding now.” – Ben Narasin
21/ “There’s another phenomenon that happens in a time like this: Google’s not hiring. Facebook’s not hiring. People are clamping down. Guess what happens to their most advanced projects? They go. And guess who are the best people in any large company? The best people are working on the most advanced projects. They are the ones who want to do visionary things. They’re the fodder entrepreneur for venture capitalists. So I think many more of the best people — not because they’re not getting paid huge raises in compensation — but because they’re working on less interesting projects — will leave to follow their vision.” – Vinod Khosla (timestamped Oct 28, 2022)
23/ “Funny people are really underrated. […] Charismatic leaders are pretty funny. Humor is a really important emotion for two reasons. One is if you can evoke it a lot and be funny, you can create a sense of bonding. Generally speaking, in a remote world, there is a shortage of emotions you feel. An exchange between us now as we stare at each other in our computer monitors is maybe 1/100th of what it would have been in the real world. When you think about it, why do movies succeed? Movies substitute the real world interaction with synthetic emotion. So… horror, humor, action, drama. So you want leaders who can do the same over Zoom. That’s why Peloton instructors have all the jokes that they’re saying. It’s same exact effect.
“But there is a second reason to why humor matters, which is if you were to imagine a Maslow’s Hierarchy of Needs, I at least find with myself, I’m not able to think of a joke if basic stuff isn’t right. […] You do have to be careful of the ‘court jester’ type. These are people who are so insecure that they’ll do anything to get a [cheap] laugh.” – Daniel Gross. For example, cursing or vulgar jokes or making fun of others are examples of cheap laughter.
24/ For follow-on checks, Founders Fund and Saastr invest 10% of the fund in each of their “winners”. – Jason Lemkin
25/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff
26/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan
Value add
27/ Everyone says they’re a value add investor or founder friendly. And every founder goes through these 10-15 moments in their founder journey from which they lose sleep over. How many of your portfolio founders call you first if shit hits the fan? Those will be who you’re remembered by. No other portfolio founders will remember you.
28/ The network you bring is table stakes. That will neither help you win deals or raise LP capital when it really matters.
29/ “Dirty secret of VC platform teams: they are more about scaling the GP than the founder.” – Sarah Tavel
30/ Are you uniquely positioned to get allocation on the cap table because you can be a value add to these companies? – Vijen Patel
31/ Sometimes the most helpful thing you can do is to say no. When founders ask for introductions, and you don’t think they’re a good fit for your investor network, “It’ll be tough for you to fundraise right now. And if you jump in a conversation now with these other investors, it’ll hurt your ability to fundraise when you finally iron out those 1-2 key metrics and get to that inflection point.”
32/ Before the term sheet is signed, sit down with them and say this. “‘Listen. The chances this company gets to the finish line – the finish line being this fantastic exit – we don’t know what they are. But what I do know is that there is a chance, a high probability, that the company will fail. And I want you to think about this as an opportunity cost. I want you to think about every day you walk in the door to this company or turn on this Zoom as an opportunity cost. If it is not working, I want you to tell me, ‘It’s not working.’ And let’s have just a dispassionate conversation about what that means, so that we don’t waste any more time trying to make it work. And I promise you I will do the same.’
“And if you can set those guidelines from the beginning, you can move onto something that might have better timing. The founder can. And I can. Be aware of what failure looks like.” – Maha Ibrahim
Pitching to LPs
33/ Don’t promise your LPs guaranteed co-investing rights to go directly on the cap table of your portfolio companies. Let the founders decide who gets to invest on their cap tables. – Samir Kaji.
34/ A typical emerging fund takes 1-2 years to raise <$10M. Plan for that timeframe. A fast raise is 6 months. – Elizabeth Yin*timestamped April 2022
35/ To LPs there are 4 main metrics that are of note. Gross and net IRR to show how cash efficient you are, as well as how your portfolio is marked up. TVPI and DPI to show your paper returns and cash you’ve returned to your LPs, respectively. – Chamath Palihapitiya
36/ When you’re pitching institutional LPs (i.e. endowments, pension funds, university investment offices, etc.), you’re bet against 10-year life cycles and portfolio strategies. When benchmarking metrics (i.e. IRRs and TVPIs/DPIs), you have to show you can outperform other asset classes (i.e. real estate) and the public market equivalent (PME). Comparing and contrasting is often the most effective.
37/ When you’re pitching individual LPs (i.e. angels, or “belief capital), largely true for Fund I’s and II’s, it’s about personality and promise. Do people like you? Do you bring in great top of funnel deals? Are you different?
38/ “Don’t run out of leads.” You want to be constantly meeting new investors, ’cause you don’t want to be in a situation where you have to go back and convince people who are clearly not sold. – Elizabeth Yin
39/ If your Fund I consists of mostly individual LPs (i.e. accredited investors, but not qualified purchasers), you’re going to have to fundraise from scratch in Fund II and III. Since they have less of a net worth than institutional LPs, they most likely don’t have the capital to: (a) re-commit for a subsequent fund, (b) and even if they do, they won’t have enough to meet the minimum check size, assuming Fund II/III is bigger than Fund I. Inspired by Elizabeth Yin.
40/ Ask LPs what they like and what they don’t like about the pitch deck, and use each conversation as a learning and refining process.
41/ Figure out how much money you’re capable of raising in Fund I, and raise 25% less. It’s much better to be oversubscribed than suffer from lack of momentum. And leverage the “oversubscription” to help you raise Fund II, III, and so on. Told me to by someone who has sat on over 6 LPACs(LP advisory committees) in his career so far.
42/ The median family office check into first-time fund managers is $750K, with over 80% of family offices investing into first-time managers.
43/ “Does the world need another VC fund?” Most LPs don’t think so, so you need to convince them why you should exist.
44/ Before wasting your time pitching to some LPs, ask “Are you actively investing in venture funds at this time?” Many take meetings, but aren’t. Your time is precious.
45/ You’re going to raise from friends and family in the beginning. Your second cohort of LPs will be people you have a substantial network to. In other words, investors who you have many duplicate warm connections with, so that they can easily qualify your ability. – Dylan Weening
46/ In a recessionary market, LPs find themselves rebalancing their asset allocations. As their public market assets go down, they find themselves overallocated into venture. As such, they’re investing in less new managers. So in order to raise as an emerging GP from these LPs, you need to replace someone they’re currently investing into. That means you need to: (a) outperform them (4x TVPI is table stakes), and (b) have one compelling story on why you, backed by numbers.
47/ When doing diligence, sophisticated LPs evaluate you based on consistency. They will evaluate fund/portfolio performance with AND without your top investment. Hence, they expect a minimum number of investments in your portfolio – usually 20 to 30.
48/ Some LPs have been burned by staying invested in yesterday’s firms for too long. The top firms a decade ago are not the same top firms today. These firms often have an emerging GP thesis.
49/ “This is not a one-trick-pony relationship. You’re a capital allocator. The cost of finding new relationships to build is significant. You need to seek long-term capital allocation partners. Have a three to five fund view – multi-decade relationships. How repeatable is your success?” Shared by an LP in 30 funds.
50/ “The best filter for this is figuring out what [an LP’s] minimum check size is. And, is that greater than 20% of your fund size? If so, it won’t be a good fit.” – Sarah Smith
51/ “There’s a thing called ’round tripping.’ If a fund in India invests in a fund that’s built in the US, then invests back into Indian startups, that’s round tripping. And unfortunately, not allowed.” – Shiva Singh Sangwan
52/ “Before you say yes to LPs, check the CFIUS rules. Under those guidelines, you may not be able to take money from certain countries and parties.” – Arjun Dev Arora
53/ “Valuations are not the way you judge a venture capitalist, or multiples of their fund. […] The way that I judge a venture capitalist is by how many companies did they back that grew into $100M revenue businesses.” – Andy Rachleff
Fund strategy/portfolio construction
54/ It’s often good practice to not lead syndicates the same time as you’re raising for a fund (outside of SPVs to maintain pro rata). It gives too much optionality to LPs. For the most part, it’s easier sell a deal than it is to sell a fund.
55/ Typical GP commits are 1-2% of the fund. If you’re unable to do so (or even if you are), good practices include recycling fees and deal warehousing. The latter is where you keep a portfolio of personal investments in storage before launching the fund. Warehousing deals de-risk the deal by allowing LPs to participate in marked-up deals at more lucrative, aka lower valuations.
56/ In a downturn, investors are still funding startups but adding in more terms in the form of side letters. The riskier the bet, the greater the liquidation preferences, anti-dilution provisions, and minimum hurdle rate expectations.*timestamped in April 2022
57/ “Bank loans for VC funds have short paybacks (90-180 days). The 2+ year paybacks relate to large PE funds. IRR boost is minimal in VC.” – Samir Kaji
58/ Don’t be scared to recycle carry early. Most funds suffer from under-deployment, which usually leads VCs to deploy the last 25% of capital either towards deals with high valuations or in difficult situations (down rounds, pay to play rounds). – Villi Iltchev
59/ While pro rata rights are technically legally binding, earn the right to invest in subsequent rounds, rather than just expect it.
60/ Liquidation preferences have little impact on fund returns, which makes sense when you actually think about it, but many VCs add these provisions to protect their downside. Data shows that only the bottom quartile funds see IRR impacted greater than 1% due to liquidation preferences. Returns are driven by the winners in your portfolio where liquidation preferences don’t matter. There’s a big difference in a strategy to win versus a strategy not to lose.
61/ IRR is a vanity metric for funds early in their life cycle. While it can be a useful metric for LPs to compare across vintages and their portfolio, overoptimizing for it gives a false sense of hope. Why? IRR values quick capital deployment. Recycling hurts IRR. Many things change over the span of a 10-15 year fund. – Seth Levine.
62/ Ownership and pro rata allocations are inversely proportional to the number of portfolio companies in a fund. Many managers can’t get 100% of their pro rata allocations, but rather only 50-75% of their allocations. Inspired by Henri Pierre-Jacques.
63/ Venture reserves make less sense in a bull market. Reserves are usually put into a fund’s winners. But in a hot market, a larger percentage of your portfolio companies get mark ups – making it harder to differentiate signal from noise. Reserves make sense in a bear market when it’s easier to differentiate signal from noise. In a bull market, it might be better to have no reserves, and spin up SPVs for a follow-on strategy.
64/ Your ability to get into later rounds, not just ’cause of pro-rata rights, should be a big determinant if you have a reserve strategy. Can you earn your allocation in later rounds? Will founders fight for you even when downstream investors want more equity? The best companies are hot commodities. Even if you have a follow-on strategy, you might not be able to get in those subsequent rounds.
65/ If you want to include more than 99 accredited investors in your fund, set up a parallel structure where you have one fund for accredited investors (<$10M) to include 249 accredited investors, and another fund for qualified purchasers (QPs).
66/ “The best way to protect yourself against the downside is to enjoy every bit of the upside.” – Bill Gurley
67/ If you have a parallel fund structure (i.e. one for accredited investors, one for qualified purchasers (QPs)) and you’re going through rolling closes, understand that your initial allocation in each deal will change as a function of each fund’s committed capital from LPs.
For example, let’s say you’re raising a hypothetical $100M fund – a $10M fund for accredited investors, and $90M for QPs. Let’s call the $10M fund Fund IA, and the $90M fund Fund I. On average, QPs take much longer to make a decision, so you’re likely to close your Fund IA before you close Fund I. As such, your first investments out of the fund might be 50-50 from each fund. But as you finish closing your Fund I, you will need to rebalance your allocation into earlier deals, like changing it from a 50-50 allocation between the two funds to 90-10. As such, in your term sheets, make sure you include the “right to transfer securities to affiliates.” And make it clear to your founders why that’s in there before everyone signs.
68/ If you’re building a concentrated portfolio, think about portfolio construction from a bottom-up perspective, rather than top-down. How many unicorns/decacorns do you need to return the fund? How often have you historically seen them in your inbox? That’ll be your deployment schedule. And subsequently, your capital call schedule.
69/ “Fund management is irrelevant unless there are winners in the portfolio.” – Laura Thompson
70/ Calculate your mark ups on priced rounds rather than valuation caps on SAFEs. Your TVPI and IRR may look nice in the short-term, and may help you raise from individual LPs. But once you start talking to institutions, you look deceitful or have no idea what you’re doing.
