Over the week, I was revisiting some of the Instagram posts that I had saved over the years, and I re-discovered one of my favorites by Christoph Niemann sharing his kudos to the late Kurt Vonnegut.
Most of all, Vonnegut’s advice on writing applies just as much to other forms of storytelling. And if you know me, I was immediately reminded of pitching.
Teach your investor something they didn’t know before.
A lot of investors claim to be experts, and even more are seen as experts. Too often, founders blindly listen to what their investors tell them to do. As Hunter Walk of Homebrew once said, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
YouTuber Derek Muller just came out with a great video on the ideal variables that manifest expertise. Two of such variables are:
Valid environments – environments that are predictable and have minimal attribution to luck
Quick feedback loops
The problem with venture is that our feedback loops are incredibly long and drawn out. Oftentimes, it takes 7+ years to fully realize any kind of financial outcome, although there are many red herrings of outcomes in between, like new funding, brand-name investors, users (rather than customers, or people who actually pay for your product), mass hirings, and so on. Because our feedback loops are slow and luck plays a huge role in success, it’s hard to differentiate true experts in the field. All that to say, every investor is learning to be better, to have more data, to make better judgments than the next.
And if you can show that you know something worth our time again and again, it’ll be worth paying our tuition money to you.
That said, I don’t want to discount how some investors can be really helpful in particular areas that have valid environments and fast feedback loops. For instance, code, A/B testing distribution strategies, ability to help you raise your next round within a certain timeframe, or get you into Y Combinator. The determinant of success in the afore-mentioned has clear KPIs versus their own financial success in the fund.
Give the listener someone to root for.
Aka you. Why you?
Mike Maples Jr. once said, “We realize, oh no, this team doesn’t have the stuff to bend the arc of the present to that different future. Because I like to say, it’s not enough. […] I’d say that’s the first mistake we’ve made is we were right about the insight, but we were wrong about the team.”
“I’d say the reverse mistake we’ve made is the team just seems awesome, and we just can’t look past the fact that they didn’t articulate good inflections, and they can’t articulate a radically different future. They end up executing to a local maximum, and we have an okay, but not great outcome.”
There’s a category of founders that are going to win no matter if an investor chooses to invest or not. Most typically like riding this train. They have to do little to no work to be recognized as a great investor.
Then, there’s the cohort of founders that may or may not win on their current idea, but their investors really, really, really want these founders to win. These founders are the underdogs. They’re also the ones with often the craziest of ideas. Even more so, they’re the ones that if they win, these founders will redefine the world we live in today.
As a founder, you have two jobs when fundraising:
You need to find the partners who really, really want you to win. As the great Tom Landry says, “A coach is someone who tells you what you don’t want to hear, who has you see what you don’t want to see, so you can be who you have always known you could be.”
You need to give these partners the ‘why.’
And I promise you that ‘why’ is not because of straight facts, but because of a story. Why should people help you get what you deeply want?
Every character should want something, even if it’s a glass of water.
Speaking of what you deeply want, almost every founder I chat with pitches me their raison d’etre. A selfless reason to cure the world of cancer. Metaphorically speaking, of course. That’s cool. You can tell that to the press. It’ll make great PR.
Rather I care about the exact opposite. What is your selfish motivation? This is a question I personally like asking founders. Your selfless motivation keeps you going during the day, during peace-time, when things are going just right. Your selfish motivation keeps you up at night, when s**t gets tough. When no one else believes in you except for yourself.
I want to know that you want that so badly, that you’re able to go the distance. And if that same thing is something that your investor can relate to, then you have a match made in heaven.
Every sentence must do one of two things — reveal character or advance the action.
Let me revise the above. Every slide must do one of two things — reveal character or advance the action. Anything else is superfluous. That means, outside of your core slides — problem, solution, action plan/financial projections, rising conflict (aka competition, blockers and risks), and your team slide, everything else is superfluous. Or at least, save it for your data room.
I’m sure some investors would debate me on this, but every investor has a slightly different framework. The above is my own perspective. That said, every slide should give an investor 10% more conviction towards investing in your business — capping out at 70%. ‘Cause after 70, any additional information (in the first meeting) has diminishing returns.
Start as close to the end as possible.
No investor cares about which hospital you were born in, but they do care about when the fire first started. And they care about your inflection points, even if that’s still ahead of you.
Be a sadist. Show awful things that happened to the characters.
Grit is one of the hardest founder traits to measure over a 30-minute meeting. Even after prolonged and deliberate interaction, most of the time it’s still hard to grasp this amorphous quality. But if you ask most investors what is the number one trait of a great founder, it’s either grit or passion. The latter of which often serves as a proxy to grit.
If you’re regular here, you know one of my favorite quotes of late is Penn and Teller’s. “Magic is just spending more time on a trick than anyone would ever expect to be worth it.“
Past performance is not a predictor of future progress. But it really does help. A lot. In a startup’s lifespan to becoming a leading business, there are 10-15 trials by fire. And for each one of those, the founders are required to pull off nothing short of a miracle. In fact, this next year will be exactly one of those tribulations for 99.9% of companies.
So, show moments in your life where you were able to pull off a miracle. And a miracle, by definition, is when the odds are heavily stacked against you.
Show excellence. Walk your listeners — your investors — through the journey of how you tasted glory. How you were able to achieve the seemingly impossible. Personally, this is why I love backing professional athletes, veterans, and chefs. Three fields (of, I’m sure, many more) that you really need to eat s**t to be one of the greats.
Write to please just one person. Don’t get pneumonia.
Every pitch should be tailored. Why would this investor be the best dollar for your cap table?
No investor (even if it’s true) wants to be just another investor. They want to be THE investor. Make them feel special. When you propose to your partner for marriage, you tell them why they’re the one for you, not why you’re the one for them. You get down on one knee and tell them why they are amazing. Not the other way around.
Give your readers as much information as possible as soon as possible.
The one-liner matters. It is the first point of interaction with your startup, and oftentimes, may be the last. Don’t shroud it in mystery and jargon. If you’re ever stuck here, remember Brandon Sanderson‘s First Law of Magic:
“Your ability to solve problems with magic in a satisfying way is directly proportional to how well the reader understands said magic.“
Equally so, the subject line of a cold outreach email serves the same purpose. This is especially true, when you’re reaching out to someone who you can reasonably assume has hundreds of emails in their inbox per week. For reference, and for the most part I’m a nobody compared to the partners at a16z of Lightspeed or Benchmark, and I get about 50 cold inbounds per week.
So, in my opinion, your subject line should have no buzzwords (well, because everyone’s using them). Think of it this way. Say you’re an author selling your new self-help book. And say your greatest distribution channel are likely bookstores in airports. If everyone in the self-help section has an orange cover with bold blue words, you want to be the one black and white cover book. And if everyone has black and white sleeves, you bring out the neons.
In the context of email subject lines, instead, you should include numbers. What is the one metric that you are killing it at? Just like what I recommend folks write in their email forwardables. Instead of “Invest in the Leading BNPL Solution in Latam”, use “BNPL startup growing 50% MoM”. Give the exact reason why your investor should be excited to invest in your company. Don’t save it behind eight clicks — Email, Docsend link, and another six clicks to get to the slide of importance.
People can only tell different, not better, unless it’s 10x. Mediocrity is a crowded market, so don’t waste your time there. Taking a quote out of Pat Riley‘s book, “You don’t wanna be the best at what you do; you wanna be the only one who does what you do.”
In closing
Storytelling is an emotional discovery. The facts don’t change, but a great pitch or story weaves seemingly disparate facts into a compelling narrative. One that inspires action and draws curiosity. In a saturated world of attention, you are fighting for minutes if not seconds of someone’s time. Make it valuable.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
When asked to write a complete story in just six words, Earnest Hemingway famously said, “For sale: baby shoes, never worn.” Six. Simple. Words. Words that even a first grader would understand. One can extrapolate profound meaning through not only what is explicitly said, but also what is implicitly not said. In fact, arguably, the impact of such a short statement is not in the former, but in the latter. Some people call it a hook. Others, a teaser. On YouTube, clickbait. In the world of startups, the one-liner.
