Category: Fundraising

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Angels who are Useless to Founders

angel. statue, broken

This may very much be the hill I end up dying on as an angel. I also realize that the title of the blogpost itself is ionically charged. But it’s something I feel strongly about.

Two caveats.

One, this is going to be one of my more strongly worded blogposts. I don’t write many of these. It doesn’t give me joy to “call” people out. If you’re a reader to this blog for the more mild-mannered Cup of Zhou, I’ll see you next week. 🙂

Let’s just say I’m writing this out of frustration after chatting with a founder who hit all the below red flags. But more importantly, frustration at myself for not recognizing the below a mile away when I took the meeting. And the opening 2 questions for that meeting was can you share what you do? and what do you invest in? Both of which are quite evident on my LinkedIn. Moreover the cold outreach came via LinkedIn.

Two, I’m a small check angel. And this may not apply if you write north of a $100K angel check or a $250K LP check. You’re likely also excluded from this hill I’ll die on if you don’t have the network that would alert you on deals on a regular basis.

That said, if you’re a small check investor like me AND you have a decent network, any founder who doesn’t know exactly why they want you on the cap table outside of money is probably not a founder worth your time.

Why?

  1. To them, you’re just another check, and not THE check. Whatever wrapper they put on things, you’re dumb money to them. Now, it’s not about feeling self-important. In fact, don’t delude yourself on your importance. It’s about being valuable, outside of the money. The early stages of company-building are so crucial that you really need all hands rowing in the same direction. Any hands that are idle, or worse, rowing in the opposite direction, is a waste of time, attention and resources.
  2. They don’t know what they want. They don’t know the critical needs of the business. Is it talent? Is it getting to $1M ARR and developing a sales strategy? Is it scaling past product-market fit? Is it finding product-market fit? And because they don’t, they don’t know what they need help in. And any non-surgical answer, including terms relative to broad strokes, is a dud.
  3. And in many ways, because of the above reasons, you’re wasting your dollar. The best founders are surgical and intentional to a fault. They’re also some of the best salespeople in the world. And they will make you feel like you’re the most important person in the world (whether actually true or not, but sometimes, even that doesn’t really matter). Because if they can win you over, they have a great batting average of winning key customers over.

FYI, also probably not worth your time if they:

  1. Say you specialize in XX industry is not enough. Anyone can guess that at a glance at your LinkedIn. Even more so, if you’ve made it explicit.
  2. Spend more time pitching to you than asking you questions to understand your values and what you’re interested in. They’re more interested in what comes out of their mouth than by how much reaches your ears.
  3. Say you’re valuable for intros you can make. LinkedIn doesn’t tell people the strength of your first degree connections. For better or worse, I’m connected with a lot of people. Product of me being a bit too liberal with inbound connections early on. But it doesn’t mean I know them all equally as well. In fact, intros for a founder as an investor are table stakes. You must either be best friends with key decision makers/customers or downstream investors, or it’s really not as useful. And that only comes out if the founder spends time getting to know you, as listed in the second point above.

Ever since I added “Angel investor” to my LinkedIn profile, I’ve received a lot of noise. Quantity of deal flow went up by maybe 10-20 per week (and some weeks where I post something or get tagged in something that gets 5K+ impressions, that inbound deal flow from LinkedIn doubles if not more). But I’d say 95% of that are deals I would never invest in. Either since it’s out of scope, stage, check size, or just type of founder. Which at some point, when I remember to and I’m not typing this on my little 6×3 inch screen, I’ll have to redact that title, “Angel investor.”

Deal flow has become easy. But easy doesn’t mean good. The truth is, I’d rather mean a lot to a few than a little to a lot people.

And by the way, the same is true, if you’re a small check LP.

At the end of the day, as a founder (or emerging GP), it’s about finding your early believers. Those who choose to stand by you not just because everything’s going up and to the right. But those who will stand by you when shit hits the fan.

I was watching the latest episode of Hot Ones (yes, this is my guilty pleasure), where Sean is interviewing Will Smith, and Will shares that there are three kinds of friends in your life that you call at 3AM.

  1. One kind of friend looks at the phone and pretends to be asleep.
  2. A second kind of friend that picks up the phone that makes you feel bad for being in trouble.
  3. And the third kind is putting their pants on while they’re answering the phone.

You want the third kind.

It also harkens back to the same conversation Aakar, Ho, Vignesh, and I had two weeks ago. Believing comes from faith. And faith comes not just from where you are today, but where you will go. And that is established on Day 1.

To get early believers, you have to show you care. You have to give (even if it means your time, attention, and/or enthusiasm/interest), before you get. That is as true for investors as it is for customers.

Photo by Jon Tyson on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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A Jerk’s Guide to Being Kind

dog, bully, fight

First off, my lizard brain that optimizes for immediate gratification thought “A Jerk’s Guide to Being Kind” would be a fun title. Clickbait-y (kinda). Great for SEO. So I used that as my prompt for this public journal entry. 🙂

So, if you didn’t come for a public apology and how I say no, I’ll see you in next week’s blogpost.

Secondly, I was reading Chris Neumann’s blogpost this week, aptly named “The Beginner VC’s Guide to Not Being a Jerk.” And realized, holy frick, I’m a jerk. In it, he describes five things that VCs do that come off as jerkish.