71/ Avoid overly large GP commits. If you invest too much of your own net worth into a fund, you’re going to make decisions that sacrifice the long game of the fund for short term personal liquidity, like selling secondaries to buy a house. Don’t go higher than 10% of your net worth. – Sheel Mohnot
72/ “For funds that are <$20MM, the GP commitment is fairly meaningless in the evaluation of a fund. Either the person is already taking a great opportunity cost by running such a small fund or has independent personal wealth where a small GP commitment is irrelevant to them.” – Samir Kaji
73/ “Most LPs allow you to reinvest returns 18-36 months after the investment period. The early wins are often small and don’t impact the returns so you are better off reinvesting to go for another unicorn. This is a game of outliers.” – Henri Pierre-Jacques
74/ “Management fee schedule adjustments: Pause or slow down fees in ’23 (with authority delegated to LPAC to avoid conflicts of interest)” – Chris Harvey (timestamped Feb 13, 2023). A way to leverage your LPAC to communicate fund decisions to the rest of your LPs
75/ “What % of companies successfully got funded from investment to the next round?
Seed —> Series A should be >35%.
Series A —> Series B should be >50%.
Series B —> Series C should be >50%.
And, Series C —> Series D+ should be >60%.” – Aman Verjee
76/ As a long-term investor, you have to generate at least three times the risk-free rate (3-month T-bonds, bank interest rates, etc.) to have an investment make sense in the long-term. – Chamath Palihapitiya, speaking when T-bonds’ rate is 6.5%, meaning a private investment must generate at least 20-25% for it to make sense
Selling positions
77/ “In consumer and consumer social, advocate more aggressively for selling along the way. The hype cycle of consumer means heat and traction do not have the sustainability of enterprise ARR and so more weight placed on selling some portion earlier there.” – Harry Stebbings
78/ “Pigs get fat but hogs get slaughtered. Even if we believe a company has tremendous longterm upside, it’s not inappropriate to take some money off the table in order to manage that risk. As we’re recently reminded, markets go down, not just up. Just be aware of the incentives, emotions, and other factors at play. It’s ok to behave one way before you hit your DPI target and another way after, but understand how those factors produce better or worse possible outcomes. This is also true with regards to recycling. If we can sell partially out of a position and put those proceeds into one that we believe has more incremental upside, that’s accretive to our results.” – Hunter Walk
79/ “Generally once a position is worth 3x the fund sell 1/3rd to return 1x the fund (if there is liquidity). […] For the hot names you will get a bunch of inbound. Negotiate to get a price you like. For less hot names, just talk to the investors leading the next round and see if they want to add to their position. A lot of times they do and don’t mind buying out earlier investors.” – Sheel Mohnot
80/ “For public shares, we’ve landed on the following model:
1/3rd immediately (either first-day lockup expires or immediate on direct listing)
1/3rd 6 months after
1/3rd up to our discretion
Here’s why — The first third books your win. If you do seed, you likely have a huge position by the time you hold public shares. The second third allows the stock price to stabilize after the market has been hit with lots of supply from VCs doing distributions. The last third allows you to have an opinion on the stock/market — however, you can choose to distribute this third anytime, including alongside or after the previous thirds.” – Chad Byers
81/ If you’re a reasonably good fund, you should return at least 1x your fund (1x DPI) within 5-7 years. – Chamath Palihapitiya and Jason Rowley
LP management
82/ Early funds generally have 30 LPs in the fund. Fund I is often an exception.
83/ A general rule of thumb is to not have any one LP contribute more than 25% of the fund, or else you might lose control when you have such a large “shareholder”.
84/ “After my LPs wire their money, I send them an intake form where I ask the question: How would you describe yourself as an LP? I have a number of statements they can select to indicate whether they are a newer or more experienced LP, if they’d like to be more active with founders, how often they’d like to communicate with me, and if they are interested in co-investment opportunities and events. I have another question following that: If you want to be more active, what are ways you enjoy helping?” – Sarah Smith
85/ “Be thoughtful about how you’re managing your time, so that you don’t turn into a full-time venture professor. You’re an investor, a GP. That’s what you’re getting paid to do.” – Arjun Dev Arora
86/ “Avoid LPs who ask you to give up economics as a GP or change your terms. LPs who want to negotiate lower management fees, a different carry structure, or they want to own 20% of the general partnership for the next three funds are best avoided if possible. They want to change the terms that everyone else has. I wouldn’t allow that. If other LPs find out (and they eventually do), it would cause my LPs to lose trust in me and rightfully be frustrated that they got worse terms.” – Sarah Smith
87/ “If someone does ask for it, and if they aren’t a large enough check, we tell them, ‘We like to reserve this spot for our largest LPs because they have the largest exposure in our fund. We’re open to you being a member in our LPAC, if you increase your check size.” That way, you can leave the ball in their court. Either, they won’t push further or they’ll commit more capital to the fund.” – Eric Bahn
88/ “If you’re in your Fund I or II, like I am, you’re still figuring shit out. You’re still testing what works and resonates and what doesn’t. I ask them, ‘what have you seen other managers do in this situation?’” – Paige Finn Doherty
89/ “The average, for a normal venture fund, is around 5-7 years to call 90% of the capital.” – Chamath Palihapitiya
SPVs/Syndicates
90/ There are two types of syndicate leads: “marketers” and “connoisseurs.” The former focuses on volume, which lead to more noise than signal. The latter focuses on quality, and as “tastemakers” lead to higher signal over noise. As LPs, quality may matter more than quantity, especially when you’re most likely diversified by being in several other syndicates already. Inspired by Julian Weisser.
91/ If you’re warehousing SPVs for your fund, do note that the number of unique LPs in your SPV(s) count towards your accredited investor limit.
92/ If you’re an LP in an SPV and agree for it to be warehoused into a fund, you are forgoing your right to the individual deal for access to the fund’s portfolio of deals.
93/ As the syndicate lead, set the minimum check size at or less than your own check size.
94/ Your GP commit into your SPV is directly proportional to your net worth. The greater your net worth, the more you’re expected to contribute. Any less, would be a negative signal. That said, the less of a net worth you have, the more you’re expected to be a great curator of deals.
Succession planning
95/ “The best way to think about succession planning is that you have to have team members at different parts of their life. Different generations. Even if they’re non-founding partners, if they all retire at the same time, you can’t build a legacy.” – An investor with 9-figure AUM
96/ Structure your fund to have a generational off-ramp for compensation. A lot of funds are structured so that payout is done through the management company, and so owning equity in the management company becomes increasingly more expensive as the firm matures and has greater AUM, etc. So the next generation, in order to succeed the firm, must buy out the previous generation’s equity. So, leadership transitions are not easy. Instead, structure your firm so that the management company doesn’t have value, where the value is at the GP. So transitions are a lot easier. – Maha Ibrahim
Tax planning
97/ When invest in a startup via SAFEs or convertible notes, your QSBS timer counts when the SAFE converts on equity round, not during the convertible round.
98/ As a GP who takes management fees through a management company, often LLC, you don’t receive W-2’s. As such, you can’t withhold taxes, so you have to be disciplined on cash management. “Outside of federal and state tax, there is a massive self-employment tax of 12.4% on up to $147,000 of earnings. And an additional 2.9% on any earnings.” – Jarrid Tingle
99/ The origin of the 1% GP commit comes from taxation laws prior to 1996. But even now, “in order for GPs to avoid their carried interest being taxed as ordinary income vs. long-term capital gains, many GPs still follow safe harbor.” – Courtney McCrea and Sara Zulkosky. While this isolates GPs who aren’t independently wealthy or are well-capitalized, in lieu of the typical cash contribution, I see a lot more emerging GPs warehouse deals and recycle carry.
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.
On Wednesday this week, I hosted an intimate dinner with founders in the windy backdrop of San Francisco. And I’m writing this piece, I can’t help but recall one founder from that evening asking us all to play a little game she built. A mini mobile test to see if we could tell the difference between real headshot portraits and AI-generated ones based on the former. There were 15 picture. Each where we had to pick one of two choices: real or AI.
10/15. 6/15. 9/15. 11/15. 8/15… By the time it was my turn, having seen the looks of confusion of my predecessors, I wasn’t confident in my own ability to spot the difference. Then again, I was neither the best nor the worst when it came to games of Where’s Waldo? 90 quick seconds later, a score popped up. 10/15. Something slightly better than chance.
Naturally, we asked the person who got 11/15 if he knew something we didn’t. To which, he shared his hypothesis. A seemingly sound and quite intellectual conjecture. So, we asked him to try again to see if his odds would improve. 90 seconds later, 6/15.
Despite the variance in scores, none were the wiser.
Michael Mauboussin shared a great line recently. “Intuition is a situation where you’ve trained your system one in a particular domain to be very effective. For that to work, I would argue that you need to have a system, so this is the system level, that it’s fairly linear and stable. So linear in that sense, I mean really the cause and effect are pretty clear. And stable means the basic rules of the game don’t change all that much.”
For our real-or-AI game, we lacked that clear cause and effect. If we received individual question scores of right or wrong, we’d probably have ended up building intuition more quickly.
Venture is unfortunately an industry that is stable, but not very linear. In many ways, you can do everything right and still not have things work out. That same premise led to another interesting thread I saw on Twitter this week by Harry Stebbings.
Today I got asked a fantastic question:
Have you ever been involved with a startup that achieved true product-market fit and still failed?
In a bull market, and I was guilty of this myself, the most predictable trait came in two parts: (a) mark-ups (and graduation rates to the next round), and (b) unicorn status. In 2020 and 2021, growth equity moved upstream to win allocation when they needed it with their core check and stage. But that also meant they were less price-sensitive and disciplined in the stages preceding their core check.
The velocity of rounds coming together due to a combination of FOMO and cheap cash empowered founders to raise quickly and often. Sometimes, in half the funding window during a disciplined market. In other words, from 18 months to 9 months. Subsequently, investors found themselves with 70+% IRR and deploying capital twice or thrice as fast as they had promised their LPs. In attempts to keep up and not get priced out of deals. Many of whom believed that to be the new norm.
While the true determinant of success as an investor is how much money you actually return to your investors, or as Chris Douvos calls it moolah in da coolah, the truth is all startup investors play the long game. Games that last at least a decade. Games that are stable, but not linear. The nonlinearity, in large part, due to the sheer number of confounding variables and the weight distribution changing in different economic environments. A single fund often goes through at least one bull run and one bear run. So, because of the insanely long feedback loops and venture’s J-curve, it’s often hard to tell.
In fact, in recent news, Business Insider reported half of Sequoia’s funds since 2018 posted “losses” for the University of California endowment. We’re in the beginning of 2023. In other words, we’re at most five years out. While I don’t have any insider information, time will tell how much capital Sequoia will return. For now, it’s too early to pass any judgment.
The truth is most venture funds have yet to return one times their capital to their investors within five years. Funds with early exits and have a need to prove themselves to LPs to raise a subsequent fund are likely to see early DPI, but many established funds hold and/or recycle carry. Sequoia being one of the latter. After all, typical recycling periods are 3-4 years. In other words, a fund can reinvest their early moolah in da coolah in the first 3-4 years back into the fund to make new investments. There is a dark side to recycling, but a story for another time. Or a read of Chris Neumann’s piece will satiate any current surplus of curiosity.
But I digress.
In the insane bull run of 2020 and 2021, the startup world became a competition of who could best sell their company’s future as a function of their — the founders’ — past. It became a world where people chased signal and logos. A charismatic way to weave a strong narrative behind logos on a resume seemed to be the primary predictors of founder “success.” And in a market with a surplus of deployable capital and heightened expectations (i.e. 50x or higher valuation multiples on revenue), unicorn status had never been easier to reach.
As of January of this year — 2023, if you’re a time traveler from the future, there are over 1,200 unicorns in the world. 200 more than the beginning of 2022. Many who have yet to go back to market for cash, and will likely need a haircut. Yet for so many funds, the unicorn rate is one of the risks they underwrite.
I was talking with an LP recently where he pointed out the potential fallacy of a fund strategy predicated on unicorn exits. There have only been 118 companies that have historically acquired unicorns. And only four of the 118 have acquired more than four venture-backed unicorns. Microsoft sitting at 12. Google at 8. And Meta and Amazon at 5 each. Given that a meaningful percentage of the 1200 unicorns will need a haircut in their next fundraise, like Stripe and Instacart, we’re likely going to see a slowdown of unicorns in the foreseeable future. And for those on the cusp to slip below the unicorn threshold. Some investors have preemptively marked down their assets by 25-30%. Others waiting to see the ball drop.