I’ve written about the power of the one-liner before, as well as shared it many a time with founders at Techstars, Alchemist, CSI Tech Incubator, WEVE, and during my own office hours. Most founders I see focus on the whole pitch deck. Smarter founders focus on selling the problem and why it means a lot to them. The smartest tell a simple, but powerful story. Focus comes not from a surplus of information, but an intentional deficit. One of my favorite examples of focus comes from mmhmm’s pitch deck – the very same one that led to $31 million in funding pre-launch. While not every founder is as fortunate to have the accolades that Phil and his team has, what every founder can have is the same level of precision and focus.
Hence, quite literally, the one-liner wields an underestimated, but extraordinary power to focus.
Most founders fall in two camps. Camp A, they come up with their one-liner haphazardly – often an abbreviated and diluted version of their more complete product description. In Camp B, they fill their one-liner with every buzzword imaginable in hopes of capturing the attention of investors and customers alike.
And well… I lied. There’s a Camp C, which is some amalgamation of Camp A and B. Rather than the best of both worlds, it’s the worst.
Camp A – Brevity via dilution
Founders here try to cover as much ground as possible, using as little words as possible. If you fail, you’re left with holes in your logic, which leave your investors in confusion. And any doubt left uncovered is a recipe for rejection.
If you somehow succeed, in combining three words into one and five words into two, you leave yourself open to sounding generic.
Camp B – Sounding smart
Your one line may seem special in the moment. You’ve hit every keyword that an SEO consultant would suggest. And Google is without a doubt going to pick up on it. Seemingly so, you’ve done everything right. But for everyone who will pick it up, the only people who won’t are the people who matter. Your initial customers and your first investors.
The companies who can afford to be generic are those who have won already. The big names. Google, Facebook, TikTok, Slack. You don’t need to define what Google or Slack is to the average person. Their target audience knows exactly what you mean without you explaining it. Last I checked, Slack’s slogan is to be your “digital HQ”, which makes complete sense, given their product, but it wasn’t always that way. Slack started off as the “Searchable Log of All Communication and Knowledge” – Slack for short. And at one point, Stewart Butterfield called email the “cockroach of the Internet.” But it’s because of such provocative statements, like the latter especially, that capture the world’s attention. As such positioning in a one-liner is paramount.
You, on the other hand, assuming you’re a founder that is still very much pre-product-market fit, are fighting an uphill battle. You’re an outsider. And as such, you need to elicit emotion and curiosity in one line. Jargon just won’t cut it. It might get your investor to click on your email, and maybe even a first conversation, but rarely an investment.
Why? You’re competing with every other team that is using that exact same permutation of buzzwords. And trust me, it’s a lot. The reality and the paradox is you’re not unique, neither is your idea, until you can prove you are.
The importance of the one line
There are three kinds of investors that are immediately impacted by your one-liner, in the order of least to most impacted:
Angel investors
Conviction-driven firms
Consensus-driven firms
As a function of their check size, angel investors make decisions quickly. Subsequently, if you can nail your 30 minute chat, their memory of you isn’t likely to atrophy over 48 hours, or until they come to an investment decision. Angels also often make their investment decisions on gut, rather than deeper diligence that firms are known for.
Why? Diligence costs money, in the form of legal fees, and time. The latter comes in the form of opportunity cost. If they’re an operator angel – a full-time founder or operator and part-time angel, they won’t have the time to spare on doing additional homework. If they’re a full-time angel, they have their hand in so many startups that spending more time on you, the founder, is keeping them from making other great and quick decisions in other founders. At the same time, many – I dare even say, most – angels index more on “signal” than actually what you’re building.
Equally so, it is also in the nature of conviction-driven firms (firms where each partner has complete jurisdiction over their investment decisions), and solo GPs, to make decisions quickly.
The party you do have to worry about is consensus-driven firms – firms that require consensus from the partnership to move forward on a decision. This is equally true for SPVs and syndicates. Here, you are playing a game of telephone – from coffee chat to partnership to second meeting to partnership meeting (if not more). With every step of friction, the likelihood for drop-off increases. The last thing you want is for your startup’s purpose and product to get lost in translation between people who haven’t even had the chance to touch it yet.
And in all of the above instances, relaying intention, not jargon, is your most powerful tool in your toolkit. What is the query or problem that your customers/users have? How can you address in the simplest but most understandable way possible?
I’ll elaborate.
The one-liner in practice
Years ago, when I first started in venture, I had the serendipity of interviewing a bike-sharing startup for the purposes of an investment opportunity. And I remember asking the founders what they did. To which, they replied, “We make walking fun.”
Needless to say, I was quite perplexed. I knew exactly what they were trying to solve. They weren’t a shoe company or a fitness app or a pedometer. The world had already seen first movers in China and India tackle this problem, but it had yet to reach the Western world by storm.
And the founders laid it out quite simply. If I chose not to take a 10-minute walk to a friend’s house, assuming I had both, would I rather drive 2 minutes, or take a 5-minute bike ride? Expectedly, I picked the latter. Rather than competing with cars which had become a rather saturated market, and neither of the founders had the chops to build a self-driving one, it’s much easier to compete with an activity everyone is forced to do – no matter how rich or poor you are. The equivalent of what Keith Rabois calls a “large, highly fragmented market.” Albeit, maybe not with the lowest NPS score out there.
Unsurprisingly, it became one of my favorite stories to share, and one I swiftly shared with many investors then. They’ve since become one of the most recognizable unicorns around. But for now, I’ll refrain from sharing the name of the company until I get permission to do so.
Lenny Rachitsky also recently came out with an incredible blogpost, which includes the one-liners of some of the most recognizable brands today, like Tinder, Uber, Instagram, and more. In the below graphic from that blogpost, you’ll realize not a single one has any jargon in it.
The words you subsequently use in that one line determine where in the competitive landscape you lie. For instance, in the scope of messaging products, if I say email, you immediately think of Gmail or Superhuman. If I say instant messaging, you think of text, Messenger, or Whatsapp. If I mention corporate or work, you think of Slack. All of the above are messaging products, but how you frame it determines its competitors.
I’ll give another example. Say, calls. If I say call, you think of phones. On the other hand, if I say meeting, you think of Zoom or Google Meet or Microsoft teams. And if I say casual call, you think of Discord.
Your competitors aren’t who you say they are; they’re who your investors think they are.
The goal of the one-liner
The greatest one-liners elicit:
Emotion
Curiosity
While they should do their job of describing your product, your one-liner is your CTA. For customers, that’s downloading the app, or jumping on a sales call. For investors, it’s so that you can get them to open your pitch deck or take the first meeting. Don’t skip steps. Your one-liner won’t get you a term sheet. So, don’t expect that it will.
Your goal is to tease just enough that investors become curious and get over the activation energy of requesting or scheduling a call.
To summarize a point I elaborated on in a previous blogpost on the psychology of curiosity, there are five triggers to curiosity:
Questions or riddles (i.e. a puzzle they can solve but others can’t)
Unknown resolutions (i.e. cliffhangers – though not something I’d recommend for a one-liner, you’re running on borrowed time)
Violated expectations (i.e. the afore-mentioned bike-sharing startup)
Access to information known by others (i.e. FOMO)
And reminders of something forgotten (i.e. empathy when they were founders or in the idea maze)
To share a few more examples, using Lenny’s list of one-liners:
Violated expectations – Dropbox, Uber, Duolingo
Access to information known by others – Tinder, Spotify, Amazon, Zillow
And reminders of something forgotten – hims, Pinterest
Just like any other human, investors are prone to all of the above. Use that to your advantage. And as you might have suspected, your one-liner depends on your audience. Different people with different goals and different backgrounds will react to different triggers.
In closing
There’s a fine balance between clickbait and a great hook. A balance of expectations versus reality. If you were to take anything away from this essay, I’ll boil it down to three:
You should promise just enough to get people excited and curious, but not more to the point where the reality of your actual product, or even your pitch deck, is disappointing.
Less is more. The simpler your one-liner is, the easier your message will spread. No one will remember the exact words of your 7-minute pitch.
Have some element of shock value to elicit curiosity – not only initially with said investor, but also with others he/she will share with.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
These past two years, we’ve seen many investors and founders alike lose their pricing discipline. A number of whom believed anything north of a 10-15x multiple was the new normal. Expectedly, it wasn’t here to last. And I fear there may be an overcorrection to revert back to the mean.