  1. Don’t Use Possessive Adjectives
  2. Don’t Multitask When a Founder is Pitching
  3. Don’t Badmouth Founders
  4. Don’t Mansplain
  5. Don’t Ghost Founders

And of the five above, I know I’m an offender of three of the above. Using possessive adjectives. Multitasking. Ghosting. Probably in that order from most frequent to least frequent. (Sorry, Chris. Sorry to founders I’ve done this to.) The first two I don’t do intentionally, nor do I do the either of them often.

Not sure if it makes too much of a difference, but rather than say “my company” or “our companies,” I do say “our portfolio companies.” Just with one extra word in there. Occasionally, will let it slip when I’m trying to shorten the sentence I’m saying.

I know I’m more prone to multi-task when I’m not the only investor in the room, and definitely when I’m not the primary investor. Again, don’t do it often, but it happens. And I never do so when I’m the only other person in that conversation. 99% of the time I do let the founders and GPs I talk to know that I’m just taking notes of our conversation. Personally don’t use the AI notetakers, but that’s a discussion for another day.

And ghosting. My goal is to get to inbox zero every day. And I really do my best not to ghost. But three things will always happen:

  1. Some email or text always ends up slipping through my inbox. Either it goes in spam, or during certain days, I’m bombarded with hundreds of emails and it slips through the cracks. And I do give every founder and GP who pitch me the right to re-surface past emails if it does slip through.
  2. If the email or message seems like it came out of an automation or mail merge AND I’m not interested, I do let it drop. I read EVERY email for sure. But if that email looks like the same one that you send to every investor, those have been going straight into the archives more and more. That also means that some emails just read like it’s an automated email even if it doesn’t, and it slips through.
  3. There’s a shortlist of people who have abused my old personal policy of responding to every email I get. And so for those people, I’m not sorry if I do ghost you. That said, it’s a pretty short list of people (probably 30-40 people as of now).

And lastly, well, I’ve made founders pitching me cry. Not something to brag about. But in sharing what I thought was honest feedback, I made tears flow.

So, in summary, I’m probably a jerk.

In my mind, a jerk is someone who prioritizes their own beliefs and priorities to the point that they either intentionally ignore or severely de-prioritize others’. Although I try my best not to ignore what other might want or need, but I do often prioritize my own. So to add on to all the above, I’m sharing some situations where my jerkiness comes out and what I say in those moments.

When having tough conversations

I actually learned this while listening to Lenny’s podcast with Matt Mochary. When I need to let someone go. When I need to call a friend out on their bad behavior. Or when my partner and I get into a fight. “Preface hard conversations with: This is going to be a difficult conversation. Are you ready?”

In addition, I also preface with how long I think the discussion will take. “May I have thirty minutes of your undivided attention?” And what the topic will be on. No point in blindsiding the other person.

It helps set the stage. And if the other person needs more time, they have the option to back out. Moreover, all tough conversations are 1:1 conversations. At least for me, even if it relates to many, I start notifying them all on a 1:1 basis.

When trying to leave a conversation at an event

This one also isn’t original. I learnt from a friend of mine who is far more eloquent than I am. Not all conversations at events are created equal. And sometimes, at an event, especially a networking event, my goal is to say hi to the event host or to talk to someone else on the floor. And in between, I may find myself in another serendipitous. Case in point, yesterday, I ended up meeting a founder who sold his last company for $500M exit to a large Fortune 50 company in the parking lot and who was figuring out his next thing. Serendipitous. And super fun, but I was going to be royally late for another event if I stayed chatting in the parking lot.

So, when I need to leave a conversation, instead of excusing myself to go to the bathroom or get more food, I’ve learned to say, “I’d love to ask you one last thing that I’d beat myself up tonight if I didn’t ask before I need to go say hi to XXX.”

One, it timeboxes the next few minutes of the conversation. Two, I’m still interested in the individual and I want them to get the last word before I head out.

For 1:1 conversations

I usually let people know at the very beginning of the conversation that I have a “hard stop” at a specific time. Which 90% of the time is true. Usually another meeting. Or I have just way too much work on my plate that I need to get to.

When turning down a meeting (for now)

I wish I had more time in a day to talk to awesome people. I also wish I had more energy in a day to talk to awesome people. But unfortunately, I only have 24 hours in a day. And well, I’m an introvert. As in, I enjoy writing this blogpost you’re reading right now since 5AM in the morning than telling someone in a live conversation what I will end up writing here.

As such, if I’m interested in meeting at some point, I usually say something to the tune of: “I would love to meet, but if I do so within the next XXX weeks / months, I would have failed in my promise to the people I care about. So if you’ll allow me to be a good friend / family member / supporter of my existing projects and investments, could we revisit this in YYY weeks / months?”

Other times to save everyone’s time, since I won’t find my interest levels gravitating towards said topic, I let people know it just isn’t of interest to me in the foreseeable future, and that their luck may be better elsewhere.

When turning down an investment opportunity

This is actually something that was inspired by one of Jason Calacanis’ podcast episodes. And while there are many things I may not agree with him on, I really like the phrasing he uses to turn down founders who push back against his investment decision. And I’ve added some lines that best fit the way I talk. Which I also included this in my 99 series for investors.