The impending future is one not on multiples but one of business quality, namely revenue and revenue growth. All that to say, unless you’re growing the business, exit opportunities are slim if you’re just betting on having unicorn acquisitions in your portfolio.
So while many investors will claim unicorn rate as their metric for success, it’s two degrees of freedom off of the true North.
In the bear market we are in today, the world is now a competition of the quality of business, rather than the quality of words. At the pre-seed stage, companies who are generating revenue have no trouble raising, but companies who don’t are struggling more.
As Andy Rachleff recently pointed out, “Valuations are not the way you judge a venture capitalist, or multiples of their fund. […] The way that I judge a venture capitalist is by how many companies did they back that grew into $100M revenue businesses.” If you bring in good money, whether an exit to the public market or to a partner, you’re a business worth acquiring. A brand and hardly any revenue, if acquired, is hardly going to fetch a good price. And I’ve heard from many LPs and longtime GPs that we’re in for a mass extinction if businesses don’t pivot back to fundamentals quickly. What are fundamentals? Non-dilutive cash in the bank. In other words, paying customers.
Bull markets welcome an age of chasing revenue multiples (expectation and sentiment). Bear markets welcome an age of chasing revenue.
The latter are a lot more linear and predictable than the former.
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.
Before we dive into this blogpost, I’ve been asked by my legal friends to include the below disclaimer. I have a version of this at the bottom of every blogpost, but nevertheless, it doesn’t hurt to reiterate it again.
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 scenes as a kid was in Harry Potter and the Sorcerer’s Stone when Harry visits Diagon Alley for the first time. As the stone wall parted like the Red Sea, we saw a world unlike any we’ve seen before. With that, the audience along with Harry (Kudos for Director Chris Columbus‘ artistic direction) watched in wonder, excitement, and mystery. And Harry and I alike (Admittedly, I didn’t start reading the books till after the first movie) was hit with an overwhelming load of new information to absorb.
Raising your first fund is very much like that. While there are still some elements of familiarity, like investing in great people and winning great deals, you are taking other people’s money (OPM) for the first time. As such, it begs the questions: Who do you take money from? And how do you manage those relationships?
And like the stone wall in Diagon Alley, there’s more than meets the eye.
I have to thank Shiva for first bringing this topic to my attention, one that deserves a more nuanced breakdown than what is currently out there. And when Rebekah brought the below notion up for the Emerging LP Playbook, I knew I had to dedicate a blogpost to just this topic.
“GPs often have some flexibility on their minimum check size. I’m a pretty small check (particularly since I’ve been living on a founder salary!), but I can bring other things to the table to help the GPs I invest in (e.g. I highlighted Janine Sickmeyer from Overlooked Ventures in my Forbes column, I’m an advisor to Zecca Lehn from Responsibly Ventures, I send them deal flow from my AuthenTech community of founders). I’ve had luck with reaching out and saying ‘I really believe in what you’re doing. Please let me know if you get enough large checks and have room for some smaller LP investments.’ They’ll usually need to get enough big investments first since there are SEC limits on how many LPs they can have, and then they can let in some smaller, value-add LPs.”
The LP landscape is rapidly changing. What we knew in the last decade won’t get us to the next. The opacity in the LP world is getting undone by new, emerging LPs hungry to get involved and to learn. Folks, like Nichole at Wischoff Ventures have also shared publicly what her LP base looks like, with a level of transparency that’s foreign, yet refreshing for this industry.
Regulation has moved the needle, allowing for greater allocations to equity crowdfunding, as well as introducing more retail and high net-worth individual investors, to join the foray. Platforms, like AngelList, Republic, Twitter, Allocate, and Revere, just to name a few, are creating engines for better GP discoverability. There have been conversations on raising the ceiling on the number of accredited investors in a fund to 600. Which, if passed, will allow for smaller checks into funds, whereas the previous decades only allowed for family offices and institutions, as well as close friends. Anecdotally, I’ve also seen a lot of angel investors starting to allocate to funds rather than just purely startups.
And at this inflection point, as a GP, you need to be ready for this market shift that’s still early now, but starting to move. And hopefully, the below insights from 11 amazing GPs will serve as your wand, potions, owl and broom as you embark into the magical world of being a fund manager.
My methodology
To be fair, LP construction is more of an art than a science. So, I asked GPs who were on Funds I, II, or III. Why? Emerging GPs would best be able to relate a lot more to the hustle of finding and persuading different kinds of LP personas than someone who was on a Fund X or XV, who already have a long track record that speaks for itself.
I’m also a firm believer in tactical mentorship — mentors who are just 2-3 years ahead of you. People who have just been through the trenches you’re in and can share the lessons they learned. At the same time, not too far ahead where they are no longer the best people to check your blind side. After all, the lessons they picked up are still fresh in their mind. As a function, every one of these amazing GPs started their current fund in the past decade. The only caveat is that this may be the first recession they’re investing other people’s money (OPM) into, although they may have invested their own in the previous decade. And while that may be true, their lessons are timeless.
In the world of baseball, there’s the idea of breaking the catcher’s mitt. In other words, a new glove must be worn and used several times before it can achieve its full potential. Pitching to LPs and LP construction as a whole is no different. Just like a founder needs to pitch to several friends, colleagues, and investors, before they can hit their full stride during fundraising, raising from LPs requires many conversations and many iterations. Even Felicis’ brilliant Aydin Senkut got his first yes from an LP in Felicis after 107 iterations of his pitch.
So, in embarking on this topic and to get the best insight I could, it came down to two core pillars: the people I asked and the questions. I’ll start with the people.
Don’t get me wrong, there are a lot. And the folks included here are by no means all-inclusive. Many who had gone on to raise a Fund IV or higher. In effect, a few years or more out of the emerging manager game. Quite a few I didn’t know well enough. That’s on me. And some who, for all their goodwill and insight, unfortunately, were busy in the weeks prior to this blogpost coming out.
The questions
Building a firm with multiple funds is, in many ways, like driving a car through fog. Not my best analogy, but gets the point across. You see the rough outlines of the road just a few meters ahead, but you won’t see the sinkholes and the cracked concrete until you’re right in front of it, nor do you see any part of the road further than a few meters away. Or as Warren Buffett says, “The rearview mirror is always clearer than the windshield.”
Things are often painfully obvious in hindsight, but are scary, mysterious and unknown in foresight. Sometimes, you just don’t know what you don’t know. And as such, I write and I ask, in hopes to help the ones starting off, to develop foresight from the below cast’s hindsight. And to each, I had five overarching questions, coupled with follow-ups for more depth:
As you embark on your fundraise, note that different LPs resonate with different pitches. Additionally, when you choose out to reach out to each persona, be aware of what each of these LP personas’ incentives are. As a seasoned LP once told me:
High net-worth individuals seek to learn and rarely have a financial incentive.
Small and medium-sized family offices seek to learn and access top decile deal flow.
Larger LPs, like institutions and fund-of-funds, seek financial return.
From my conversations, it seems most GPs raising a Fund I start with individuals, then target larger check sizes as their fundraise matures. For Fund IIs, many seem to start with finding an anchor LP first, before reaching out to individuals and family offices.
The truth is there’s no silver bullet. And you’ll see exactly why below. So what might be more useful to you, an emerging GP, are anecdotes of what worked for different funds. As I call it, tools for your toolkit.
I will note that the one LP persona I won’t touch on as much since I have a lack of data here are corporates who usually seek technology, as well as information access, largely for acquisition opportunities.
Individuals
Start with people close to you.
“You should always target friendlies first. Welcome your references and first believers who might be founders, individuals, former coworkers, classmates.”
— Sarah Smith, Sarah Smith Fund
“It all depends on which Fund you are raising, how much you are raising, track record, team, and many more variables. If you are an emerging manager that is not spinning out of a brand named fund with a significant track record, you are going to have to be scrappy and start with people who know and trust you. “
— Steven Rosenblatt, Oceans Ventures
“You should always start off with your network – from the closest circle and outwards through the various concentric circles. At the beginning, you want to focus on finding your first believers. Those are your first-degree and maybe second-degree connections. So it’s less of the archetype of LP, but more so the depth of relevant relationship that matters. After the first close, that’s when you explore emerging manager programs or talk to more traditional asset managers — still largely within your first- and second-degree networks and/or those of your close early LPs and advisors.”
— Arjun Dev Arora, Format One
“The first $5 million is the hardest. Go to your friends and family. Build some momentum. After you get the initial momentum, it builds off of that. Everyone back channels everyone.”
— Vijen Patel, The 81 Collection
“For the beginning of a fundraise, I’d recommend asking for advice (before money) from people you’ve worked with for an extended amount of time. Your earliest checks may often be smaller but meaningful amounts from colleagues, co-investors, and GPs at other firms.”
— Paige Finn Doherty, Behind Genius Ventures
“The thing is my fund wasn’t oversubscribed from the beginning since I found it hard to raise. It’s a game of momentum, and in the beginning, I didn’t have any. In the beginning, it was about reaching out to the folks that you know. So, I mostly reached out to GPs and fund managers I knew and getting them through.”
— Shiva Singh Sangwan, 1947 Rise
“At the beginning, always start with people you have relationships with — people who’ve known you for a very long time. They not only want to invest in the fund, but invest in you. My first LPs would have likely invested in anything I created, but they knew I wanted to build a track record in venture. I’ve known one of my LPs since we were kids. Another was one of my best friends in university. Another was a friend of his.”
— “Mr. Huxley”, GP with two funds
Beware of relying too much on publicly available data to find LPs.
“The challenge with a purely data-driven approach (i.e. on LinkedIn or Pitchbook) is that you don’t understand the full rationale for why certain LPs invested in a fund. On paper, it may look like a family office is an LP in venture funds, but the principal at that family office could just be the brother- or sister-in-law of the GP. Most LPs also don’t explicitly say they’re LPs on LinkedIn. They could be an asset manager or a CEO of a Fortune 500 company. They almost always don’t want to be inundated with asks. Only after understanding why the industry is opaque, can you then understand LPs and find them.”
— Arjun Dev Arora, Format One
For potential MVP LPs, check size doesn’t matter.
“At the beginning of the fundraise, anyone that knows you and trusts you already AND can easily part with some money. Our first close was $20 million, and it was almost all people who knew us already – either directly or through our brand. We only had one new investor. In that group, we were lucky to have some fairly common names, which helped build the momentum for the rest of the fundraise.
“We did think about check sizes a little bit. There were some people we wanted to have involved for sure, and for them, the check size didn’t really matter. In our first close, we thought of people who could write a $250K check. And if there was someone we really wanted, we’d reduce it to $100K. I’m also an LP, and I do the same. If I plan to invest, I always negotiate down as well. The GP tells me X and I say I’ll invest X, divided by three.”
— Sheel Mohnot, Better Tomorrow Ventures
Persistence also speaks for itself.
“There are two types of investors: those who will commit to your fund now, and those who will invest after building trust. A lot of investors don’t like to invest in a Fund I. To keep them engaged, you either take a tiny check they’re comfortable with or you share regular LP updates that showcase your proof of work.
“In addition, you have to be clear with expectations. I bucketed potential LPs into four buckets:
High net-worth individuals
Founders and operators
Family offices
And GPs
“With each meeting, my pitch evolved and did a lot of follow ups. I had to show I was getting access to good deals and how I was getting access to those deals. You have to share the story behind that. That’s how you attract other investors. For instance, I remember sending my proof of work and an additional ten follow-ups to an LP. And each time I followed up, there has to be some new substance, value, and proof of work. It was a long process, but he ended up becoming one of my largest checks.
“Investors who were or are hustlers tended to gravitate towards my pitch. They became high-functioning people because of their hustle and respect me for my follow-ups and my persistence. They saw themselves in me. Similarly, founders are most likely going to get a reply from me who follow-up at least 2-3 times.
“The lesson here is that being persistent shows that you care. 99.9% of people won’t follow up, and by doing so, you’re already standing out.”
— Shiva Singh Sangwan, 1947 Rise
There are different ways to get in front of LPs: events, Twitter, deal flow, etc.