Signal was heavily weighted on the names of other investors, whereas it’s now weighted on strictly traction and revenue. As Samir Kajipublished not too long ago, “The market reset provides a return to a rational environment where underwriting of deals has shifted away from a “growth at all costs” mentality, and inclined toward fundamental metrics such as margins, capital efficiency, and the current public market comps.”
The pandemic years
I’ve written before why it’s better to get 70% conviction, than 50 or 90%. 50% is a gamble. And for the past two years, investors made many more and much larger gambles than would have been kosher. When capital became a commodity and we saw a convergence of value adds in the early-stage investing world, one of the only differentiators between firms became more capital, better terms, or more introductions. Quantity became the selling point rather than quality. Subsequently, that also bolstered many a founder to take bigger risks.
Companies were overcapitalized. Companies then hired more talent than they needed, which meant, on average, each employee needed to do less work than previously required. It wasn’t rare that we saw the best talent out there working more than one job. In fact, in a study by Nielsen, over 50% of talent worked for two companies without either knowing. As such, we’ve the trimming of fat over the past few months with massive company layoffs.
Very few investors were going to spend an extra week or two to dig deeper – do a little more homework to get the extra 20% conviction. Why? Because if they did, they’d miss the funding window. They’d miss the opportunity to invest in the next big thing.
I also saw many founders working on 10% improvements and features, rather than building robust, 10x, non-cyclical products. Founders rushed to product-market fit, followed by massive injections to put fuel on the fire, as opposed to taking time to A/B test for channel-market fit and minimum lovable products. Founders also became less scrappy with the surplus of capital. Growth at all costs was revitalized as the memo of the future. We were left with a world that too quickly forgot the importance of cash in the bank in the few months from March of 2020 till the summer.
Where is money after the market correction?
Today, investors are going for 90%, much of that on fundamentals, rather than a technical analysis on markets. People have become more focused on the beta portfolios than the alpha in portfolios – not saying the latter isn’t important. It still is.
The good news is that there are still many more dollars to deploy. The nine- and ten-figure funds aren’t going anywhere. The bad news is while there’s technically already money allocated to invest in early-stage companies, they’re getting deployed more slowly. But we’ve seen a slowdown in the deployment of capital. And while capital calls are usually leading indicators of capital deployment schedules, they became lagging indicators in March’s slowdown.
What are capital calls? No LP keeps a massive amount of money parked in a checking account with 0% interest, aka a VC fund. So, capital calls are a VC’s legal right to call forth a portion of the money promised to them by LPs. Usually capital calls are made semi-annually.
From 2015 to 2018, this metric hovered in the 20% range, however a step change came into effect in 2019 and we’ve been sitting in the 30% range ever since. pic.twitter.com/fF3kOWMGe9
Last year we saw capital call schedules rise from 20% to 32%. As such, timelines were compressed. Funds were deployed in 1.5-2 years. I even saw one-year deployment periods. Today, I’m anecdotally seeing funds revert to a 3-4 year timeline.
What does that mean for founders?
You should prepare for the worst. Things may turn out differently, and that’ll be great, but don’t expect it will. Over the next two years, there will only be a third to half as much capital to deploy into private companies. That also means your competition has increased two- to three-fold.
Focus on your gross margins, your customer acquisition costs (CAC), and your burn multiples. For software companies, aim for greater than 50% gross margins. Your CAC payback periods should be at most a year. And get your burn multiple to one. In other words, you bring back a $1 for every $1 you’re spending. If you’re south of that, great! Instead of raising venture money, see if you can use non-dilutive capital, aka revenue, to help you grow. For those, that are still growing north of three times per year on ARR after you hit $1M ARR, then venture capital is a very viable option.
If you’re raising a new round, show that you’ve hit your milestones and that you have a road to your next set of milestones to raise your next round in 12-18 months. If you’re raising a bridge (or preemptive) round, you’re on a tighter schedule. You need to show you can hit milestones deserving of a new round within six months or less.
Sometimes even when you have all the above, investors still won’t bat an eye. So, at the end of the day, I always go back to the sage advice my friend shared with me. Teach your investor something new. Mike Maples Jr calls it the earned secret. a16z calls it spending time in the idea maze. I don’t care what you call it. Investors pay their tuition to work alongside the best. If you want investors fighting over you, you need to show them value from Day 1.
One reason investors are more willing to express unconventional opinions than people running other businesses is that they don't mind alienating fools. A cookie company boycotted by fools would lose a lot of money. Whereas a VC boycotted by fools would be better off.
In the past two years, when people became bullish, I became bearish. I didn’t trust myself to find signal in hot markets. For example, while I believe in the amazing potential of blockchain and the future of web3, I intentionally chose to look at consumer solutions that were not tied to the chain, unable to justify for most ideas, why the chain was necessary to solve the problem. I found many founders stumbling on a solution, then finding a problem to fit in the solution. Rather than the other way around.
Today, I’m more bullish than ever (when others are bearish). An investor will generate much more outsized alpha being in the nonobvious and non-consensus than being in the consensus. And we’re swimming in an ocean of non-consensus today. As Keith Raboistalked about earlier this year, don’t focus on just optimizing for the beta where you’ll only be optimizing for incremental returns. Focus on the alpha.
Innovation is secular to the macro-economic trends. It’s exactly in this time that I’m excited to uncover the next world-defining teams. That said, I’m looking for world-defining insights I’ve never heard of or seen before.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
When your message lands in someone’s inbox, do they let out a sigh of relief – excited to click into that email – or are they dreading to click it open – knowing fully well that you may be tracking their open rate?
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.
If you’re helpful, and I don’t mean that you think you’re helpful, you’ll get the former response. Communication, or for that matter, feedback and help, is not measured by what leaves your mouth, but by how much reaches the other person’s ears. If otherwise, you get the latter.
As the saying goes, a friend in need is a friend indeed. It is no less true in the world of startups. Your brand is built on times when others need you most. And there are two types of moments when others need you most:
When they’re in deep shit, and
When they’re an outsider.
The former needs no introduction.
There are 10-15 moments in a startup’s journey when shits hits the fan. And if you’re on speed dial when that happens, founders will remember you for life.
So, let me elaborate on the latter.
Insiders and outsiders
Who’s an insider? Insiders are:
Founders of unicorn startups
Early team members or executives at $1B+ companies
Investors who were some of the first ones to back at least one (ideally many) unicorn companies
Or best friends with at least one of the world’s top investors (or any of the above)
Who’s an outsider? Everyone else. That’s 99.99% of people out there. And I might be missing a few 9’s after the decimal.
Seedscout’s Mat Sherman wrote a great Twitter thread at the beginning of this year, one I’ve cited here and here about how founders who are outsiders can win at fundraising.
The no bullshit guide to raising angel funding/venture capital as an outsider.
If you take the other side of the table as an investor, specifically an early-stage investor, our job is to increase the aperture at the top. We define the archetypes of founders who will get funded by downstream capital. We decide what the funnel looks like. Simply put, we decide what obvious looks like.
Helping one outsider become an insider
If you’re someone who’s excited about putting ‘investor’ on your resume and is willing to put in the legwork for at least a decade to become a great one… Frankly put, if you intend to make early-stage investing your career, then you need to bet one someone non-obvious. Just one. You don’t need to help every founder out there, but every founder you do promise your time to must be worth it.
To me, there are four obvious reasons to bet on one non-obvious founder:
Brand: You’re building a long-term career in the venture space. This/these founders are going to be your reference checks when you raise a fund. And even if you don’t, the startup world is small. Gossip – both good and bad – travel fast. What makes or breaks a business is not in the capital, but in the people. Venture investing is in the business of people.
Deal flow: When that founders’ teammates goes off to build their own businesses, they’ll remember what you did for the founder(s). As such, you’ll be the first person they call when they start great companies.
Value-add: You gain tactical operational expertise. You learn the most when shit hits the fan, not when it’s smooth sailing.
Empathy. You understand to your core what it’s like to build a business today, which will be invaluable in relating to and with founders. Founders you work with in the future know you are capable of being truly founder-friendly, and that it isn’t just lip service.