“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.”

In closing

Sometimes I think it’s inevitable to appear as a jerk to some people out there. While one can try to reduce the splash damage, the truth is sometimes what you have to say may not be what the other person wants to hear or see. But as long as you hold yourself to a high degree of integrity and do so in as kind of a way as you can, I think that’s all that really matters.

Often times, I do believe it’s more important to be kind than nice. I hope the above helps.

Photo by David Taffet on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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“Who Else is Investing?” Is a Good Question

who, who else

Ok, before y’all rise up in arms, hear me out. And if by the end of this blogpost, you still want to bring the pitchforks and torches, so be it.

Generally, I get it. Who else is investing isn’t usually a great question. Because for most investors who ask this question, it means they’re outsourcing their conviction.

Tweet I stumbled on reading Chris Neumann’s post yesterday

In fact, I wrote a quick LinkedIn (and tweet) post about it the day before yesterday. Which admittedly got a lot more attention than I expected. And if you have the time, it’s worth seeing the discussion on that post that ensued.

Source: Me on LinkedIn
Yes, I’m a dark mode user. 🙂

So, potentially hot take, I believe investors should ask the question. Who else is investing? It’s part of the diligence process. That said, when they ask that question is key. There’s a vast ocean between the shores of asking that question before you reach conviction and after.

If you pop the question before you reach conviction, well, we’ve seen the follies of that. Most evidenced by the manic rush of 2020 and 2021 into “hot deals” largely led by names that grew to popularity around the dinner table.

If you pop it after, it’s diligence. Where the availability of names shouldn’t convince you to bat or lack thereof to otherwise. But that you now have additional opportunities to reference check and cross-diligence the same opportunity. And it extends to the LP side as well. Jamie Rhode who’s now at Screendoor, said on a Superclusters episode that one of her greatest lessons as an LP was committing to a fund where there was a bunch of soft commits but far less in hard commits, and ended up overexposing Verdis (where she was at) to a single asset and taking a much higher ownership as an LP into a single fund.

Truth is, LPs pay GPs for their opinion. Not anyone else’s. And while given long feedback loops, no one really knows what’s right and what’s wrong except over a decade later and only in hindsight, you have to really believe it, and be able to back it up.

Photo by Patrick Perkins on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Do Founders Like You For Your Money?

club, party

Would the founders in your portfolio let you in on the cap table if you weren’t an investor? If you had no money? If they could only borrow your brain for two hours every three months, and that’s it?

The uncomfortable truth is that most founders won’t.

But to find the founder who will take that deal is the person you want to be focusing on. They’re the archetype of founder you want to win — that you put your whole heart into perfecting your craft for that founder.

Play to your strengths, not your weaknesses. Where do you have home field advantage?

Why does this matter?

All cards on the table, it won’t matter if you plan to stay a boutique VC firm or angel whose check size for an investment never goes past $250K. Even better if you don’t have any pro rata. But if you plan to institutionalize your firm — and I don’t mean to say this is the only way to institutionalize — you need to hire. To hire, you need enough management fees to support a team of that size. And to get enough management fees, most of the time, that requires you to scale your fund size.

Whereas in Fund I and maybe II, you played the participating investor. Squeezing in great deals. And everyone’s your friend. Founders love you. Your co-investors love you. With larger funds, you may end up scaling your check size. If you don’t, you start diversifying your portfolio more and more. And most large LPs prefer concentrated portfolios. Why?

They often do the diversification work in their own model. They pick their own verticals and stages they want exposure to. The product they want to buy is not to be their portfolio for them, but that it is just one asset in a larger portfolio. A lot of LPs also fear diversified portfolios in managers because at some point, managers will be investing in the same underlying asset. No LP wants to invest in 10 funds and have four of them all be investors in Stripe. If that’s the case, they might as well invest directly in Stripe via co-investment.

But at the end of the day, if your checks are bigger (along with ownership targets), it’s hard to always be 100% friendly with other investors since they have their own mandates. And at some point, the founder is forced to pick: you or any of those other interested investors.

And for you to win that deal, you must have something enduring that founders want outside of capital.

Examples

Of course, there are different ways to prove that you can win deals to your prospective LPs. The list below is by no means all-encompassing, but may help in giving you an idea of how people who have walked the path before you have done so.

  • Being chosen as the independent board member in other companies you didn’t invest in (Kudos to Ben Choi for sharing this one in our episode)
  • Having a platform to generate customers/leads for your portfolio companies. Like Packy McCormick‘s Not Boring or Harry Stebbings‘ 20VC.
  • Winning pro rata in past subsequent rounds
  • Even better if super pro rata (rarely happens though, especially after Series A)
  • (Co-)Leading rounds (met an emerging GP last year who syndicated the whole $2M round)
  • Repeat founders (with previous exits >$100M) let you invest in oversubscribed rounds with a check larger than $250K
  • Founders letting you invest on previous round’s terms (or highly preferential treatment)
  • Incubating the company
  • Evidence or repeatable ability for you to pre-empt rounds before founders go out to fundraise
  • Some combination of the above

In closing

Unintentionally, this blogpost is the unofficial part two of my first one on the topic of sourcing, picking, and winning. Part one was on sourcing. This one is on winning. No guarantees on picking, but who knows? I may end up writing something.