“Throw events for your LPs — a nice dinner or a cool experience — and ask them to invite their friends. Host events in a thoughtful way.
“Share relevant SPVs. Even broader, it’s content. Having founders be big fans of yours is also helpful. It’s a positive signal and creates buzz.
“That said, having co-investors who like you is a more direct path. LPs often ask VCs: Who are you co-investing with? Which emerging managers are you excited about? These LPs are looking for names. Some GPs are more generous with intros; while others prefer not to share but that’s OK as long as some do.”
— Arjun Dev Arora, Format One
“Looking back at my experience, a majority of our LPs from both Fund I and II actually came from Twitter and warm intros. I’m on Twitter a lot, mostly because I raised Fund I during the pandemic, so Twitter was where I hung out with many of my friends. I love to tell stories and as an extension I help founders tell their stories. And I host events and have done so since elementary school when I was on the student government event planning board. People are interested in my story because I don’t come from a traditional background. They invested mainly because they realize ‘she’s putting so much into the ecosystem, so it’ll eventually come back to pay dividends.'”
— Paige Finn Doherty, Behind Genius Ventures
Some individual LPs are not financially motivated.
“I want to preface that we only have foreign LPs, not US LPs. So, sophistication is very different. With European investors, while running a fund investing in the US, you can play the access game. In other words, you can sell access to great US companies. It’s something I lean on quite a bit.
“My LPs are quite sophisticated outside of the world of tech. They’re finance-savvy wealth managers, founders, high net worth individuals with net worths greater than $50 million, where they invest out of leisure and pursuing a mission, rather than for financial returns. They don’t understand venture, but want exposure to venture.”
— “Mr. Huxley”, GP with two funds
Start with HNW individuals, and end on family offices.
“Let’s make a few assumptions here. Let’s assume this is a Fund I and an emerging manager who doesn’t come from an extreme pedigree. Not from Sequoia or the like. This person is a decent operator-turned-VC, investing with a cool thesis. I’m going to also assume they’re not going to raise a $50 million Fund I or greater. They’re staying small and only raising $10-20 million.
“So I break down LPs into four categories.
High net-worth individuals – These are your angels.
Family offices – They have a lot more assets, usually $100 million or greater.
Fund of funds – They have a mandate to invest in other funds.
Endowments – These are very large institutions, maybe even sovereign wealth. They tend to write big checks into big funds.
“The big mistake I see many GPs make is that most GPs try to target the big ones out of the gate. Rather, in the beginning, focus on the high net-worth individuals. This is similar to asking angels. Their conviction and speed is quick. Their typical check size is no greater than $100K.
“Once you get a few million in the bank, then focus on the family offices — the $1-5 million checks. They tend to operate a lot like angels, but have just accumulated a lot more wealth. Around Fund II or III, then you target larger institutions.
“So, my recommendation is that as an emerging manager, start with angels, end with family offices.”
— Eric Bahn, Hustle Fund
“When you get closer to a final close, and you have a small fund, you can always welcome 1-2 family offices who can write small checks as well as individual investors who can be really helpful.”
— Shiva Singh Sangwan, 1947 Rise
Family offices
Find LPs by optimizing your search with certain keywords.
“Ask your existing LPs if they know anyone. Search LinkedIn to make their life easier. To find LPs, I would recommend looking up the keywords: Venture capital, asset manager, family office, emerging manager, startup (or venture) ecosystem, allocation, active allocator. All the above implies someone is putting money to work.”
— Arjun Dev Arora, Format One
Ask each person for just one intro, nothing more.
“Hustle Fund today has hundreds of LPs in our pipeline. But when we started off, we didn’t know a single family office. So, at the risk of sounding unintentionally mean, here’s how I think about it. Finding a family office is kind of like finding a cockroach. It’s always hard to find the first one. But once you find one, you’ll find a whole nest.
“I’ll share a tactical networking tip of how we found family offices over time. So, let’s say we chat with David. He likes us and decides to invest in the fund. We then share our fundraising blurb and deck and ask, ‘Do you mind sending this to one person you think would be a good fit for our fund?’
“The mistake I see a lot of other fund managers make is they ask, ‘Do you mind sharing this to anyone you think would be a good fit?’ Don’t ask for too much. There’s just too much paradoxical choice. There’s too many in their network to choose from and that overwhelms them.
“So, we change the question to just ask for one. That’s it. Generally, they think of the richest person they know. With just one intro, you’re magically in the family office world. A rich person tends to be friends with a lot of other rich people. It is secretive, but they also talk amongst each other a lot. When they invest, they like to bring their own friends in too.”
— Eric Bahn, Hustle Fund
Ask for intros to LPs who backed GPs who look like you.
“Another big filter is to find LPs who have backed GPs that look like you or have a similar investment strategy. For me, it was finding LPs who have backed solo GPs. To be fair, it’s not easy to figure out, since it is a rather opaque industry. So, I had other solo GPs I knew well and have co-invested with help make intros to their LPs.
“For LPs that I’ve never talked to before, a question I always ask LPs is: ‘Have you ever backed a solo GP?’ If not, don’t waste your time as you’re extremely unlikely to be their first. They likely have strong philosophical reasons to not back solo GPs so your meeting time is better spent elsewhere.”
— Sarah Smith, Sarah Smith Fund
Institutional LPs
Don’t underestimate the power of an anchor LP.
“If possible, having a respected entity who could anchor 5-10% of the fund would be ideal. In my case, my former partnership Bain Capital Ventures anchored my fund which was ideal because it keeps us connected and they are well known in the industry. Just like for a founder, having a lead is important. Having an anchor early helps you build momentum to close the rest of the fund.”
— Sarah Smith, Sarah Smith Fund
“For Fund II, I wanted an anchor LP to provide stability and credibility in the fundraise. Cendana was my number one pick. As a function of fund size at the seed stage, they’re definitely the best. The Harvard of LPs. To become part of their community, for me, was really important.
“It was a hard process, but was doubly as difficult, since Josh and I went our separate ways for Fund II. We had to communicate that decision to our 120 LPs in Fund I before starting the fundraise.
“In Fund I, some LPs believed in me. Some believed in Josh separately. I remember fondly of our first $10K check of belief capital. BGV’s most expensive decisions were our investment decisions. We made all our decisions together in Fund I. We also tried doing a few SPVs via Assure. While it was a great start to our career in VC, it required more work than we thought made sense. But for Fund II, it was going to be different. It was just me. No more SPVs, just checks out of the fund. The story itself wasn’t hard to communicate, but when we got to our 70th call, it was hard to sell the same emotional story.
“So, once we did, I put in the work. I flew to Australia to get introductions and to meet his teammate. Whenever I chatted with other GPs that were backed by Michael [Kim], I’d ask them to say hi to him.
“Pitching to Cendana, and most importantly, Michael, was the longest sales process I’ve ever gone through. He passed on Fund I, but he finally said yes to BGV’s Fund II. Along with Michael, GREE also doubled down on Fund II, along with operator checks from folks at Dropbox and other companies.”
— Paige Finn Doherty, Behind Genius Ventures
Bigger LPs have the ability to write smaller get-to-know-you checks.
“At the end of Fund I, we ended up with Cendana, Greenspring, Industry, Vintage, and Invesco. All fund-of-funds, but they all wrote relatively smaller checks than they typically do. For all the afore-mentioned funds, they wrote $1-3 million checks. It was a get-to-know-you check. They would talk to other companies in our portfolio and other managers we co-invested with. And so the best way to get in front of them was to get intros from other managers these fund-of-funds invested in.”
— Sheel Mohnot, Better Tomorrow Ventures
Talk to LPs whose minimum check size is 20% or less of your fund.
“Some CIOs like being in Fund I’s; others don’t. There’s a lot of alpha in Fund I. At the same time, there are others that won’t consider you seriously until Fund III. The challenge is figuring that out as quickly as possible.
“The best filter for this is figuring out what their minimum check size is. And, is that greater than 20% of your fund size? If so, it won’t be a good fit.”
— Sarah Smith, Sarah Smith Fund
“Biggest thing is their own AUM and the amount they need to deploy. First barrier to entry is the size of the fund you are raising as the GP. If you are raising sub-$75M (give or take) it wouldn’t be big enough for their minimum check size. LPs don’t want to be even close to a majority of your fund, or likely more than 20%.”
— Nichole Wischoff, Wischoff Ventures
“Some institutional LPs also cannot write small checks since they are dealing with other variables around their asset allocation models.”
— Steven Rosenblatt, Oceans Ventures
Start conversations early with LPs who can invest in the ideal fund size you want to raise.
“It’s not just about what your fund size is today, but where you aspire to be. Say you have a $25 million fund today, but aspire to have a $150 million fund where you lead Series As by Fund III or IV, then you should still talk to LPs who are able to write checks that are 20% or less of that future fund. It’s important to know there may be incredible university endowments or foundations who really like you as a GP but in order to run their business efficiently, they have to be able to write minimum checks of $25M or even $50M+ which means they only seriously consider funds of $150M+.
“The question for you, the fund manager, is: Are you going to grow your fund size over time? Or are you going to stay consistent with your current fund size? If the former, then you need to spend a fair bit of time in your deck about how your strategy will shift over time and some views into those larger future funds.”
— Sarah Smith, Sarah Smith Fund
“I started having conversations with institutions while I was raising Fund II knowing they wouldn’t come in until Fund III at the earliest. You need a lot of touchpoints and time with these types of LPs before they invest. I am very focused on LPs that want to underwrite me/the fund for years. I want long lasting relationships and partners that can come in fund over fund.”
— Nichole Wischoff, Wischoff Ventures
“So, when I speak to institutions that are more data-driven — they think about the scalability of AUM — I knew many of those folks were not going to be the best fit. That’s why raising Fund I was so hard.”
— Paige Finn Doherty, Behind Genius Ventures
“We have been cultivating relationships with a large amount of institutional LP’s over the last few years. Investors invest based on trust and relationship and in our mind that doesn’t happen overnight.”
— Steven Rosenblatt, Oceans Ventures
LPs hate surprises.
“There are some institutional LPs who will give you transparent feedback and transparency about their process but most do not. The #1 thing that rules them all is track record and performance. Institutional LPs don’t want surprises; they want to see a multi-year established track record in what you are investing in.”
— Steven Rosenblatt, Oceans Ventures
And even if they disagree with you, LPs like consistent LP updates, even prior to their investment.
“We have a couple institutions that have invested in Hustle Fund. What I didn’t appreciate out of the gate is how long it took to build those relationships. They want to see at least one fund cycle, ideally two. That’s usually anywhere between two and four years. But we’ve nailed how we do it passively.
“We have a newsletter that goes out on the first day of each month at midnight — every month for the past 5.5 years. Each issue has two things: a state of the market and a deal memo on each deal we’ve invested in.
“Today we have 150 investors across three funds and an additional 450 investors who have not invested yet. Think of it like a monthly drip campaign for these prospective investors. Investors get to see what we execute against what we say we’re going to do.
“In some cases, these investors like what they see and choose to eventually invest. In other cases, they find themselves totally disagreeing with how we run our process so they don’t invest, and that’s okay, too. Drip campaigns are always a great marketing tool to close customers. That’s no less true for Hustle Fund. So, at some point, when we mention we’re going to raise a Fund IV, all the meetings will just line up.
“I’ll share a story. Our biggest LP, Foundry Group — Jaclyn and Lindel run their LP initiatives — initially didn’t like our thesis and approach. To them, our investment model was a little too spray and pray. But at the end of our Fund II, they told me, ‘Even if we’re a little uncomfortable with your thesis, you’ve been so consistent with sharing how you’re learning and developing, and we love it. So, we want to invest now.’ They invested because of our newsletter, and witnessing our exact fund thesis. You gotta put in the work. And if you do, the money will follow.”
— Eric Bahn, Hustle Fund
Give LPs a compelling reason not to back an established fund. Otherwise, they will.
“Every institution is different, but it’s also really important to realize that with most institutions, the decision maker is not making the decision based on their own capital. So, risk is a huge point. No one is going to get fired for backing Sequoia. They could potentially get fired for putting a huge check into a new emerging manager that isn’t proving anything and going backwards. It’s important to understand the incentives of who you’ll be working with. So institutions are a completely different beast than individuals. Anything they do there’s usually 5 to 10 back references. It’s a small world. For pushback, they want to see a track record, which is really hard for emerging managers. And they want to see some sort of pedigree.”