In closing
When you bet on one non-obvious founder, you don’t have to invest in them (although that would help your own track record). But you need to be on their speed dial. You need to be willing to pick up their calls on weekends and at 2AM in the morning.
It’s going to be tough. Not nearly as tough as being the founder her/himself, but still tough. And it might not go according to plan. In most cases, it doesn’t. But when that founder tries again. You’re there again. Eventually, with superhuman grit and persistence, both of you (and more) will get there.
That is how you build a brand in the world of venture capital. Something I’m personally working towards.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Given the impending, potentially larger market correction, I’ve been thinking a lot about liquidation preferences recently. And it seems I’m nottheonlyone.
Many reasons, two amongst them, concisely:
1) Liq pref results in lower FMV to option-holders, which ostensibly is net +ve for employee equity comp
2) Liq pref makes it so the startup needs to create value. Can't just raise money, immediately return capital, and profit from it
— Matt Levine .eth lol (@Matt_Levine_1) May 26, 2022
I’ve seen three major trends over the past two months:
Founders are raising on smaller multiples compared to the last round. Investors argue it’s come back to the fundamentals. Founders say it’s the market conditions. Regardless, we won’t see the same 2020 and 2021 multiples in the near future.
If a startup is still growing and is cash efficient, valuations won’t have changed as drastically. David Sacksput it best when he said that founders are still going to get well-funded, if they’re:
Cash is king. We’ve seen it in the news all of last month. Founders are extending their runways, by reducing burn. As Marc Andreessensaid 1.5 months ago, “The good big companies are overstaffed by 2x. The bad big companies are overstaffed by 4x or more.” Companies are buckling in for 18-24 month runways, if not longer.
So what?
That goes to say, if a startup isn’t growing as expected, has a high burn, AND still wants to raise an up-round a year out of their last raise, investors are adding in more downside protection provisions. Anti-dilution provisions, minimum hurdle rate expectations, blocks on IPO or M&A opportunities, and liquidation preferences. What Bill Gurley and some VCs call the “dirty term sheet.”
Now I know there’s nuance and reason behind why liquidation preferences were created. To align incentives between the founder and investor. It stops a founder from immediately “selling the business” as soon as the money is in the bank, as Matt Levine mentioned in the above tweet. It also leads to a lower fair market value in a 409a valuation as both Matt and Keith mentioned as well. A net positive for employees, who are looking for lower strike prices to exercise their options in the future.
But as an aggregate, it seems liquidation preferences are really a strategy not to lose rather than a strategy to win. Not just the 1x liquidation preference, but the 2-3x liquidation preferences I’ve been seeing in the side letters offered by VCs.
To put it into context, that means investors get 2-3x their money back before the founders and everyone else gets theirs. By the same token, investors believe that same startup is worth at least 2-3x the money they gave the founders. Again, downside protection.
How does venture differ from other asset classes?
Unlike real estate or public market stocks or bonds, venture capital is a hit-driven business. Success is not measured by percentages, but rather by multiples. High risk, high return.
In a successful venture portfolio of 50 companies, 49 could theoretically be a tax write-off, if one makes you 200 times your capital, you’ve quadrupled your fund. A respectable return for a seed stage fund. As such, liquidation preferences have little impact on fund returns. If you’ve done venture right, your biggest winners account 90% of the fund’s returns. And they are the best pieces of evidence you can use to raise a subsequent fund. Your fund returners are the greatest determinants of your ability to raise the next fund, not how much money you saved after making a bad bet. No one cares if you got your dollar back for dollars you’ve invested towards the bottom of your portfolio, or even 50 cents back on every dollar.
And when a startup wildly succeeds, liquidation preferences don’t matter since everyone is getting a massive check in the mail, far exceeding any downside protection provisions.
In closing
Of course, as always, I might be missing something here, but preferred shares feel like a vestigial part of venture capital – thanks to our history with other financial services businesses.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
A friend asked me the other day, “If you meet a founder that you think isn’t going to make it, do you tell that founder?”
So I responded:
“Say you have a 7-year old daughter. And her biggest dream is to be an WNBA all-star. Or to be the president. Would you tell her ‘statistically speaking, you have almost no chance of succeeding?’ Or would you encourage her to keep pursuing her dream in spite of the odds? It’s the pursuit of a greater purpose that makes the person we are today and the person we will be tomorrow.
“Maybe your daughter doesn’t end up becoming a basketball star, but her pursuit of it lands her in Harvard where she meets incredible friends who end up growing together to be the next PayPal mafia. It’s the relentless pursuit of a dream that builds grit. And that grit will aid her well in whatever path she ends up choosing. Because the world is tough – no matter what you do. You will get beaten down again and again. And the difference between the ultra successful and everyone else is that the former continues to get back up.
“So when I meet a founder who’s championing an idea I don’t believe in, I neither have the guts nor the conviction to tell that person that it won’t work out, just that I won’t invest. ‘Cause if I know anything about the venture business, it’s that it keeps us humble. And every day I live in this industry, I have the privilege of being proven wrong. And even if I’m right, their pursuit makes them a more resilient person than before they began to do so.
“After all, there’s a big difference between impossible and really, really hard.”
#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!
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.
Whether you’re a founder or investor or just friends of the afore-mentioned job titles, you’ve most likely been asked for warm intros. The sage advice in the world has always been, that it is better to ask for warm introductions than send cold outreach, leaving the latter to be severely underestimated. Anecdotally, some of my best friends and mentors today came and continue to come from cold outreach.
Most people in this world love to help others. They derive joy and fulfillment in doing so. It enriches their life just as much, if not more so than, it does yours. There are a number of academic studies, like this 2020 one, that show positive correlation between giving kindness and your own happiness. The Ben Franklin effect extrapolates that you are more likely to like someone by doing them a favor. In sum, people want to help others. Investors (and friends of investors) are no exception.
But… the world does not make it easy to do so.
I’m not here to preach kindness. Nor do I think I need to. There are plenty of more incredible individuals in the world who are more capable of relaying that message than I am. But as the title of this blogpost alludes to, what tactical advice is there to:
Help friends of investors/investors help you
Get investors excited to meet you
Why even bother with a forwardable
Founders often ask me: Do you know any investors you can introduce me to? Which, in fairness, is an understandable question when you don’t know who you don’t know. In a world where I’m only helping 10 or less founders total, it’s a great question.
The problem is I, like many other people in the venture ecosystem, am often trying to help more than 10 founders. For me, I’m helping founders I’m actively advising, On Deck founders, Techstars founders, Alchemist founders, founders who are intro-ed to me, founders who cold email me, and founders who come to my weekly office hours. The number varies, but in any given week, I’m sending between 20-40 founder intros. And given that, I face a few obstacles:
The colder the connection and the longer the time since we last spoke, the more likely I am to forget what you’re building. I’m sorry; I wish I had photographic memory.
As much as I would like, I physically don’t have time to write a curated intro to every person who asks me.
I don’t want to ping the same investor/advisor multiple times in a week without clear reasons why. The investors who have more social clout get more intros than others. And they only have so much time and attention they can give in their inbox/socials to new people.
Rather, I flip the question on founders. Build a preliminary list of people you would like to chat with. See who you know that’s connected with these individuals. Do note I did not say firms. Long term marriages begin with each human not their last name. If I’m a 1st degree connection to them, then reach out to me and ask:
“I’m currently raising for [startup], [context]. I saw you’re connected to [name], [name] and [name]. Would you be comfortable reaching out to them for a double opt-in intro? And if so, happy to send you forwardable to make your life easier.”
To which I respond…
What goes into a forwardable
While everyone has their own preference, I prefer all the forwardables I send to have three things – nothing more, nothing less. Nothing more, since busy individuals don’t have time to read essays. Nothing less, well, it is what I call the minimum viable forwardable. And yes, I just made that term up.
The one metric you think you’re doing better than 95% (99th percentile is ideal) of the industry. On the off chance that the afore-mentioned metric isn’t obvious as to why it’s crucial to the business, spend another sentence explaining why. For example, if you’re a marketplace, the metric you’re slaying at might be the percent of your demand who organically converts to supply. While it may not be obvious to most, it is one of the earliest signs of network effects. Your customers love your product so much they want to pay it forward.