For the uninitiated, this was said by both Ben Choi and Samir Kaji on the Superclusters podcast. That to be a great investor, you need to be great in at least two of three things: sourcing, picking, and/or winning. If you only have great deal flow, but don’t know how to pick the right companies that come your way or have the best founders pick you, then you don’t have an advantage. If you’re really good at winning deals, but no one comes to you or you pick the wrong deals to win, then you also don’t have anything. You need at least two. Of course, ideally three.

But as you institutionalize, the third may come in the form of another team member or as you build out the platform.

Photo by Long Truong on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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A Case Study on Why LPs Pass on Great Funds | Jeff Rinvelt & Martin Tobias | Superclusters | S1 Post Season E1

Jeff is a partner at Renaissance Venture Capital an innovative venture capital fund of funds. Jeff’s diverse background in venture capital and technology and his experience working in various start-up ventures uniquely position him to advise startups. In addition, Jeff is quite active in the Michigan start-up community, volunteering his time to mentor young entrepreneurs, judge pitch competitions, and guest lecture student classes and organizations. Through Jeff’s work on the Fund, his volunteer efforts, and his role as the chair of the Michigan Venture Capital Association’s board of directors, his passion for fostering a productive environment for venture capital investment in the State of Michigan is evident.

You can find Jeff on his socials here:
Twitter: https://twitter.com/rinvelt
LinkedIn: https://www.linkedin.com/in/rinvelt/

Martin Tobias is the Managing Partner and Founder of Incisive Ventures, an early-stage venture capital firm focused on investing in the first institutional round of technology companies that reduce friction at scale.

Martin was previously at Accenture and Microsoft and is a former Venture Partner at Ignition Partners. Martin is a 3X venture-funded CEO rising over $500M as CEO with two IPOs who has also invested in hundreds of companies and is a limited partner in over a dozen VC funds. Martin was an early investor in Google, Docusign, OpenSea, and over a dozen Unicorns.

Martin is the father of 3 daughters, a cyclist, surfer, poker player, and life hacker. Martin tinkers with motorcycles on the weekends. He writes about Venture Capital on Incisive Ventures blog and Twitter.

You can find Martin on his socials here:
Twitter: https://twitter.com/MartinGTobias
LinkedIn: https://www.linkedin.com/in/martintobias/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Introducing Jeff Rinvelt and Martin Tobias
[04:14] What was Jeff’s pitch to their LPs for Renaissance Capital?
[06:30] Why did Jeff pivot from being a founder to an LP?
[08:10] Renaissance Capital’s portfolio construction model
[13:00] Jeff’s involvement in non-profits
[15:56] How did Martin become an angel investor?
[18:03] The big lesson from being an LP in SV Angel’s Fund I and II
[20:10] Why is Martin starting a fund now?
[26:07] A lesson on variable check sizes
[28:53] What is Martin’s value add to founders?
[33:29] What stood out about Martin’s deck and email when it arrived in Jeff’s inbox?
[35:43] The 2 biggest worries Martin had in sharing his deck with Jeff
[36:47] What does Jeff think about generalists?
[40:49] What held Jeff back from making an investment in Incisive Ventures?
[42:37] What kinds of conversations does Martin usually have with LPs?
[47:05] One of the greatest professional lessons Jeff picked up as a manager
[49:07] Martin’s greatest lesson from his days as a CEO
[51:57] Thank you to Alchemist Accelerator for sponsoring!
[54:33] Like, comment and share if you enjoyed the episode

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“One of the things a lot of investors don’t do is go back and be honest about where they got fucking lucky and where they had a thesis that they could potentially replicate in future investments.”

– Martin Tobias

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
Follow Superclusters on Twitter: https://twitter.com/SuperclustersLP
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Big If True

baby

I wrote a blogpost last year, where I went a level deeper into my NTY thesis. In short, in what situations and in front of what kind of ideas do I ask founders: Why now? Why this? And why you?

Plausible IdeaWhy this?
Possible IdeaWhy now?
Preposterous IdeaWhy you?
For the deeper dive, check out this blogpost.

But let’s go a step deeper. As I’m writing another blogpost slated to come out next year, I’ve had the chance to sit down with some amazing multi-cycle investors. And a common thread across all those conversations has been that they chose to be the first check in companies that would be big, if true.

Which got me thinking…

If ‘big if true’ is for the preposterous ideas out there, then possible ideas would be ‘big when true.’ And plausible ideas would be ‘big AND true.’

Let’s break it down.

Big AND true

Not too long ago, the amazing Chris Douvos shared with me that the prerequisite to being “right and alone”, where fortune and glory lie, is to be “wrong and alone.”

Imagine a two-by-two matrix. On one axis, right and wrong. On the other axis, alone and in the crowd. You obviously don’t want to be wrong and in the crowd. But you do want to be in the right and alone quadrant. Because that’s where fortune and glory are at. Most people think that to get there, you must first start in the right and in the crowd quadrant. But it’s important to note, that once you’re in the crowd, and you get the dopamine hits of validation, it’s really hard to stray away from the crowd. So really, the only way to get to fortune and glory is to be wrong and alone. To be willing to go against the grain.

Unfortunately, for big AND true, you’re in the crowd. And while you can usually make money on the margins, it’s hard to be world-defining. ‘Cause you’re too late.