— Vijen Patel, The 81 Collection
“I’m the horrible anomaly of being able to raise from institutional LPs in my first fund. I’ll chalk up timing, privilege, and reputation as being the reason we were successful in doing so. While not all of this is relevant to emerging managers today, 100 Days of Fundraising was a blog post which detailed how Homebrew ran its process.”
— Hunter Walk, Homebrew
Author’s Note: Of particular note, in Hunter’s alluded blogpost, is when he writes:
“What we also had was a point of view as to where we’d be investing: the Bottom Up Economy. This set us apart from other funds with broader or non-descriptive investment principles. We also had given extensive thought to our portfolio construction strategy around playing lead roles in rounds, the number of deals we would do each year, how much capital we’d hold back for follow-on, etc. The combination of these two meant that a fund could see how we’d be differentiated in the marketplace and where we’d fit against their current exposure.”
Should your LPs be active?
The truth is, and you’ll read this below, most LPs are passive. But in a world where you take so many different types of risk as an emerging GP, it helps to have people you can lean on. So, it really comes down to two questions:
What can you ask of your LPs?
What is the upside and downside to having active LPs?
The bull case for active LPs
HNW individuals are just waiting for the ask.
“The LPs I love working with are the ones who are going to be actively involved. They share their expertise with the portfolio, answer our questions, and are willing to jump on random calls with me. A lot of our LPs are high net-worth individuals, and they’re just waiting for the ask. They’re waiting for the GPs who they invested in, to engage with them. Sometimes, all it takes is a 20-minute call to share deals or thoughts or questions.”
— Paige Finn Doherty, Behind Genius Ventures
Your LPs will make LP intros if you have a good story.
“I think you can do a good job of getting LPs to send intros. If you can build trust and tell a good story, your LPs will naturally tell others because it comes up at a cocktail party organically. A VC fund is more interesting than ‘Hey I invested in a new ETF.'”
— Vijen Patel, The 81 Collection
Incentivize your LPs with additional carry.
“With Fund II, my Fund I LPs opened the door to other LPs in their network. Additionally, I am quite generous with my 20% carry for running the fund. I share 5% of the carry pool with other founders and LPs who send me deals, help with diligence and introduce me to other LPs.”
— “Mr. Huxley”, GP with two funds
Leverage your LPs’ brand to win deals.
“In my case, I had smart and well-connected LPs, and I was able to win deals because of them by inviting them into deals I wanted to get into. Some of my LPs happened to be fund managers as well, and I have been able to learn a lot from them.”
— Shiva Singh Sangwan, 1947 Rise
Build communities alongside LPs.
“I do believe there is room for LPs to provide value on top of what we expect today – better ways to tap their networks on behalf of our portfolio companies for example. At Screendoor for example, a fund of funds that backs underrepresented emerging managers, we strive to create a community among these VCs to support each other, and also pair them with VCs (like me) who can be coaches along the way when they have questions about firm building.”
— Hunter Walk, Homebrew
If you’re doing something for the first time, ask institutional LPs how other managers they’ve backed have done so.
“Since their investment offices have decades of experience in the venture sector and exposure to top managers across all stages, we often turn to them to gut check our reality against their perspective of the market. And when we encounter a type of situation for the first time, understand how other managers have approached the solution.”
— Hunter Walk, Homebrew
Author’s Note: Paige’s anecdote on how she engages her LPAC below is a great +1 to this point.
Let your LPs choose the kind of LP they want to be.
“I have no preference here. Rather, I’m open to what my LPs want their experience to be like. I have LPs that want to be more passive, as well as operator LPs who want to learn more about investing, lend expertise during diligence, facilitate customer intros, and even help out portfolio companies with hiring.
“After my LPs wire their money, I send them an intake form where I ask the question: How would you describe yourself as an LP? I have a number of statements they can select to indicate whether they are a newer or more experienced LP, if they’d like to be more active with founders, how often they’d like to communicate with me, and if they are interested in co-investment opportunities and events. I have another question following that: If you want to be more active, what are ways you enjoy helping?”
— Sarah Smith, Sarah Smith Fund
“I leave it completely up to them, but they typically opt to be more active. I host monthly one-hour office hours, share quarterly updates and deal reviews. For office hours, while we mostly chat about interesting deals I’ve been seeing in the last 30 days, my LPs can ask me anything. I try to be as communicative as possible – valuations, deal memos, and diligence. Sometimes they ask me to set up an additional SPV if they’re interested in putting additional capital in. I have a separate Airtable for deals we’re diligencing at the moment which LPs have access to. If they’re interested in a deal, they can reach out and ask. If not, they don’t have to.”
— “Mr. Huxley”, GP with two funds
The bear case for active LPs
Having engaged LPs is a lot of work.
“Candidly, I don’t want LPs that want to be super engaged outside of maybe one or two. It’s enough work as it is with quarterly reporting, etc. I want LPs focused on returns. Cendana is the most active with me and in great ways because they have so many emerging managers. I can strategize on fund size, raise timing, first hires, etc.”
— Nichole Wischoff, Wischoff Ventures
Emerging LPs want to learn from you, but remember you’re an investor, not a professor.
“Emerging LPs want that education. For emerging LPs who write a $5 million check or greater, they might like for you to jump on a call every quarter to educate them and share your current portfolio and what else you are seeing out in the field.
“Also, be thoughtful about how you’re managing your time, so that you don’t turn into a full-time venture professor. You’re an investor, a GP. That’s what you’re getting paid to do.”
— Arjun Dev Arora, Format One
Then again, most LPs are just passive.
“Most LPs are pretty passive. Sometimes they are helpful by making intros to our portfolio companies. We also like getting a pulse on the market from them.”
— Sheel Mohnot, Better Tomorrow Ventures
“Mostly passive. Most of the time, when the deals are good, they require little involvement.”
— Shiva Singh Sangwan, 1947 Rise
GP-LP fit: Red flags and things to watch out for
Avoid LPs who ask for special terms.
“These are long-term marriages, really long term. If you are going to be partners for the next 10-20 years, you better like each other. We have a no-asshole rule. We want investors who believe in our approach and ethos. My mentors at some of the top VC funds of the last 20 years have also coached us to keep the terms clean and I think a lot of emerging managers feel pressure to give special terms and ownership of their management company or GP, and long term, that might be something you regret.”
— Steven Rosenblatt, Oceans Ventures
“While I haven’t said no yet, I have selectively not followed up. For example, after talking with other GPs, I’ve heard some LPs were tricky to manage – outside the norm. It’s okay to expect quarterly communications, but when people start pushing an agenda, that’s too much.
“Avoid LPs who ask you to give up economics as a GP or change your terms. LPs who want to negotiate lower management fees, a different carry structure, or they want to own 20% of the general partnership for the next three funds are best avoided if possible. They want to change the terms that everyone else has. I wouldn’t allow that. If other LPs find out (and they eventually do), it would cause my LPs to lose trust in me and rightfully be frustrated that they got worse terms.”
— Sarah Smith, Sarah Smith Fund
Do your LPs’ goals align with your fund goals?
“As we got into the process we realized there was, at the time (2013) some other attributes we needed to take into consideration. One for example was the LP’s definition of success.
“We wanted LPs who were investing in us solely because they thought we’d be good stewards of their capital and return above-benchmark results. If there was a second agenda that they made obvious we typically declined the opportunity to work together. Our mindset was that there’s so much risk in trying to build a new firm, let’s focus all of our energy on a single definition of success: cash on cash returns. That precluded taking capital from LPs who were emphasizing direct co-investment (some of our LPs have direct practices and we love to bring them in to portfolio company cap tables when there’s mutual interest but we didn’t want it to be an expectation) or strategic investors who had interests in our portfolio different than our own (e.g. corporates that wanted access to market information).”
— Hunter Walk, Homebrew
Do you have the bandwidth to teach?
“If someone wants to learn, that can take a lot of time. Time that, for you, might be better spent elsewhere. If you’d rather spend the time elsewhere, like with your portfolio or investing, be clear with expectations. And if they don’t budge, don’t take that money.”
— Arjun Dev Arora, Format One
Beware of round tripping.
“I actually couldn’t take any Indian capital due to regulations. There’s a thing called ’round tripping.’ If a fund in India invests in a fund that’s built in the US, then invests back into Indian startups, that’s round tripping. And unfortunately, not allowed.”
— Shiva Singh Sangwan, 1947 Rise
Check your CFIUS rules.
“Before you say yes to LPs, check the CFIUS rules. Under those guidelines, you may not be able to take money from certain countries and parties.”
— Arjun Dev Arora, Format One
Did you take the right capital from the right people?
“Even though we heard ‘no’ a lot during our first fundraise we also turned down some offers. We’d already done a good job of pre-screening out LPs who we didn’t think were values aligned with Homebrew (e.g. money came from sources/institutions we wouldn’t want to work on behalf of).”
— Hunter Walk, Homebrew
“If they’re asking for things that you’re not comfortable with, then you probably shouldn’t work with them. The key is that there should be zero second-guessing. You need to be in a relationship with partners you won’t regret, during bull and bear markets. Ask yourself, ‘Did I take the right capital from the right people? Sometimes, it’s about where that capital came from and if you feel good about that. If there’s any inkling of doubt, don’t take the money or it’ll come back to haunt you.”
— Steven Rosenblatt, Oceans Ventures
“You need to communicate your clear values as a fund and long-term platform. Any LPs not aligned on your mission and values would be people to say no to quickly.”
— Arjun Dev Arora, Format One
“So, I did say no. I turned down a million dollar check because I didn’t feel comfortable with him being in front of a founder. And we’re very geared on our community. Money’s nice, but it’s not everything.”
— Vijen Patel, The 81 Collection
“Another thing to be mindful of is if an LP has a history of making verbal commitments and then changing that number at closing. You want a reliable and trusted relationship. If you did a reference with another GP, and heard that an LP cut their commitment by 50% at the last minute, that capital’s just not worth the risk to me.”
— Sarah Smith, Sarah Smith Fund
Don’t tolerate disrespect.
“I said no to a few LPs in Fund II. This was largely because they were super disrespectful during the raise process. I had an LP fly in from the UK after already committing and was so insanely rude to me in front of his all-male team that I decided not to work with them. I also try to be very transparent for folks that might not be a great fit for the fund.”
— Nichole Wischoff, Wischoff Ventures
“Small things I look for include off-color jokes, like ‘Look at that hot chick,’ or asking stupid questions. Some LPs have said this to Elizabeth, ‘How do you balance being a mom and being a full-time investor?’ I dare people to ask me that question. I’m a dad and I’m still doing it, but no one does.”
— Eric Bahn, Hustle Fund
Author’s Note: Eric goes into much more detail on ten reasons why you shouldn’t take LP money here, which I highly recommend a read.
Are your LPs disengaged during the diligence process?
“There are people who are disengaged in the diligence process. Those are people who are usually a bad fit.”
— Paige Finn Doherty, Behind Genius Ventures
Look for complimentary experience and diversity of opinion and experiences.
“Like any cap table or LP base, what is important to us is to have partners who can grow with us for a long period of time and where we have diversity of thought, experience, and exceptions. It was really important to Oceans and our ethos to have amazing founders and tech execs as LPs early on who could be great to lean on for diligence and additional leverage to support our founders and entrepreneurial family offices. At the same time we have LPs who are extremely valuable on the finance side and who have a long history of investing in venture. Complimentary experience and diversity of capital is really important to us.”
— Steven Rosenblatt, Oceans Ventures
“I also want to put it out there that GPs should be intentional about their LPs. For me, I aim to have my LP base include at least 50% who identify as women or non-binary, 10% black or Latinx, and 10% LGBTQ. Be intentional and solicit a diverse group of people. People talk about the diversity of founders and venture investors, but not about LPs. I think a lot about wealth creation, and it starts from the very top. I think people should be thinking about that a lot more.”
— Sarah Smith, Sarah Smith Fund
Don’t discount vibe.
“For Fund I, we had a chance to close $30 million worth of LP capital, but we only chose to raise $11 million. That’s a lot of people we said no to.
“It comes down to say a single word: vibe. It’s kind of like a marriage. ‘You’re trusting me with your wealth for a decade, if not more. It’s not a relationship we take lightly.’ I also share all the reasons why it won’t work out. So our LPs know what they’re getting themselves into.