1-2 sentences as to what your startup does
Why this recipient would be the best dollar on your cap table
The first two are things you, as a founder, should have readily on hand. The third is often the one I get the most questions on. What does “the best dollar on my cap table” mean? And how would I find that?
Why the best dollar is important
Fundraising is often seen as a numbers game. Analogously, so is networking. Both of which I agree and disagree with. I agree with the fact that you have to engineer serendipity. You have to increase the surface area for luck to stick. And to do that, you need to talk to a s**t ton of people. I get it. The part I disagree with is that a game optimized for quantity is often conflated with templated conversations. Or worse, purely transactional ones. Relationships don’t scale if you approach it from scale.
… which is why I need the third point in every forwardable. If you are unable to provide why an investor would be the best dollar on your cap table, then:
You don’t need a warm intro. And that’s fine. Some investors’ inboxes are less saturated than others. If it might help, here is also my cold email “template.”
I’m not your person. I, like any other person facilitating an intro, am putting my social capital on the line to get you in front of the person you want. And if you don’t think it’s worth the time to tailor your email to one that I would be comfortable sending, then I just can’t be your champion.
Examples of the best dollar
Predictably and unpredictably so, there are many ways to make someone feel special. While I will list some of my favorite that I’ve seen over the years, the list is, by no means, all-inclusive. In fact, I’m sure some of the best and most timeless ways to showcase an investor’s value add is still out there waiting to be discovered. And for that, I leave it to you, my reader, to surprise me and the world. The below, hopefully, serves as inspiration for you to be tenaciously and idiosyncratically creative.
I’ll break it down into two parts: (1) what do you need help on, and (2) what help can they provide.
What is the 3 biggest risks of your business? The biggest one should be solved by you or someone on the team slide. The biggest risk should be the minimum viable assumption you need to prove that people want your product. At the early stages, sometimes that’s showing you have a waitlist of folks begging for your product. Sometimes, it’s just proving you can build the product (i.e. a deep tech product or AI startup). The next two risks, which aren’t as great in magnitude, but still prescient, requires you to be scrappy and at times, bring in external help.
What are your potential investors’ value adds? Where does their tactical expertise lie in? There’s no one-stop shop for every investor for this… yet (hit me up if you’re building something here). But nevertheless, I find it useful to search “databases” of value adds on:
Lunchclub profiles under “Ask [name] about…” Note: I forget if Polywork and Lunchclub are still invite-only, but if they are, feel free to use my invite codes here for Polywork and Lunchclub. For those curious, this is not a sponsored post.
Doom-scrolling to the bottom of their LinkedIn profile and reading their references
Who, of their existing investors, if they were to build a new business tomorrow in a similar sector, is the one person who would be a “no brainer” to bring back on their cap table? And why?
Who did they pitch to that turned them down for investment, but still was very helpful?
Subsequently, referencing (with the founders’ permission) those founders when reaching out/getting introed to those VCs. Note: Generally, Crunchbase and Pitchbook has more exhaustive lists of portfolio companies oftentimes than their website of “selected investments.”
Any publication/press release (i.e. Techcrunch, Forbes, etc.) where founders share how helpful their investors were. This may require a bit of digging.
As a general rule of thumb, the more specific you are, the better.
On the flip side, some examples of lackluster “best dollars” include:
Just stating which industry they invest in
Stating that they’re ideal because they work at X firm. You’re drafting individual team members for your all-star team, not brands.
Stating that they’re ideal because they USED to work at X firm
Using the recipient as a means to an ends. In other words, you want to get in touch with someone they know rather than they themselves. No one feels special when you like them only because they know someone else you like more. Either find a warmer connection to the “end” person or cold email.
Being generic
In closing
As my friend “James” says, “Do all of the leg work. Help them help you as much as possible. Everyone wants to be the hero that helps someone else, but people have lives – and if you’re the one that is getting the value, bring the value as much as possible.”
If you were the recipient of said email, what would make you say: “Absolutely?”
May 9th, 2022 Update: Added the “Why even both with a forwardable” section
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Earlier this week, I came across a curious quote while reading Sammy Abdullah’s notes on the book eBoys by Randall Stross, chronicling the founding and early days of Benchmark. In it, the quote read: “What’s it like recruiting when the stock price is so high? Really hard. The options offered to new employees were certain to be valueless, as they would depend on the stock ascending still higher. I mean, it’s at such a ridiculous level, there’s going to be a big fall here. The question is sort of when and how.”
2022’s VC landscape
After an insane 1.5-year run, I’ve seen valuation multiples that were 100-200x a company’s revenue get funded. At the end of the day, venture capital is belief capital. And it is not my place to criticize someone else’s belief, but I know that same belief will falter in the coming months to year. We’ve already seen public market stocks fall and VC exit values plummet 90% in Q1 this year. Tiger Global fell 7% in 2021 – its first annual loss since 2016. $10,000 invested in the basket of IPOs for 2021 would be worth $5,500 today. We’re in a correction soon. Or as Martin who I’ve had the pleasure to meet via On Deck calls it, the “Great Asset Repricing.” When exactly? I don’t know.
That said, as a function of the great repricing, VCs are coming in with more aggressive terms to hedge their bets. Greater liquidation preferences. More aggressive anti-dilution provisions. For LPs into late-stage capital allocators, they’re expecting greater minimum hurdle rates. In other words, they expect investors to have an internal rate of return (IRR) of at least 20%. Every year, an investor’s assets need to be worth 20% more than the year before. This is up from 10-12% from back in 2021, which I cited in last week’s blogpost.
And as Martin surmises, we’ll see a lot more inside rounds (investors re-upping in their own portfolio) for two reasons:
Insiders have more information.
Insiders tend to be more conservative on valuation.
And “companies without significant traction to face a very tough fundraising environment in the near term.”
What the hell does all this esoteric jargon mean for employees?
The best private companies are still playing ball with the ball on their side of the court. They have leverage. But most companies that were funded in the past one and a half years won’t. As such, there are four things that will and have already started to happen:
You don’t raise. Cut your burn rate. Stay close to the money. Extend your runway, but set clear expectations. That’s what Alinea did at the start of the pandemic. Your team is in it for the long run. Many may choose to leave, but that is the reality.
You raise, but on a flat or down round. This is better for your employees that you plan to hire, since there is a better chance that their shares will appreciate in the next funding window. But you’re not getting any fancy press releases.
You raise on an up round. That’s great. You make the headlines on TC or Forbes. But it increases the pressure for both your current team members and new hires. VCs add in more aggressive terms. No one’s getting paid until investors get 2-3x their money back via a liquidity event or exit. As a founder, you have more pressure to shoot for a bigger exit than you would have needed to shoot for otherwise. Or else, the team that bled for you for years will get little to no upside for their time and effort.
Or, you go out. Monetarily, no one wins.
So what can you do as a startup employee? Or as a prospective startup employee?
Ask questions on revenue drivers. What do growth metrics look like for the last three months? How does churn and net retention look like? When do they plan to raise their next round? And simply, how much revenue is the company generating? Does the price-to-sales multiple make sense? For example, is the latest valuation of the company 200x the company’s revenue or 50x. The former is likely to come with more insane expectations from their investors. In December last year, Retool wrote a great piece why they chose to raise at a lower valuation and why that makes sense for their team members, which I highly recommend checking out.
Of course, as a startup employee, you want your shares to increase in value, but too much too quickly can be detrimental. We’ve seen the recent example with Fast. They were last valued at $580M according to Pitchbook, but were only making $600K in revenue, but was burning $10M a month. Almost a 1000x multiple!
A growth-stage startup grounded on fundamentals (i.e. traction) will likely still be able to raise. A startup funded on promises that has yet to deliver may not be able to. As Samir Kaji tweeted yesterday:
The late-stage market has definitely re-priced for net-new deals. For those that are expecting across the board big write-downs this year, you may have so many companies are still sitting on a lot of $, and won't need to access the capital markets this year. But next year…
Contrary to popular opinion, a company’s valuation is not how much a startup is worth, but rather it is a bet on the chance they will be as big as their incumbent competitor. Take Yuga Labs as an example. They recently raised $450M on a $4B valuation from a16z and a number of other incredible investors. With that capital injection, they are building Otherside, their take on the metaverse integrating their various NFT properties. Epic Games, on the other hand, is valued at $31.5B. $32 billion for ease of calculation. Yuga’s $4B valuation is a bet their investors are taking that Yuga has a 12.5% chance (4/32) to be as big as Epic, and by transitive property, Fortnite.