The thing to be wary of here if it is any investor’s strategy to deploy capital here is to not be the last money in. Hype and compounding are dangerous. And for many companies that exist here, they have a short half life. If you’re the last one holding the bag, that’s it.

Big WHEN true

You know that saying, “It’s a matter of when, not if…” it’s just as true in the innovation space. There are some things in life that are bound to happen. Recessions. Hype cycles. Rain. First snowfall. Summer heat. Progress. Maturity. When one’s baby teeth fall out. Wrinkles. Gray hair. Some with more predictability than others.

These ideas are defined as those with early commercial traction, likely with a niche audience or only your 1000 true fans. And that’s okay. Usually happens to be some of the toughest pre-seed and seed rounds to raise. There’s clearly traction, but no clear sense of rocket ship growth.

Timing matters. Is the larger market ready to adopt the beliefs and culture and habits of the few?

For some investors, it’s why they target quality of life improvements to the wealthy made ready for the masses. Living a wealthy lifestyle is, after all, aspirational for many. On the flip side, if you have a niche audience and are looking to expand, are there underlying beliefs and traits that the broader market has but has instead applied those beliefs and habits in other parts of their life?

Big IF true

Sam Altman put out a blogpost just yesterday, titled “What I Wish Someone Had Told Me.” And out of the 17 lessons he shares, one in particular resonated the most with me:

“It is easier for a team to do a hard thing that really matters than to do an easy thing that doesn’t really matter; audacious ideas motivate people.”

While the stories of Airbnb or Coinbase or Canva seem to suggest that these are nigh impossible ideas to raise on, anecdotally, I seem to find that the most transcendent companies with CEOs who are able to acquire world-class talent to their companies have less trouble fundraising than the ‘big when true’ ideas. But more difficulty raising than the ‘big and true’ ideas.

That said, instead of many smaller checks, you just need to find one big believer. In other words, the Garry Tan for your Coinbase or the Fred Wilson for your Twitter. One way to look at it, though not the only way, is what Paul Graham puts as the “reasonable domain expert proposing something that sounds wrong.” Crazy, but reasonable. Simply, why you?

Photo by Jill Sauve on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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#unfiltered #85 Relationships are Built on Actions, Not Words

action

This past weekend, I ended rewatching a classic and one of my favorite Eddie Murphy movies, A Thousand Words. Eddie, who plays Jack McCall, a literary agent, is someone who will say anything to get what he wants. And the plot of the movie effectively revolves around him trying to sign his next author and the after effects of doing so.

At one point, Dr. Sinja, the author he’s trying to sign, tells Jack, after he exclaims that he tells his wife he loves her “all the time”, “Words? More words, Jack. You tell her, like meaningless leaves that fly off a dying tree?

“Words.

“Can’t you show her that you love her? Make peace. Show them that you love them. And be truthful.”

One of my favorite people in the world, my friend who I met by way of mutual friend introduction, also happens to be one of the more well-traveled people I know. While it’s not my intention to embarrass her by writing this blogpost, she’s someone I’m deeply grateful for — my pen pal.

Every time we text, we send these long passages to each other. Paragraphs long. It doesn’t happen super often, every 2-3 months or so. And at times, we go six months without texting each other. But what makes her awesome aren’t our virtual letters, while I do really enjoy writing and reading them. What makes her awesome is that every time we meet in-person, she brings me gifts from abroad.

And she did so, ever since the day we first met, and I, in a passing remark, mentioned I didn’t travel often. And because of my work, my school, the need for me to be close to take care of family, I’ve stayed in the cocoon of the Bay Area my whole life. As such, I really do enjoy when friends tell me in detail of their travels beyond the horizons. But she took it a step further, where she would:

  1. Buy gifts, snacks and souvenirs from abroad to bring back
  2. Mail me postcards from every trip, sharing the smells, sights, sounds, and feels of her surroundings as she writes them
  3. And of course, bring me back tales from her adventures when we meet in person.

They’re small things. But despite being small, they mean a lot to me.

I’m luckier now to be able to travel more. And just like my pen pal brings back treasures when she travels, I do so for her now too.

And of course, this extends beyond friendships. The fundamentals for any relationship (friendship, romantic, customer, investor, or some other business relationship) are fulfilling promises. Too often, I meet folks, who like Jack McCall say more than they can deliver. Most times unintentionally. A large part due to society’s expectations to be nice.

I’ll give an example. How often do we hear “How can I help?” at the end of a conversation? If you’re anyone who has something that others want — connections, capital, or advice — the ones on the receiving end probably wish to pay you back in some way. But most people ask that, and when they get an answer back, they take it in like the passing wind. Personally, I’d rather people who can’t deliver on that not ask that question than ask and not deliver (if there is something the other could use help on).

To go beyond just a normal relationship means you need to deliver the unexpected — beyond the initial promise. That requires you to actually spend time caring. And when you do, actions will naturally follow words or perform independent of words.

Brex won many of their first customers finding who just raised and mailing them a $50 bottle of Veuve Clicquot. In turn, they got to demo in front of 225 out of 300 leads, and 75% of those closed. Instacart’s Apoorva Mehta delivered a pack of beer to Garry Tan at YC to win admission into their famously competitive cohorts — after they applied late!