“If something feels off, I don’t have to explain it. No one on our team has to explain it. If your gut feels like this could be off, we should just always trust that. Those one or two LPs your gut tells you is off are likely going to be super annoying,
“People like to logos their way out of things, but you really have to go back to gut feel. It’s almost never worth it. I can’t explain what an asshole feels like. But when you meet one, you know it.”
— Eric Bahn, Hustle Fund
“If I have a gut feeling that something is weird, then I trust that.”
— Paige Finn Doherty, Behind Genius Ventures
Big checks prevent you from bringing in other LPs you want.
“We haven’t had to say no to that many LPs. In our case, we either told them, ‘It’s too late – we’re full now and don’t have room for you.’ Or we talked LPs down from how much they wanted to commit. We had an LP who initially committed $22 million. And we told them, ‘Hey, we want to add more investors to our fund, so we don’t want to have any investors who commit more than $15 million.’”
— Sheel Mohnot, Better Tomorrow Ventures
Sometimes, the check size is just too small.
“I’ve said no because people wanted to invest below the minimum. To which, I told them to wait until they could meet the minimum. I’m not in the business of putting people in financial distress. And if my minimum, which is modest by design, $100K, called over two years, puts people in a position where they are stressed out, they shouldn’t invest in me or perhaps venture as a whole.”
— Sarah Smith, Sarah Smith Fund
“As the fund grew, I would turn down certain individuals due to check size.”
— Paige Finn Doherty, Behind Genius Ventures
But check size can vary based on an LP’s value to you or the portfolio.
“I also only reached out to people I wanted to have on board. The minimum check size did vary from individual to individual, which I largely based it off of the value they could provide for the fund and my portfolio companies.”
— Shiva Singh Sangwan, 1947 Rise
Or don’t settle and aim high.
“I hate the word ‘oversubscribed.’ It’s something I was lucky to learn very early on. Early in my career I had a board member say to me that if you hit your goals every quarter, your goals aren’t high enough.”
— Steven Rosenblatt, Oceans Ventures
Author’s Note: As you might realize even more after the last three pieces of advice, there’s really no right answer.
How do GPs think about building an LPAC?
Your anchor and other major LPs will ask you to create one.
“On the LPAC, I think I can confidently say that no fund manager wants an LPAC and proactively creates one. It is usually the ask of an anchor LP as you scale fund size. For example, for my second fund, I was asked by an LP to create one, and I was told a good number of LPAC members is three. You want the anchor LP in the LPAC because they are your biggest investor, and the two others should be trusted partners who want to help you. It’s up to me who I ask assuming not many have asked to be a part of it.
“I’ve been told most managers will have a bi-annual quick check-in call just to talk about how things are going. TBD if I ever do this. On the other hand, a lot of managers try to wait until they have at least $100M in AUM to give into an LPAC. But I didn’t say no.”
— Nichole Wischoff, Wischoff Ventures
“I think it’s, in large part, who wants to be on it. A lot of your larger LPs, in exchange for 10% of your fund, want to be on your LPAC. There are some investors who committed 10% but don’t want to be on it. It’s not like a board. If people want to be on it, it’s okay.
“We have five on our LPAC, and it’s a good number. We give them an early look by sharing with them our plan and fund deck. So, they gave us early feedback, like on carry structure.”
— Sheel Mohnot, Better Tomorrow Ventures
If a smaller LP wants to be on the LPAC, push back by giving them options that fit what you’re looking for.
“There are no real rules about how you approach them. We typically like to have our largest investors in it, at least symbolically. They’re putting in the most risk, so they should have a say in the direction of the firm.
“If someone does ask for it, and if they aren’t a large enough check, we tell them, ‘We like to reserve this spot for our largest LPs because they have the largest exposure in our fund. We’re open to you being a member in our LPAC, if you increase your check size.” That way, you can leave the ball in their court. Either, they won’t push further or they’ll commit more capital to the fund.”
— Eric Bahn, Hustle Fund
Evaluate a potential LPAC member on five different dimensions.
“So I will preface that emerging funds — Funds I to III or IV — are different from established funds, which have a mostly institutional base. Those who tend to write large checks may also be more inclined to want a seat on the LPAC.
“We look at it from these different dimensions, which we categorize into:
Flexibility,
Complementary skills,
Ability to give honest feedback
Value, and
Capital
“So, flexibility is important because we’re not an institutional fund yet. The construction of the committee depends on the ebbs and flows of fundraising. Some investors don’t want to be on an LPAC — conflicting interests, not wanting to be actively involved, or just don’t want the time commitment. This’ll admittedly look very different for an institutional LPAC down the road for someone who has several hundred million in AUM. Institutional LPs will ask to have a seat on the LPAC, especially if they’re writing a check that accounts for 20% or more of the fund.”
— Steven Rosenblatt, Oceans Ventures
Go to them if you plan to go off-thesis.
“You go to them for things you might think are a conflict. For example, if I say I write $1M checks and I am considering going off-thesis and writing a $250K check, I might want to gut check and get a thumbs up that I’m not being an idiot. It would be a super simple email saying: ‘Hey team, here’s the scoop – please share thoughts.’ It’s very loose.”
— Nichole Wischoff, Wischoff Ventures
Ask your LPAC what they’re seeing in other managers they’ve backed.
“I didn’t expect to negotiate my LPA with Cendana. I have Michael [Kim] and Yougrok [from GREE Capital] on my LPAC. Youngrok is someone I meet with very often. And since GREE backed us since Fund I, he’s seen my growth as a fund manager. Our LPAC offers a great and critical lens into the industry.
Individually, I chat with both quite often. Together, as an LPAC, we meet quarterly. We’re also going to have our first general annual meeting on April 21st.
What’s great about Michael and Youngrok is that I’m not afraid to ask questions I think are dumb. If you’re in your Fund I or II, like I am, you’re still figuring shit out. You’re still testing what works and resonates and what doesn’t. I ask them, ‘what have you seen other managers do in this situation?’ They’ve worked with so many other managers, and in learning from their deep knowledge, I’m better off as a manager. It’s about building BGV as a long-term institution.”
— Paige Finn Doherty, Behind Genius Ventures
Your LPAC is your LP base’s chief influencer.
“One useful note about having an LPAC is that sometimes you want to make a minor change to the LPA. Say you originally planned to only invest in North American companies, but now you want to invest 5% of the fund in African startups. If you don’t have an LPAC, you have to go back to all your LPs each time you change the parameters of the agreement. If you have an LPAC, they can approve those minor changes for you on behalf of the rest of the LPs.”
— Sarah Smith, Sarah Smith Fund
“To be honest, I’m still confused about the purpose and concept of an LPAC. I like to think of the LPAC as the influencer of the LP base. They keep the investors’ interests in mind and help you communicate hard decisions to your investors.”
— Eric Bahn, Hustle Fund
Consult your LPAC for tough decisions.
“It definitely matters more at the end of the fund life. For instance, if we want to wait an additional year for Stripe to IPO. Then we consult with our LPAC to figure out the best way to message that to our LPs. Additionally, we can ask them what they think about a deal we’re about to do. It can also be useful in corporal situations. Hypothetically, if Elizabeth was beating me up, I can ask our LPAC to help me remove her.”
— Eric Bahn, Hustle Fund
“Since we’ve got a very small group of LPs that make up 95%+ of our funds, there isn’t much difference between our relationship with our LPAC and the other LPs. That said, we do have an LPAC and it’s composed of the largest investors in our funds. We meet with them once a year – typically a lunch before our annual meeting. And share the materials/discussion with the rest of the institutional LPs as well, so it’s less about anything confidential and more about a group of stakeholders we can get feedback from. Of course there are sometimes administrative aspects (approve us raising our recycling limits for a fund) but more often than not Satya and I are seeking feedback on questions we’re facing about how we want to manage the firm, tradeoffs between short and long-term thinking, and such.”
— Hunter Walk, Homebrew
“For us, when we constructed our LPAC, the questions we asked ourselves were:
Who do we think would be valuable in helping us balance short term decisions with long term thinking?
Who do we think will give us honest feedback and engage in honest conversations?
And who do we know has complementary DNA?”
— Steven Rosenblatt, Oceans Ventures
Find LPAC members who come from diverse experiences.
“I use it as a mini-board. I won’t go to it for big decisions, but I like the idea of surrounding myself with people who have different experiences than me, who have dissent, and make me a better investor.”
— Vijen Patel, The 81 Collection
Build an LPAC of different LP personas.
“If you have a great LPAC, they’re almost like a board of directors. You have some kind of cadence to get advice. If I did have one, I would like to do it with a group that represents my LP base – a few family offices, individuals, and people who could give really good advice.
“For first-time funds, you don’t want it to be any more than three to four people. And four to six for more established funds.”
— Sarah Smith, Sarah Smith Fund
“My advice to other VCs in building their LPAC would be to remember it’s about institutions, not individuals – your LPs representative might change over the course of the years. And, if applicable, to make sure you have a mix of LP types – for example, if your fund LPs are a mix of evergreen investment offices (such as most endowments) and folks who think of returns on a different cycle (fund of funds), include both.”
— Hunter Walk, Homebrew
The tech stack of engaging LPs
While I didn’t ask everyone this question, thought I’d share what notes I did have on some firms’ tech stack for engaging their LPs and managing their investor relations.
Wischoff Ventures — Airtable, Figma
“A spreadsheet/Airtable — I have everyone’s emails and copy-paste when I’m ready to send a quarterly update. I only talk to most once per quarter and it’s for my update. I built that in Figma (wouldn’t recommend it).”
Oceans Ventures — Affinity
“We use Affinity to manage our LP CRM. Our existing LPs get quarterly reports. And we try to write an LP update at least two times a year but will also often put out memos especially during key market moments. Also, since day one, we have a newsletter that keeps people up to date. It goes out every two to three weeks. And we have a personality. We’ve had other VCs tell us how excited they are to read it and we have LPs tell us they love our newsletter. We try to over-communicate and keep them heavily engaged.”
The 81 Collection — Streak, Airtable, Hubspot, Excel/Google Sheets
“We use Airtable, Hubspot, Excel and Google spreadsheets, but Streak is our main thing.”
“We’re pretty software-heavy — something I picked up from my time at WorkOS. We use:
Cloze — as our CRM, where we track what cities folks are in in, who’s in the pipeline and more
Airtable — for portfolio management
Google Drive
Webflow — for our website
Zapier — but there’s only so much you can automate
1Password — we’re pretty big on security
Calendly — but we’ve gone back and forth on that. I’m trying to spend more time with people who’ve invested in our fund, as well as the founders we invested in.
Twitter
Descript — for podcast transcriptions
Riverside — to record podcast episodes”
1947 Rise — Email, AngelList
“Regular LP updates, as well as my newsletter, have been my biggest engagement tool with LPs. I send the former out once a quarter, and the latter every few weeks. Luckily, I can also see all my LPs on my AngelList dashboard.”
“We used Carta, Affinity, Mailchimp, Aumni for analytics, and Anduin to bring LPs in. Fundraising is a bunch of chasing people down. Anduin’s a workflow tool. You can send people stuff and have people sign them all in one tool. Actually, several LPs told us that Anduin was the smoothest onboarding experience they’d ever had.”
“Mr. Huxley’s” Firm — Airtable, Notion, Whatsapp, Quickbooks, Google Drive
In closing
As I was writing this blogpost, a big part of me wanted a nice, easy linear narrative around LP construction. But I knew there wasn’t. In the many conversations that led to the above writing, it became quite evident there was no undisputed best way — no cure-all — to build an LP base.
Some believed in aiming high and never becoming oversubscribed. Others generated demand for their subsequent fund or was able to be judicious with their LPs by being oversubscribed.
Some built momentum by securing an anchor LP. Others started from individuals they knew the best.
Some didn’t budge on minimum check size. Others were flexible.
The list goes on and on. While there is no right answer, in knowing all of the above possibilities and strategies, I, and everyone who helped me make this blogpost a reality, hope you are armed with the knowledge to make the most informed decision for your fund. And to that, cheers!
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
In the wonderful world of venture, an investor takes a different kind of bet with each stage as a function of industry. For instance, a pre-seed SaaS product, it’s a distribution risk. Can this founder sell this product to others? In general, the angel or pre-seed round is often a founder bet. Can this founder or founding team pull off their vision? And subsequently, if they’re able to achieve their milestones in the funding window, will those milestones excite downstream capital?