As an employee, the bet you make is not with capital, but with time – the world’s scarcest resource. We’re coming into a world soon where cash is king. Make your judgments accordingly.
To close, I had to cite Brian Rumao‘s tweet, early investor in Fast. He boiled it down beautifully in 280 characters.
Lesson 8: Investors lose at most 1x their capital. Employees lose much more.
I feel for Fast employees who lost their jobs and equity overnight.
Most startups don't fail this fast after raising $100M+. Remind yourself that the shutdown is more painful for employees than angels.
Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Back in mid-2020, I started writing a piece on 99 Pieces of Unsolicited, (Possibly) Ungooglable Startup Advice. There was no ETA on the piece. I had no idea when I would publish it, other than the fact, that I would only do so once I hit the number 99. Yet, just like how I was inspired to write how similar founders and funders are, it finally dawned on me to start writing a similar piece for investors around mid-2021. The funny thing, is though I started this essay half a year later, I finished writing it one and a half months sooner while I was still on advice #95 for the former.
Of course, you can bet your socks I’ve started my next list of unsolicited advice for investors already. Once again, with no ETA. As I learn more, the subsequent insight that leads to an “A-ha!” moment will need to go deeper and more granular. And who knows, the format is likely to change.
I often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve more nuance, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites for investors below cover everything, in no particular order other than categorical resonance, including:
Unfortunately, many of the below advice came from private conversations so I’m unable to share their names. Unless they’ve publicly talked about it. Nevertheless, I promise you won’t be disappointed.
As any Rolodex of advice goes, you will not resonate with every single one, nor should you. Every piece of advice is a product of someone’s anecdotal experience. While each may differ in their gravitas, I hope that each of the below will serve as a tool in your toolkit for and if the time comes when you need it most.
To preface again, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
General advice
1/ To be in venture capital, you fundamentally have to be an optimist. You have to believe in a better tomorrow than today.
2/ “Everyone has a plan until they get punched in the mouth.” – Mike Tyson. Told to me by an LP who invests in emerging and diverse managers.
3/ Have good fluidity of startup information. “No founder wants to meet a partner and have to answer the same questions again and again. Best partnerships sync and with every discussion, process the questioning.” – Harry Stebbings
4/ The lesson is to buy low, sell high. Not to buy lowest, sell highest.
5/ “The New York Times test. Don’t do anything you wouldn’t want to see on the front page of the NY Times.” – Peter Hebert
6/ “It takes 20 years to build a reputation and five minutes to ruin it.” – Warren Buffett
7/ When you’re starting off as an investor, bet on one non-obvious founder – a real underdog. Support them along their entire journey. Even if there’s no huge exit, the next one will be bigger. When their VPs go off and start their own businesses, they’ll think of you first as well.
8/ When planning for the next generation of your firm’s successors, hire and mentor a cohort of brilliant investors, instead of focusing on finding the best individual. Investing is often a lonely journey, and it’s much easier to grow into a role if they have people to grow together and commiserate with.
9/ “When exit prices are great, entry prices are lousy. When entry prices are great, exit prices are lousy.” – David Sacks
10/ Illiquidity is a feature, not a bug. – Samir Kaji
11/ Three left turns make a right turn. There is no one way to break into VC. Oftentimes, it’s the ones with the most colorful backgrounds that provide the most perspective forward.
12/ “Whenever you find yourself in the majority, it is time to pause and reflect.” As an early stage investor, I find Mark Twain’s quote to be quite insightful.
13/ “It’s not about figuring out what’s wrong; it’s about figuring out what is so right. The job of an investor is to figure out what is so overwhelmingly great, or so tantalizingly promising that it’s worth dealing with all the stuff that’s broken.” – Pat Grady retelling a story with Roelof Botha
15/ Track your deal flow. Here’s how I track mine. Another incredible syndicate lead with over 5x TVPI (total value to paid in capital) I met keeps it even simpler. A spreadsheet with just 4 columns.
Company
Valuation in
Valuation out
Co-investors – This is where you start sharing deal flow with each other here.
16/ One of your best sources of deal flow might not be from other investors, but those who are adjacent to the venture ecosystem, like startup lawyers and VC attorneys.
17/ A WhatsApp group with your portfolio is a great tool for diligencing investments, not as much for sourcing deals.
18/ “Decide once you have 70% conviction.” – Keith Rabois. Don’t make decisions with 40% conviction since that’s just gambling. Don’t wait till 90% conviction because you’ll miss the deal for being too slow.
19/ Ask questions to founders where they show grit over a repeated period of time. They need to show some form of excellence in their life, but it doesn’t have to be in their current field. From a pre-seed manager with 3 unicorns in a portfolio of 70.
20/ As an emerging manager, one of the best reasons for investing in emerging markets: Do you want to see the deals that the top 0.1% see? Or do you want to see the deals that the 0.1% passed on? From the same pre-seed manager with 3 unicorns in a portfolio of 70.
21/ Every day, open your calendar for just one hour (two 30-minute slots) to founders you wouldn’t have had otherwise. Your network will compound. From a manager who’s invested in multiple unicorns and does the above from 10-11PM every night.
22/ The bigger your check size, the harder you have to fight to get into the round.
23/ The best investors frontload their diligence so they can have smarter first conversations with founders.
24/ Perform immersion-based diligence. Become super consumers and super users of a category, as close as you can get to subject-matter experts. That way you know very quickly after meeting a founder if their product is differentiated or unique. While you’re at it, write 2-3 page bug report stress-testing the product. Founders really do appreciate it.
26/ When a founder can’t take no for an answer and pushes back, “I always have to accept the possibility that I’m making a mistake.” The venture business keeps me humble, but these are the benchmarks that the team and I all believe in. Inspired by JCal and Molly Wood.
27/ Win deals by “sucking the oxygen out of the air.” In investing there are two ways to invest: picking or getting picked. Picking is naturally in a non-competitive space. Getting picked is the exact opposite. You have to eat competition for breakfast. And when you’re competing for a deal everyone wants to get into, you have to be top-of-mind. You need to increase the surface area in which founders remember you, not just to take their time, but to be really, really valuable in as much time as you can spend with them. Inspired by Pat Grady on an anecdote about Sarah Guo.
Pitching to LPs
28/ Surprises suck. On Samir Kaji’s podcast, Guy Perelmuter of GRIDS Capital once said: “There’s only one thing that LPs hate more than losing money. It’s surprises.” More here.
29/ Fund I: You’re selling a promise. Fund II: You’re selling a strategy. And, Fund III: You’re selling the returns on Fund I.
30/ Steven Spielberg didn’t know what E.T. should look like, so he had everyone write down people they respected. And so E.T. looked a bit like everyone on that list, including Carl Sandburg, Albert Einstein and Ernest Hemingway. In a very similar way, come up with a list of your ideal LPs. And create a fund based on what they like to see and what you can bring to the table. Oftentimes, it’s easier to ask them for personal checks than checks out of their fund.
31/ Ask the founders you back for intros to their other investors as potential LPs in your fund.
32/ The return hurdles for LPs are different per fund type: *subject to market motions. Timestamped in Sept 2021 by Samir Kaji
Nano-fund (<$20M): 5-7x+
Seed fund: 3-5x+
Series A: 3x+
Growth: 2-2.5x+
Crossover/late growth (driven by IRR, not multiples): 10-12%+
33/ “If you know one family office, you know one family office.” Said by one of the largest LPs in venture funds. Each family office situation is uniquely different.
34/ Family offices are surprisingly closed off to cold emails, but often share a lot of deal flow with each other. Have co-investors or founders introduce you to them.
35/ It takes on average 2 months for an institutional LP to do diligence and reference checks. Plan accordingly.
36/ LPs look for:
Track record (could be as an individual angel as well)
Value add
Operational excellence
37/ Data shows that first-time/emerging managers are more likely to deliver outperformance than their counterparts, but as one, you still need to show you have experience investing.
38/ People, including LPs, tend to remember stories, more than they do data. Teach your LPs something interesting.