Both were pitches. But neither in the format one would traditionally imagine.

As the saying goes, actions speak a thousand words.

Photo by Kid Circus on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Are Conferences Worth It If You’re Fundraising?

audience, conference, event

Warning: This blogpost may be controversial.

Simple answer, no.

Longer answer, it depends.

So, what do I mean?

All cards on the table, I love conferences. It’s a great exchange of ideas. And every once in a while, you meet some really cool people. In fact, I’ve met quite a few of my now-great friends via large events. And hell, I love swag! Like, frickin’ love them! Arguably too much so.

I also love events, and have deep respect for not only the magnitude, the effort, but also the creativity that goes into making great events great. And if you’re a regular fan of this humble piece of internet real estate, you’ve seen me write about it. If not, would recommend searching up “social experiment”, “community”, or “events” in the righthand side bar. But I digress.

So, all of this transpired, when a founder asked me publicly in a Slack community, “Is TechCrunch Disrupt worth going to, to meet investors?”

I love TC, and all it stands for! But if you’re looking to raise and meet VCs who’ll be interested in listening to you pitch, your bang for buck is better elsewhere. Not saying it’s not possible, but if you’re not on stage, it’s just a lot of wasted effort. Why?

  1. VCs who are there are not looking there for deal flow, at least the good ones who have great pipelines.
  2. ‘Cause most people who are there are looking for investors as well. You’re not getting as much facetime with the right people as you would like. The ones you wanna get in front of are always the most popular ones.

On the flip side…

Why I think TC (or similar) is worth attending?

  1. Conversion. Conferences should not be top of funnel for you. ‘Cause if it is, you’re one step too late. Maybe two steps. Use it as a conversion tool. Set up Zooms with investors prior. Then use IRL time to convert them into fans or reinforce why you’re awesome. I mean, have you ever been to a networking event where strangers intro themselves to you and you forget their name within 5 seconds? The same is true for most investors unless you have a story that’ll make you go viral. If that’s the case, then you really don’t need conferences anyway. (Unless you’re on stage.)
  2. Hosting your own event/happy hour/fireside chat. Better to be a host of even a small intimate 6-8 person dinner than to be a participant. Participants are for the most part, forgettable. As a host, you’ll be able to live rent-free in someone’s mind for at least a few weeks.
  3. Or purely for fun. Then yes, go have fun. Everything else is a cherry on top. Did I mention conference swag is usually really awesome?

In closing

Do I personally go to conferences?

No. Usually. This doesn’t have any bearing to a conference’s quality. In fact, I think events like Saastr’s, Upfront’s, All-In, just to name a few are very well-organized.

  1. I’m just too busy.
  2. I enjoy intimate conversations more. I’m an introvert, what can I say.
  3. I like letting my creativity run wild by hosting my own.

So if you’re a founder fundraising, hopefully the above might be some helpful context when you are next at a crossroads in relation to event attendance. And yes, I find the above to be true if you’re an emerging manager fundraising as well.

Photo by Headway on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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The Evolving Faces of Investor Relations

old, young, age, hands, faces

It’s fundraising season again. For founders. And for investors.

It may have been a product of the content I’ve been writing and the events I’ve been hosting. It could also be a product of my job title. But in the last few months, I’ve met a great deal of fund managers — from Fund I to Fund XIII. With a strong skew to the right. In other words, vastly Fund I through III.

And given the current market, there is the same pressing question from all: How should I pitch my fund?

And subsequent to that, who should I talk to? Or can you intro me to any LPs?

And in all these conversations, I’m reminded of a great piece Jason Lemkin once wrote on hiring the right VP of Marketing. I won’t go too much into depth since I’ve written about it here. But if you have a spare five minutes, I highly recommend the read. As such, the framework I share with fund managers is:

  1. Fund I and II, it’s all about lead generation.
  2. Fund III and IV, it’s about product marketing. The product is the fund. The product is the partners’ decision making.
  3. Fund V and onwards, it’s all about brand marketing.

I’ll elaborate.

Now I’ll preface with most emerging funds won’t have the capacity to bring on an investor relations person, so the onus lies with the founding partners themselves.

Lead generation

Barely anyone knows you exist. You need to be out there. You’re pre-product-market fit. And you need to sell why you are the best sub-$50 million fund to return three times your LPs’ money back. Five times if you’re pre-seed or seed. LPs are looking for GP-thesis fit. But more importantly for you, this looks very much like a sales game, not a marketing game.

Generating demand where there is none is key. How do you best tell a story no one’s heard of?

You have to break an arm and a leg to close LPs outside of your initial friends and family. You have to show you care. Or as Mark Suster recently said (quoting Zig Ziglar), “People don’t care how much you know until they know how much you care.”

You’re going to events. Trade-show equivalents. You’re hosting your own. Your asking co-investors to be your LPs. You’re asking for LP intros to largely high net-worth individuals, who’ll be your beachhead “customers” before you prove the promise you’re selling capital allocators. And just as much as they’re looking for the right people to marry for the next 10 years or 20 years (latter if you’re working together for at least three funds), you need to qualify them as well. And while yes, it’s important to keep your funnel wide, you need to have a strong idea of who’s a good fit and who isn’t from the very beginning. If it helps, here are some of my favorite pre-qualifying questions.