One of the greatest byproducts in starting my career in venture as a scout — sending seed and Series A deals to those respective investors — was that I learned what archetypes of deals interested them. And what didn’t. As I moved even earlier in the funnel, so, pre-seed and seed, I could help founders and their teams set themselves up for the subsequent round.
Admittedly, that became a bit harder to do in the hoorah of 2020 and 2021 — with insane multiples and raises coming together as a function of FOMO.
When looking at the present day, mid-February of 2023, one in three or four deals in my inbox is a company raising a bridge. The bet here is an execution bet. Now before I get into the questions I consider when a founder pitches a bridge fundraise, I think it’ll be helpful to consider bridge rounds as a function of good and bad markets. And why they make more sense in a bull market, for better or worse, than in a bear market.
Bridge and venture debt
In a bull market, bridge rounds — or preemptive rounds, pick your nomenclature — and pay-to-play rounds make sense. The promise of capital within six months is extremely likely. Interest rates are low enough, where equity instruments have greater return potential than debt instruments. In a similar way, the same can be said for the premise behind venture debt. Venture debt (I am but an armchair expert at best, but have been lucky to query some of the best) is debt that is issued with the expectation of another round. At the same time, the warning label here is in a few-fold:
Many VCs prefer not to have investors higher than them on preference stack.
Subsequent equity raises are used to pay back venture debt first.
You have a 36-month repayment period usually, after if you decide to use the capital within the first 12 months or not.
There are usually warrants that ask for additional ownership in the company on top of the loan.
But I digress. In a bear market, bridge markets make less sense for an investor. Bridge rounds usually occur when teams miss expectations. They’ve missed milestones. Their burn rate was higher than expected. And their runway is naught but less than a year. It’s way the most common recommendation VCs gave their portfolio companies in 2022 was have at least a 24-month runway. You have more wiggle room to prove assumptions and get to an inflection point.
In a bull market, missing expectations is almost impossible. Sky high valuation multiples and funding rounds made capital cheap. When capital’s cheap, founders are more likely to spend with less discipline than otherwise. Moreover, consumers felt richer. Their net worth appreciated in a good economy. Interest rates lag inflationary signs. And the money is out of the pocket before it has time to warm up. Consumers also not only spend more, but they invest more. Companies saw greater revenue numbers and market cap growth, leading to more liberal spending habits. Greater market budgets to acquire customers. That spending led to high burn multiples.
This all led to a virtuous flywheel, that though growth and revenue numbers hit, the cost to get there also exponentially grew. The quality of businesses declined, as consumers and companies got used to the spending habits of the good times. Those same habits, unfortunately, don’t work in a recessionary market. And when founders are unable to part with their multiple in a boom market, and for many, the spend during that same market, they go to raise a bridge round instead of offering new equity, hoping they’ll, in some way, “make it work.” And yes, that’s the exact wording some founders used.
If investors have the chance to place new shots on goal, a lot of investors today are willing to bear the opportunity cost of passing on a bridge round.
Inflection points and lack thereof
Each new round is raised on the assumption your company is at an inflection point. Right as your second derivative shifts from negative to positive. To some businesses, that’s a market inflection. A (lucky) black swan event. A technological release. Or a regulatory easing. To others, it’s a traction inflection. Users just love your product. And to another cohort, not mutually exclusive to the afore-two inflections, is an insight inflection. You’ve learned something that’s going to catapult you so much further. For Duolingo in 2012, it’s the realization of going mobile. For Zynga, in 2010, it was its partnership with a rising class of platform usage, social media, namely Facebook.
On the other hand, for Airbnb, in 2011, its major competitor abroad, Wimdu raised $90 million to focus on its European expansion. That meant if Airbnb didn’t expand outside of the US, they would lose access to a whole market of Europeans but also Americans whose vacation destinations were one of the seven continents. To the Airbnb team, in the words of Jonathan Golden, their first PM, it was the realization that “marketplaces are normally winner-take-all markets” and “when competition comes after you, move ridiculously fast.” And they did.
Bridge rounds often don’t carry that same drive or momentum. It’s not raised at an inflection point, but rather in efforts to get to one. Usually it’s not proving a new assumption but last round’s assumptions. As I mentioned at the top, it’s an execution bet. And as such, it begs the question: How much conviction do I have that a founder is going to be a great steward of capital?
Fortunately or unfortunately, unlike most other early-stage round constructions, there are multiple data points. Have they used capital to date efficiently and effectively? If so, do I believe this founder will 10x their KPIs within this funding window?
Usually the funding window I allude to is 12 to 18 months. In the scenario of a bridge, that timeline becomes six months. The expectations are less forgiving and more aggressive. What are you building to in half a year? Do you have the discipline to execute on that goal? Does your track record corroborate? Do you have a detailed plan to get there?
In closing
IVP’s Tom Loverrorecently shared, “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.”
A bridge round, more often than not, is a half measure.
He goes on to say, “If it’s a good company, give them a lot of capital. If not, zero.”
This past week, I chatted with three institutional LPs, and three more venture investors about this topic. In five out of six conversations, one phrase made its appearance. “Don’t put good money after bad.” And while anecdotal, all six — every single one having participated in bridge rounds at some point in their investing career — concluded money was better spent in new investments than in bridge rounds. The caveat from these conversations was that it may work if you are either leading the round or setting the terms. Then again, that’s favorable for an investor, and may not be as much for the founders.
That said, I’m sure there’ll still be great companies raising bridges. But who knows… I await the day, not just in outliers, that we see bridge rounds trend otherwise. For that to happen, I agree with many of my colleagues that we need to see a lot more discipline from the average founder.
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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.
“Magic is just spending more time on a trick that anyone would ever expect to be worth it.” —Penn & Teller
Five years ago, back in 2018, I would have never guessed. But I fell in love with the soles of another person’s feet. And I knew this was going to be one of the most tenacious people I’d ever meet.
I was introduced to “Ben” by a dear friend with one line, “No one can outhustle him.” “Ben” grew up with an insatiable appetite to learn, in a village located on the outskirts of Cairo. He would spend many days and nights in conversation with village experts and the village library, until one day he noticed he learned all he could have.
It just so happens that there’s a two-hour bus to Cairo that comes once a week. And that was how he found the libraries in Cairo, where he realized his interest in AI. But due to the bus’ odd schedules, instead of riding it, Ben chose to instead walk ten hours to Cairo every week. He’d then download, read, and print (to bring back to his village) as many Stanford PhD research papers on AI as possible. Sleep overnight at the bus stop. Then the next day, walk ten hours back to his village, where he’d continue with his reading for the week with all the loose leaf papers he had.
Needless to say, he had the feet to show for it.
I shared that story with a friend two days ago at the perennially-packed Superhot. We were chatting about the traits we look for in founders we back and the questions we ask to get there. The latter of which I’ve written about before. And at the early stages, the chief thing we look for is grit. There’s a tweet I stumbled on this week summarizes that rather nicely:
The problem is it’s so hard to see if a founder has the qualities of a “white belt who never quit” in just one meeting, even a few meetings. So, instead of sharing what questions we ask founders — most of which I know are designed to be reveal tells of grit, and are at least to my friend and his team, proprietary to some degree — I’ll share why grit matters, not just as a founder trait, but as a variable in the fundraising process, and a story that I hope will inspire you.
Candy versus the meal
One of the frameworks I love thinking about is the difference between how people think and what people talk about. This is by no means original. I actually stumbled across this when watching Malcolm Gladwell on Masterclass. For instance, when people watched the most recent Avatar movie, they didn’t say “Here’s the plot of the movie.” They talk about their favorite scenes or how great the performance capture was for underwater sequences. Neither is all-encompassing of the movie, but it gets people excited. That’s what word of mouth is.
Malcolm Gladwell calls it the meal and the candy, respectively. The meal is how people think — what people take home. They sit down with it and take time to process. The candy is what people talk about. The parts of the narrative that are easiest to share and remember.
From a go-to-market presentation I did earlier this year
Candy without the meal is clickbait. A meal without the candy means no one will talk about the good work you do. So you need both.
Similarly, in the world of venture, when I, like most other investors get excited about a deal, assuming it’s a good one, don’t talk about the whole pitch deck. Neither do I get super excited about sharing the one-liner unless it’s actually something unique. Like when a bike-sharing company pitched their one-liner as “We make walking fun.”
What I talk about is what’s cool and what stands out. That’s the investor’s word of mouth. And that’s how you fill a round. Or get people excited to help you find investors who will. Things I shared before include:
“That startup that hit 130% net retention.”
“Customers literally write love letters to the founders.”
“That founder cold emailed a Disney exec for 300 days straight to inevitably close their first enterprise deal.”
“This founder started a podcast as a growth engine to 1/ secure his first 10 customers, 2/ bring on one of the best advisory board I’ve seen to date.”
As you might notice, it’s almost impossible to guess what each company does above with just what I shared. And it sure as hell doesn’t get investors to conviction with just that. But they’re powerful enough for investors to take a second look at and talk about. Among the above, the absolute favorite thing investors love to talk about with each other is a founder’s ability to hustle. And subsequently, their Herculean efforts that demonstrate grit.
Years later, my friend on Wednesday was still talking about a founder he backed who waited in the cold outside an exec’s office until he got a meeting. Then found unique ways to turn 20 minutes into 30 minutes into hours into their first enterprise client.
The thing is it’s rare to see this. Most people promise that they will, but the best founders have demonstrated this grit time and time again before, against seemingly impossible odds. And they’re only “impossible” if you’ve set lofty goals in the past and you did nothing short of your best to try and achieve it. I’ll give another example. One that I knew if he was to start another business, you knew he was going to make it happen.
Spoiler alert: He did.
From losing everything to acquisition
I first met Anthony at 1517 Fund’s quincentennial “anniversary” summit back in 2017, designed to bring together the world’s most divergent thinkers.
The first thing you notice about Anthony is that he had a small frame. A demeanor that belied his life experiences and the courage it took for him to share them. Yet, he has a way to command the attention of his audience.
He started his business back in freshman year of college delivering food to his fellow classmates at USC. It started off as a side hustle to earn some spare change. Something he didn’t expect would become something greater, until one day Mark Cuban came to USC to give a talk.
As the fireside chat ended sooner than expected, Mark polled the audience, “What if we did a live Shark Tank?” Anthony explained that while unsure if it’ll work, but not wanting to let a once-in-a-lifetime opportunity go, he decided to pitch this idea he’d been working on — which at that point, was not even an app, but just a series of text messages between friends who ordered food and friends who were willing to deliver them.
To his surprise, Mark loved it. Soon that snowballed into Anthony dropping out of school to focus on the business full-time. They got into 500, and he became a Thiel fellow. But one spring later, amidst the hype of a party in Vegas, he miscalculated a dive into the pool. Fractured his spine. And became paralyzed from the neck down.
In the ensuing months, his top priority was not to grow what became EnvoyNow, but to breathe, to drink water — to survive. His co-founders had promised him they would look after the business and that he should focus on recovery. So he did. Months passed. And while Anthony still sat in the occasional company meeting, he was focused on mobility and feeding himself.
A few more months passed by, and one day, his co-founders decided to visit him while he was still focused on recovering. And they broke the news. The business was stalling. Investors had lost faith. Moreover, both his co-founders had already lined up new opportunities and wanted to close the business down.
As I sat listening, I couldn’t help but wonder what I’d do in that situation. Anthony instead decided to go back full-time to the business and win back his remaining team and investors. He said, “I went back to our investors. I shared where we were at, which wasn’t good. And asked them to believe in me once more. They did once before, and as long as I showed I was still passionate about the business, I was banking on the hope that some will still continue to support us.” Luckily, a small handful did.
With renewed drive and determination, and a tough situation to get out of, within the year, they expanded to 16 schools and employed 1500 students around the nation. The rest is history. They sold to JoyRun. And Anthony went on to found more companies, including his current one, Vinovest, which he started 2019 and raised an A in 2021.
If you’re curious about the additional details to the story, there’s also a great 2017 Fortune piece cataloging his journey. I love the line Blake Masters, President of the Thiel Foundation, shared in that piece, “Good luck finding something that will hold [Anthony] back.”