39/ LPs have started looking more into two trends: private investments and impact/ESG initiatives. By nature of you reading this blogpost, you’re most likely the former already. The latter is worth considering as part of your thesis.
40/ Every coffee is worthwhile in some form.
41/ LP diligence into VCs break down into two types: investment and operational DD.
Investment DD includes team, incentive alignment, strategy, performance, current market, and terms/fees.
Team: What does leadership look like? How diverse are you?
Alignment: Do you have performance-based compensation?
Strategy: What sectors are you investing into? What does your underwriting discipline look like?
Performance: What do your exits look like? Are you exits repeatable?
Market: What are the current industry valuations? Economies of scale?
Terms/fees: Are they LP friendly? Are the fees based on alphas or betas? Are they aligned with your value add?
Operational DD includes business model, operational controls, tech platforms, service providers, compliance and risk.
42/ If you’re pitching to other venture funds to be LPs, say for $250K checks, larger funds (i.e. $1B fund) typically have fund allocations because check size is negligible. And a value add as deal flow for them at the A. Whereas, smaller funds don’t because it is a meaningful size of their fund. So, GPs write personal checks.
43/ If you’re planning to raise a fund, think of it like raising 10 Series A rounds. For most Series A rounds, a founder talks to about 50 investors. So for a Fund I, you’re likely to talk to 500 LPs to close one.
44/ Send potential LPs quarterly LP updates, especially institutions. Institutions will most likely not invest in your Fund I or II, but keep them up to date on the latest deals you’re getting into, so you’re primed for Fund III.
45/ Family offices want to get in top funds but most can’t because top funds have huge waitlists. Yet they still want access to the same deals as top funds get access to. They’re in learning mode. Your best sell to family offices is, therefore, to have:
Tier 1 investors as your fund’s LPs
Tier 1 investors as co-investors
Deals that they wanted to get into anyway
46/ Your Fund I LPs are going to be mostly individual angels. They believe in you and your promise, and are less worried about financial returns.
47/ Institutional LPs are looking for returns and consistency. If you say you’ll do 70% core checks and 30% discovery checks, they’re checking to see if you stick to it. Institutions aren’t in learning mode, instead you as a fund manager fit into a very specific category in their portfolio. Subsequently, you’re competing with other funds with similar foci/theses as you do.
48/ Be transparent with your IRRs. If you know you have inflated IRRs due to massive markups that are annualized, let your (potential) LPs know. For early stage, that’s probably 25-30%+. Especially when you’re in today’s frothy market (timestamped Jan 2022). Or as Jason Calacanis says it for his first scout fund that had crazy IRRs, “It’s only down from here.”
49/ Don’t waste a disproportionate amount of time convincing potential LPs about the viability of your thesis. Shoot for folks who can already see your vision. If you manage to convince an LP that didn’t previously agree, they may or may not end up micromanaging you if your thesis doesn’t work out as “expected.” Inspired by Elizabeth Yin.
50/ “The irony for us was LPs asking about portfolio construction was a sign that the meeting was going poorly.” – Jarrid Tingle.
51/ Institutional LPs prefer you to have a concentrated startup portfolio – less than 30 companies. They already have diversification across funds, so they’re maximizing the chance that their portfolio has fund returners. That said, you’re probably not raising institutional capital until Fund III. Inspired by Jarrid Tingle.
52/ If you’re an emerging manager with a fund is less than 4 years old, boasting high IRR (i.e. 50%+) is meaningless to sophisticated and institutional LPs. Focus on real comparative advantages instead. – Samir Kaji.
53/ When raising early checks from LPs, ask for double the minimum check size. Some LPs will negotiate down, and when they only have to commit half of what they thought they had to, they leave feeling like they won.
54/ When potential LPs aren’t responding to your follow ups/LP updates, send one more follow up saying: “I am assuming you are not interested in investing into our fund. If I am wrong, please let me know or else this will be your last update.” Told to me by a Fund III manager who used this as her conversion strategy.
55/ It’s easier to have larger checkwriters ($500K+) commit than smaller checkwriters (<$100K). $500K is a much smaller proportion of larger checkwriters’ net worth than checkwriters who write $100K checks. And as such, smaller checkwriters write less checks, have less “disposable income”, and push back/negotiate a lot more with fund managers before committing. Told to me by a Fund III manager.
Fund strategy/management
56/ As an investor, if you want to maintain your ownership, you have to continue requesting pro-rata rights at each round.
58/ “Opportunity funds are pre-established blind pool vehicles that eliminate the timing issues that come with deal-by-deal SPVs. Opportunity funds sometimes have reduced economics from traditional 2/20 structures, including management fees that are sometimes charged on deployed, not committed capital. Unlike individual SPVs, losses from one portfolio company in an opportunity fund offset gains from another when factoring in carried interest.” – Samir Kaji. See the full breakdown of pros and cons of opportunity funds here.
59/ There are two ways to generate alphas.
Get in early.
Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.
60/ Sometimes being right is more important than being in the non-consensus. Inspired by Kanyi Maqubela.
Market risk as a function of ownership – What is the financial upside if exit happens? Is it meaningful enough to the fund size?
Judgment risk – Are you picking the right companies?
Win rate risk – How can you help your portfolio companies win? What is your value add?
62/ By Fund III, you should start having institutional capital in your investor base.
63/ The closer you get to investing in growth or startups post-product-market fit, the closer your capital is to optimization capital. Founders will likely succeed with or without you, but your name on the cap table will hopefully get them there faster and more efficiently.
64/ If you’re a traditional venture fund, you have to invest in venture-qualifying opportunities, like direct startup investments. But you can invest up to 20% of your fund’s capital in non-venture-qualifying opportunities, like tokens/SAFTs (simple agreement for future tokens), real estate, secondaries, and so on.
65/ If increased multiples coming out of various vintage funds, feel free to deviate from the normal 2-20. Many funds have 25 or 30% carry now, or accelerators where 20% scales with multiples (and often with a catch-up back to 1.0x at higher carry). – Samir Kaji
66/ Normally, fund managers take 2% management fees, usually over 10 years, totaling 20% over the lifetime of the fund. These days, I’m seeing a number of emerging managers take larger management fees over less years. For example, 10% as a one-off. Or 5% over 2-3 years.
67/ “The razor I apply to investing and startups is that every decision that increases your probability of wild outlier success should also increase your probability of total failure. If you want to be a shot at being a 10x returning fund? You’ll have to take on the higher likelihood of being a 1x. If you think you’re going to build the next Stripe? You’re going to have to run the risk of going nowhere.” – Finn Murphy
69/ The longer you delay/deprioritize having diverse partners, the harder it’ll be to hire your first one.
Advising founders/executives
70/ A founder’s greatest weakness is his/her/their distraction. Don’t contribute to the noise.
71/ It’s far more powerful to ask good questions to founders than give “good answers”. The founders have a larger dataset about the business than you do. Let them connect the dots, but help them reframe problems through questions.
72/ You are not in the driver’s seat. The founder is.
73/ A great reason for not taking a board seat is that if you disagree with the founders, disagree privately. Heard from a prolific late-stage VC.
74/ Advice is cheap. Differentiate between being a mentor and an ally. Mentors give free advice when founders ask. Allies go out of their way to help you. Be an ally.
75/ The best way to be recognized for your value-add is to be consistent. What is one thing you can help with? And stick to it.
76/ Productize your answers. Every time a founder asks you a question, it’s likely others have the same one. Build an FAQ. Ideally publicly.
77/ If you have the choice, always opt to be kind rather than to be nice. You will help founders so much more by telling them the truth (i.e. why you’re not excited about their business) than defaulting on an excuse outside of their control (i.e. I need to talk with my partners or I’ve already deployed all the capital in this fund). While the latter may be true, if you’re truly excited about a founder and their product, you’ll make it happen.
78/ Help founders with their firsts. It doesn’t have to be their first check, but could also be their first hire, engineer, office space, sale, co-founder, team dispute, and so on.
79/ There are four big ways you can help founders: fundraising, hiring, sales pipeline, and strategy. Figure out what you’re good at and double down on that.
80/ Focus on your check-size to helpfulness ratio (CS:H). What is your unique value add to founders that’ll help them get to their destination faster? Optimize for 5x as a VC. 10x as an angel.