For a deeper dive of LP construction as an emerging manager, I’d highly recommend reading this deep dive on how other fund managers do it.

Product marketing

You’ve now gotten to a stage where your strategy is known. Founders and LPs self-select themselves into investing in you or not. For instance, if you know you can win on a diversified strategy betting with portfolio sizes north of 50, all the LPs that look for concentrated portfolios or strong reserve strategies will turn the cheek.

You’ve built a strategy off of the scare tissue from Fund I. Now you’re selling that strategy. Are you fishing in ponds that other GPs are not? In other words, is it differentiated? And how?

It’s an interesting exercise but it’s usually not the first thing you think of, but the third. When you really dig into your fund’s soul. Why do founders come for you? Why will they choose you over all the other 4000 VC fund options out there? Equally as helpful to do a “Why did you choose me” survey with your founders.

The big question for LPs now is: Is this repeatable?

Why? Your initial LPs for Fund I, maybe II, are smaller checkwriters, given the size of most Fund I’s and II’s. A lot of them know, even innately, that as you scale in assets under management, you will eventually graduate from their check size. But starting from Fund III, and maybe even Fund II, you’re targeting sophisticated and larger LPs, who are looking to build that 20+ year relationship. And for them repeatability and consistency is important.

Brand marketing

When you’ve finally settled into your quartile, which usually takes at least 6-7 years of track record, you’re now focused on largely selling the returns on your previous fund. Your product works. For some funds, they diversify into other product offerings, or bring on new partners to manage new verticals and initiatives.

Just like a Super Bowl ad needs to be played at least seven times or in the marketing world the 7-11-4 strategy (you need at least seven hours of interaction, 11 touchpoints, and in four separate locations) before one remembers and hopefully buys your product, you’re trying to help LPs keep you top of mind. Again not hard and fast rules, but a useful reference point of just how much work it takes to stay top of mind.

That could mean a focus on content — a newsletter, podcast, great/frequent LP updates, social media and so on. Or great AGMs (annual general meetings). And hosting events. Or being that awesome co-investor that pops up other emerging managers’ pitch decks. Strong communication is key — either directly or indirectly — so that when you raise your next fund, your LPs are ready and have pre-allocated to re-up in your fund.

In closing

Now the purpose of all this segmentation isn’t to just be snotty about it, but that the focus for pitching and closing LPs varies per the number of your fund. Don’t try to do everything at the same time. It’s not worth it, and neither do you have the resources, time or bandwidth. Stick to one strategy and get really good at it.

Photo by Rod Long on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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To Court or Not to Court (Big LPs)

volkswagon, mini, big, van

I’ve had multiple conversations with emerging managers currently fundraising over the past few weeks, and the common theme, outside of the usual no’s, seems to be that larger LPs are saying, “If you were raising a larger fund, we would invest.”

And so there’s this catch 22 in the market right now. In one Fund I GP’s words, “either raise a larger fund and be told by the large checks that they don’t do Fund I’s. Or do a smaller fund, and be told by the high quality LPs that they’re too small.”

As a note, for the uninitiated, most large, seasoned LPs usually don’t want their check to be more than 10% of the fund. Why? Too much exposure in a single asset. And the need to diversify. Every year, there are really 20 great companies that are made. Or on the higher end, as Allocate’s Samir Kaji recently wrote, “30-50 companies drive the majority of returns.” Your goal as an LP, is to get as much exposure to those as possible. And they rarely all come out of just 1-2 funds.

If LPs are open to taking up more than 10% of the fund, they usually come with rather aggressive terms. For instance, investing into the GP stake, as opposed the to the LP. That’s a conversation for another day though.

As such, I’ve seen many a manager play both angles. They call it the “toggle.” If we raise a target of $10M fund, we’ll only do pre-seed. We’ll also have no reserves. If we raise a $25M fund, we’ll have 20% reserves and more seed checks. But if we’re able to close a $50M fund, we’ll have 33% reserves and do 50% pre-seed and 50% seed. The deltas between some fund managers’ targets and caps have grown as wide as the Grand Canyon. I was chatting with a Fund I GP yesterday who had a $10M target with $40M cap. Still relatively reasonable. Another GP raising their Fund I two weeks ago told me he had a $15M target and $70M cap. Far less reasonable. In fact, I might even say, a $15M fund and a $70M fund are two completely different strategies.

So begs the question, as a Fund I or II GP, is it worth raising a larger fund to possibly close large LPs or staying disciplined in your pre-product-market fit fund?

Spoiler alert… I don’t have the silver bullet. So if you’re looking for one, this blogpost isn’t worth your time.

But if you’re not, here’s how I’ve been thinking about it.

The short answer is really, whoever’s willing to give you money. Not the most sophisticated answer, but if you know large LPs well and they’re willing to invest in you, go bigger. Otherwise, you need to consider a more grassroots approach.

If you have a strong, portable, relevant track record that’s either returned good distributions already OR that has persisted for at least 6-7 years, larger LPs may be more open to investing in you. If not, you may need to play the numbers game with smaller LPs, that are liquidity-constrained as of now. And for that, you either take smaller checks, or prove you are the best option for their $250K LP check, that it somehow outcompetes the S&P, 3-year treasury bonds (because of interest rates), real estate and so on.