In closing
There’s a fun little thought exercise a couple investors I know used to do (maybe still do). They first posed the question to me when I first jumped into venture, which is:
If you had two young founders… One went to MIT, graduated with a 4.0 GPA in computer science, and was summa cum laude. The other is a high school graduate, and instead of paying over $200,000 over 4 years, took every single MIT computer science course on Coursera in one year. All else held equal, who would you invest in?
Naturally, the answer biases towards the latter. Yet, in the past few years, or at least since I’ve been in the world of VC, there’s been a bunch of logo shopping and chasing the idea of “signal.” While no one says is explicitly, logos have become more important than the hustle.
Today, we’re in a tough market. One where we haven’t seen the light at the end of the tunnel. Hell, we don’t even know when we’re at the trough yet. Or at least, the lagging indicator that we are is a massive slowdown or lack of layoffs. Yet, we recently saw Google, as well as Microsoft and Amazon, go through cuts.
And so, it no longer matters who you’re backed by or where you’ve come from. As Engineering Capital’s Ashmeet Sidana said, “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.”
What matters is that you can make it out the other side. What matters is that you’re inventive and creative, that you can tighten your belt and put the pedal to the metal, and do what looks in retrospect as superhuman.
And that requires perseverance and the ability to learn. That requires spending more time on something than anyone would ever expect to be worth it. As you do so, you embark on what VCs call — insight development.
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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.
“‘Mutation’ is simply the term for a version of a gene that fewer than 2 percent of the population has. […] Imagine enough letters to fill 13 complete sets of Encyclopaedia Britannica with a single-letter typo that changes the meaning of a crucial entry.” A fascinating line from David Epstein. One that makes you pause and think. I apologize that this is where my mind wanders to every time I read something that stops me cold in my tracks. The world of startups, at least in fundraising, is no different.
Let me elaborate.
While this is rather anecdotal, the average VC I know takes 10 or less first meetings in any given week. As an average of 500 emails land in their inbox every week, that’s a 2% chance of having your cold message land you a meeting. And that’s not even counting the heavy bias towards warm intros. In other words, to get noticed, you have to stray from the norm. A variant. A mutation.
The good news about being a mutated monkey with two left ears and an overbite hosting two dozen fangs is that unlike in nature, you can genetically modify and give birth to a mutated product of your choosing. While I probably could’ve used more floral language, I realize I’m also not writing a rom com, but a documentary capturing the cold realities of an investor’s virtual real estate. That has more eyes trying to peer into it than it has time, space, and most importantly, attention to open doors.
Your appearance on that stake of land is your debutante ball. The question is how will you grace the ballroom floor among a sea of people who have access to the same town tailors, dressmakers, and dance instructors as you do. A name. A subject line. And at most 50 characters to make a first impression.
The short answer is you don’t.
I also understand that in writing a piece on how to stand out in an investor’s inbox, I run the risk of sounding like every other Medium article who’s covered this topic before me. So, instead of sharing the five steps to get every investor to open your email, I’m going to share three examples, starting with some initial frameworks of how and some of my favorite thought leaders think about narratives.
As a compass for the below, I’ll share more about:
For the purpose of this essay, I’ll focus on cold emails, rather than warm intros. But many of the below lessons are transferrable.
The investor product
Blume’s Sajith Pai recently wrote a great piece detailing on what he calls the investor product. And how that is different from the content product — what customers see and hear — and the internal comms product — what your team members see and hear. Even in my own experience, I see founders often conflate at least two. They bucket it into the internal story… and the external story — bundling, ineffectively, the investor and content product.
In short, the investor product is the narrative that you tell your investors. A permutation of your personality and your vector in the market in a sequence you think investors find most compelling. That narrative, while not mutually exclusive, is different from the story you tell your customers. For customers, you are the Yoda to their Luke Skywalker. For investors, you’re the Anakin to the Jedi Order. The future.
Not all pitches are created equal
Just like expository writing differs from persuasive writing which differs from narrative writing, there are different flavors of fundraising pitches as well. Kevin Kwokboils it down to three.
Narrative pitches: What could be. What does the future look like?
Inflection pitches: New unveiled secrets. In Kevin’s words, for investors, “now is the ideal risk-adjusted time to invest.” Why is the present so radically different? Why is the second derivative zero?
Traction pitches: Results and metrics. How does the past paint you in glorious light? Admittedly, people rarely index on the past. So, traction pitches are on decline. It’s akin to, if someone were to ask, “What is your greatest accomplishment?” You say, “It has yet to happen.”
The truth is most early-stage founder pitches are narrative pitches, focused on team and vision. But the most compelling ones for VCs are inflection ones. One of my favorite investor frameworks, put into words by the an investor in the On Deck Angels community, is:
Do I believe this founder can 10x their KPIs within the funding window?
The funding window is defined as usually 12 to 18 months after the round closes. And usually the interim time before a venture-scale company goes out to raise another round. In order to 10x during the next 12 to 18 months, you have to be on either a rising market tide that raises all boats, or more importantly, the beginnings of the hockey stick curve in your product journey. Do you have evidence that your customers just love your product? For instance, for marketplaces, that could be early organic signs as demand converts to supply. In other cases, it could be the engagement rate post-reaching the activation milestone.
What channel does the pitch land in
While the message — the narrative — is important, the channel in which the pitch is received is just as, if not more important. As Reid Hoffmanonce wrote, “the cold and unromantic fact is that a good product with great distribution will almost always beat a great product with poor distribution.”
The truth is that email is a saturated channel.
While Figma’s Naira Hourdajian notes that this applies to any form of communications, not just politics, she put it best, “Essentially, when you’re working in politics, you have your earned channels, owned channels, and your paid channels.”
Owned — Anything you control on your own channels. Your website, blog, your own email, and in a way, your own social channels.
Paid — Anything you put out into the world using capital. For instance, ads.
Earned — Because others are not willing to give it to you and that it is their real estate, you have to earn it. Like press and in this case, others’ email inboxes.
On an adjacent point, the thing is most founders don’t spend enough time and effort on owned and earned channels when it comes to the content product. Both are extremely underleveraged. Many think, especially outside of the context of fundraising, and within go-to-market strategies, think paid is the only way to go. While powerful, it is the channel that carries the most weight post-product-market fit. Not pre-.
In the context of fundraising, I always tell founders I work with to always be fundraising, just like they should always be selling. There’s a saying that investors invest in lines, not dots. But the first time you pop up in someone’s inbox is, by definition, just a dot. Nothing more, nothing less. Rather, you should start your conversations with your future investors before you kickstart your fundraising. Ask for advice. Host events that you invite them to. Interview them on a podcast or a blogpost. Feature them in a TikTok reel. (Clearly, I spend the bulk of my time with consumer startups).
As you might have guessed, sometimes it has to be outside of the inbox. To get their attention, there are two ways you can pick your channel:
Target powerful channels in an innovative way,
Target powerful, but neglected channels,
And, target new and upcoming channels.
As such, I’ll share an example for each.
Powerful channel used in an innovative way: Email
In one of Tim Ferriss’ 5-Bullet Friday newsletters recently, I found out that Arnold Schwarzenegger handwrites all his emails.
Source: Tim Ferriss’ 5-Bullet Friday — Jan 13, 2023
It’s brilliant. Genius, I might say. I don’t know how much intentionality went into why Arnold does so, but here’s why I think it’s brilliant.
If you’re sending it to someone who owns a Gmail, you’ve just given yourself 100% more real estate (albeit ephemeral) in their inbox. If their inbox is set on Gmail’s default view. Additionally, via the attachment name, that’s 10-15 characters more of information you can share at just a glance. Or at the minimum, if they’re reading via the compact view, an extra moniker that most emails do not have. A paper clip. To a reader’s eyes, it draws the same amount of attention as a blue check mark on Twitter or Instagram.
Once they click open the email, instead of plain text, your reader, your investor, sees font that stands out from all the other email text. A textual mutation that leads to curiosity. Something that begs to be read.
Powerful, but neglected channel: Physical mail
When I started in venture, I didn’t have a network, but I knew I needed one. Particularly, with other investors. After all, I didn’t know smack. I quickly realized that email and LinkedIn were completely saturated. One investor I reached out to later told me that he doesn’t check his LinkedIn at all, since he got 200 connection requests a day. So, it begged the question: Where must investors spend time but aren’t oversaturated with information?
Well, the thing is they’re human. So I walked through every step of what a day in the life of an average human being would go through, then guesstimated if there were any similarities with an investor’s schedule. Meal time, time in the bathroom, when they were driving or in an Uber (but I don’t run a podcast they’d listen to). And, like every other human being, they check their physical mail. Or someone close to them, checks them.
I knew they had to check their mail for their bills (a surprising number of investors haven’t gone paperless). But it couldn’t seem sales-y because they or their spouse or assistant would immediately throw it out. That’s when I decided I would write handwritten letters to their offices.
The EA is the one who usually sorts through the stack, and is someone who also doesn’t get the attention he/she deserves. Nevertheless, I believed:
Handwritten letters are going to stand out among a sea of Arial and Times New Roman font.
The envelope had to be in a non-white color to stand out against the other white envelopes. So, I went to Michael’s to buy a bunch of blue and green envelopes. Truth be told, I thought red was too much for me, and often carried a negative connotation.
The EA or office manager has to deem it not spam or marketing, so including a name and return address is actually a huge bonus, AND a note that doesn’t seem market-y on the envelope (i.e. thank you and looking forward to catching up).
At the end of the letter, I’d write I’d love to drop by and meet up with them in the office. Then I’d show up at their office within the week, and say, “I’m here to see ‘Bob.'”
The EA would ask if I had an appointment, and I would say that he should’ve received a letter in earlier in the week that let him know I would be here. Then, the EA would go back and ask if ‘Bob’ was free. If not, I’d wait in the lobby until they were, without overstaying my welcome. If they weren’t in the office, I’d ask to “reschedule” and book a time with them via the EA. Which would then officially get me on their calendars.
New and upcoming channel: Instacart
In a blogpost I wrote in 2021, I recapped how Instacart got into YC:
Garry Tan and Apoorva Mehta have bothshared this story publicly. Apoorva, founder of Instacart, back in 2012, wanted to apply to Y Combinator. Unfortunately, he was applying two months late. So he reached out to all the YC alum he knew to get intros to the YC partners. He just needed one to be interested. But after every single one said no, Garry, then a partner at YC, wrote: “You could submit a late application, but it will be nearly impossible to get you in now.”
For Apoorva, that meant “it was possible.” He sent an application and a video in, but Garry responded with another “no” several days later. But instead of pushing with another email and another application, Apoorva decided to send Garry a 6-pack of beer delivered by Instacart. So that Garry could try out the product firsthand. 21st Amendment’s Back in Black, to be specific. In the end, without any precedent, Instacart was accepted. And the rest is history.
In the above case, Instacart in and of itself was the emerging platform of choice. The application portal and email here were both saturated and had failed to produce results. What I missed in the above story is that the 6-pack arrived cold, which meant that the product worked and could deliver in record time. A perfect example of a product demo, in a way the partners were least expecting it.
In closing
Siddhartha Mukherjeeonce wrote: “We seek constancy in heredity — and find its opposite: variation. Mutants are necessary to maintain the essence of ourselves.”
Variation — being different — is necessary for the survival of our species. That’s what evolution is. That said, what worked yesterday isn’t guaranteed to work tomorrow. ‘Cause that same mutation that enabled the survival of a species has become commonplace. The human race, just like any other species, replicates what works to ensure greater survival.
The same is true for great ideas. A great idea today — even the above three — will be table stakes at some point in the future. Thus, requiring the need for even newer, even more innovative ideas. Hell, if it’s not via my blog, it’ll come from somewhere else. With the rise of generative AI — ChatGPT, Midjourney, Dall-E, you name it, if you’re average, you’ll be replaced. If you don’t have a unique voice, you’ll be replaced. Some algorithm will do a better and faster job than you will. As soon as more people start using the afore-mentioned tactics, the above will no longer be original. As such, I don’t imagine the case studies will age well, but the frameworks will. That said, the only unsaturated market is the market of great. To be great, you must be atypical. You must go where no one has gone before.
For those interested in startup pitches that stand out, specifically how to think about compelling storytelling, I highly recommend two places that inspire much of my thinking on the topic:
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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.