81/ “The job of a board is to hire and fire the CEO. If you think I’m doing a bad job, you should fire me. Otherwise, I’m gonna have to ask you to stay out of my way.” – Frank Slootman to Doug Leone after he was hired as CEO of ServiceNow.
SPVs and syndicates
82/ The top syndicates out there all have 3 traits:
Great team
Great traction
Tier 1 VC
If your deal has all of the above, and if you raise on AngelList, your deal is shared with the Private Capital Network (PCN), which AngelList’s own community of LPs and investors, a lot of which are family offices, who allocate at lest $500K of capital per year.
83/ If you’re raising an AngelList syndicate, you need to raise a minimum of $80K or else the economics don’t really make sense. AL charges an $8K fee.
84/ If you want to include Canadian investors in your syndicate, for regulation purposes, you need to invest 2% of the allocation size or $10K.
85/ Investing a sizeable check as a syndicate lead (e.g. $10K+) is good signal for conviction in the deal, and often gets more attention.
86/ 99% of LPs in syndicates want to be passive capital because they’re investing in 50 other syndicates. You can build relationships individually with them over time, but don’t count on their strategic value.
87/ Historically, smaller checkwriters take up 99% of your time. Conversely, your biggest checkwriters will often take up almost no time. Even more true for syndicates.
88/ LPs don’t care for deals where syndicate leads have time commitment without cash commitment.
89/ Don’t give LPs time to take founders’ time. Most of the time LPs don’t ask good questions, so it’s not worth the effort to set up time for each to meet with founders individually. On the other hand, a good LP update would be to host a webinar or live Q&A session. One to many is better than one to one.
90/ There’s a lot of cannibalism in the syndicate market. The same LPs are in different syndicates.
91/ Choose whether you will or will not send LP updates. Set clear expectations on LP updates. And if you do, stick to that cadence. The people who write you the $1-5K checks are often the loudest and demand monthly updates. If you choose not to, one of my favorite syndicate leads says this to their LPs, “We won’t give any LP updates. I’ve done my diligence, and I won’t give information rights. I have a portfolio of hundreds of deals, and I can’t be expected to give deal-by-deal updates every month or every quarter. So if you are investing, just know you’re along for the ride.” Some LPs won’t like that and won’t invest, but mentioning that upfront will save you from a whole lot of headaches down the road.
92/ If you’re setting up an SPV to solely invest in a fund (or where more than 40% of the SPV is going into the fund), all your SPVs can’t against the 249 LPs cap on a fund <$10M and a 99 cap on a fund >$10. But you can invest in funds if you’re setting up an SPV to invest in more than one fund. Context from Samir Kaji and Mac Conwell.
Evergreen/Rolling funds
93/ Just like vintage years/funds are important for traditional funds, vintage quarters matter to your LPs. If they didn’t give you capital during, say Q2 of 2021, when you invested in the hottest startup on the market, your Q1 and your Q3 LPs don’t have access to those returns.
94/ Whereas GPs typically make capital calls to their LPs every 6 months, AngelList’s Rolling Funds just institutionalized the process by forcing GPs to make capital calls every 3 months.
Angel investing
95/ “The best way to get deal access isn’t to be great with founders—it’s to have other investors think you’re great with founders. Build a high NPS with investors, since they have meaningfully more reach than an operator. But of course, fight hard to be great with founders too or else this will all crash down.” – Aaron Schwartz
96/ Make most of your personal mistakes on your own money as an angel (before you raise a fund).
97/ When you’re starting off, be really good at one thing. Could be GTM, growth, product, sales hires, etc. Make sure the world knows the one thing you’re good at. From there, founders and investors will think of you when they think of that one thing. Unless you’re Sequoia or a16z, it’s far better to be a specialist than a generalist if you want to be top of mind for other investors sharing deal flow.
98/ “As an angel investor, it’s more important to be swimming in a pool of good potential investments than to be an exceptionally good picker. Obviously if you’re able to be both, it’s better 🙂 but if you had to choose between being in a position to see great deals and then picking randomly, or coming across average deals and picking expertly, choose the former.” – Jack Altman
99/ “Just like the only way to get good at wine is to drink a lot of wine. The only way to get good at investing is to see a lot of deals.” – Lo Toney.
Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
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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 or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”
“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”
“I don’t think we’ll make it, David. How do we break it to our team?”
It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.
Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.
Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.
I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:
Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.
Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!
To preface, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
On fundraising…
1/ Some useful benchmarks and goals for stages of funding:
<$1M: pre-seed
Find what PMF looks like and how to measure it
$1-5M: seed
$2-4M – you found PMF already and you’re gearing up to scale
$5M – you’re ready for the A
$5-20: Series A *timestamped mid-2021, your mileage may vary in different fundraising climates
2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly. *timestamped mid-2021, your mileage may vary in different fundraising climates
3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.
4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.
5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.
6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys *Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.
7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?
Pitch deck + appendix slides
Current round investment docs
Use of funds
Current and proforma cap table
Pilot usage data, if any
References + links to everyone’s LinkedIn:
Key members of management
1-2 customers, if any
1-2 investors, if any
Financials: annual + YTD P&L + projections
Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
List of all FAQ investor questions throughout the fundraising process
Press, if any
Legal stuff: Patents, trademarks, IP assignments, articles of incorporation
8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.
9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.
10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.
11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.
12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“
13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.
Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.
It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.
14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.
15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitorslides.
16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.
17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.
18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”
19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.
20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.
21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.
22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.
23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.
24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.
25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.
26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky
27/ If you want money, ask for advice. If you want advice, ask for money.
28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.
29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.
30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.
31/ A good distribution of your company’s early angel investors include:
32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.
33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao
On managing team/culture…
34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)
35/ Please pay yourself as a founder. Some useful founder salary benchmarks:
Seed stage – lowest paid employee
Series A or when you find product-market fit (PMF) – lowest paid engineer
When you hit scale – mid-level engineer
When you’ve reached market dominance – market rate pay for CEOs
If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again
36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.
One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eaterinterview, time-stamped at the start of the pandemic.
37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.
38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libinbefore, when he said, “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.
39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.
40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.
41/ James Currier has a great list of ways to compensate your team and/or community.
Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
Cash (e.g. USD, EUR)
Equity shares (traditional)
Discounted fees
Premier placement and traffic/attention
Status symbols
Early access
Some voting and/or decision making, ability to edit/change
Premier software features
Membership to a valuable clique of other nodes
Real world perks like dinner/tickets to the ball game
Belief in the mission (right-brain, intrinsic)
Commitment to a set of human relationships (right-brain, intrinsic)
Tokens (fungible)
Non-Fungible Tokens
42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.
43/ “Outliers create bad mental models for founders.” – Founder Collective
44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.
45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.
46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.
47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.
48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.
49/ “The founder’s job is to make the receptionist rich.” – Doug Leone
50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.
52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.
53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.
54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.
55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.
56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.
57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.
58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.
59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.
On governance…
60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.
61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.
62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.
63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.
64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:
(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation) *based on what you believe their salary would be **typically 1-2 years
65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.
66/ Monthly/quarterly investor updates should include, and probably in the below order:
Your ask
Brief summary of what you do
Key metrics, cash flow, revenue
Key hires
New product features/offerings (if applicable)
67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.
69/ “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.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.
70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman
71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.
72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.
73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”
74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham
On building communities…
75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.
76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”
77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.
On pricing…
78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?
Customers will try to negotiate for earlier renewal, longer contract periods.
When you waive the price increases, customers feel like they’re winning.
You can upsell them more easily to more features.
79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.
80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.
On product/strategy…
81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:
Product discipline, through priorities, where company leaders have to think months in advance for, and
Expectations and motivates team members to help showcase a new product.
82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.
83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.
84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.
85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
86/ Good founders are great product builders. Great founders are great company builders.
87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.
88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani
89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.
90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.
91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”
92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.
93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.
For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.
94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.
On market insight and competitive analysis…
95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.
96/ Have a contrarian point of view. Traits of a top-tier contrarian view:
People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
It’s iterative. Be willing to change your mind when the facts change.
97/ Falling in love with the problem is more powerful than falling in love with the solution.
98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.
99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).
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