Also, remember that LPs are always nice in meeting #1. I’ve heard of very few instances where they’re not. A lot are just in exploratory mode. No pressure to commit. You will also need a great barometer of what nice looks like and what kindness looks like. Otherwise, you will waste a lot of time.

What does that mean? It is easier for a large LP to tell you “I will invest if your fund was bigger” than to tell you “No.” It’s the equivalent of VCs telling founders, “You’re too early for me.” And the same as recruiters and hiring managers telling job candidates “We have a highly competitive pool, and while we loved meeting you and you’re great…” There might be some truth to it, but a lot of smokes and mirrors, and a fear to offend people. I get it. We’re all people.

Just don’t lie to yourself.

Taking the hard road, which will be true for the vast majority of managers raising now, is to keep the fund size small and disciplined. Aim for a minimum viable fund. And deploy.

The minimum viable fund

Simply put, what is the minimum you need to execute your strategy? To set yourself up to raise a larger fund 1-2 funds from now?

What assumptions are you trying to prove?

What does your ideal Fund III look like? And What does fund-market fit look like to you? Be as detailed as you can. It could be that you’re getting four high quality deals per quarter. And that you have $30-40M to deploy per senior partner. That you’re leading rounds for target post-money valuations between $10-20M. That you have early DPI from Fund I by then. And so on.

Then work backwards. If that’s what Fund III looks like, what does Fund II look like? What does Fund I look like? As you’re backcasting, to borrow a Mike Maples Jr. term, each fund when you work backwards in time is focused on testing 1-2 key assumptions that you and LPs need to get conviction on. Assumptions that require data.

I’ll give an example of one kind of assumption. Your ability to win allocation.

If Fund III is where you lead pre-seed and seed rounds and have strong ownership targets, then Fund II is where you have to test if founders and other downstream investors will let you take pro rata for more than one round. And, if you can win or negotiate for that pro rata. It all comes down to, will a founder pick you over another awesome, possibly brand-name VC? And if so, why?

Some LPs prefer co-investment opportunities. And while it is helpful for them to go direct, part of the reason for it, is even if your fund can’t execute on the pro rata, just the ability to negotiate that is powerful for the day you need to lead. And if that’s Fund II, Fund I may be, can you win allocation in hot rounds and/or can you discover non-obvious companies before they become obvious?

Let’s say your Fund I is focused on the latter. You’re probably investing on $5-10M post-money valuations, and you’re going to try to maintain 5% ownership till the A-round. That’s $250-500K checks. $250K would be your base check, trying to get at least 30 shots on goal. That’s a $9-10M minimum viable fund, hoping for more than a 2% outlier rate in the generalist market, or north of a 10% outlier rate in bio, hard sciences, healthcare, or deep tech space.

Any less than 30 companies, you’re going for the hyper-concentrated portfolio and it’s a lot more about ownership and the greater the pressure, you need to pick well. But the goal is to get to a 3x net minimum for your fund by the time you get to a Fund III.

I heard from LPs with more miles on their odometer that once upon a time, it was normal for GPs to give undeployed capital back to their LPs. Circa 2002-2005 vintage funds. Where GPs don’t execute on 50% of their capital calls. But we don’t live in that era anymore. For better or worse.

Some LPs don’t even want their capital back early because then they need to pay taxes AND find another asset that compounds at the same or better rate your fund currently is. Say 25% IRR or CAGR. That’s hard. Because minus the inflated marks of the last 5 years, 25% is a hard benchmark to hit for the vast majority of funds.

So sometimes to be the best fiduciary, that means raising a small fund today (easier to return too) to set you best up for tomorrow.

The questions to ask

If you are in the midst of conversation and trying to court a large LP, do ask the following:

  1. Have you invested in an emerging manager in the last two years? — If not, you’re unlikely to be their first. If you’re not seeing demonstrable progress from intro to partnership meeting to diligence within three meetings, move on. If they did so, 20 years ago, doesn’t count. That means investing in emerging managers is not top of mind for them.
  2. What is your minimum check size? And how often, if ever do you deviate from it? If so, why was the last time you did so? — Multiply this number by 10. If it’s greater than your fund size, you might find more success elsewhere.
  3. What is the typical process look like? — Find out what their process is and see if you’re progressing forward. If not, very clear they may not be interested.
  4. (If the person you are talking to does seem to really like you) What are the questions you’re being asking in your investment committee? — Figure out the bottlenecks as soon as you can. And determine if that’s something you can solve for in the near future or not. If it’s track record, you realistically can’t.
  5. What is the thing you hated most in the last few years? — Understand their red flags early on in the process. And cross your fingers, it’s not something that’s relevant to you or your fund. If it is, move on.

Of course, the above, while useful pre-qualifying questions, are mentioned in broad strokes. Your mileage may vary. Have there been examples of large LPs betting on small funds? Yes. But far and few in between. But don’t expect you will change many minds.

In closing

Fundraising is all about momentum and time you’re in market. You can theoretically spend six months trying to close one large LP, but your time might be better spent closing smaller checks in the beginning from people who believe in you and strong referenceable names. And if you so choose, come back to the large LP in the second half of your fundraise.

Photo by Alexei Maridashvili on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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