Not too long ago, in the sunbathed streets outside of Maison Alysée, I was chatting with an incredible serial entrepreneur backed by some of the greatest names in the venture world, who also happened to have spent some time at my favorite VR startup. All in all, he knew what he was talking about. But to respect his privacy, I’ll call him James. And James said something that was quite the head-turner.
“I never got a check for sending the pitch deck before the meeting.”
And so began my deep dive into the contrarian thinking that led to the above statement.
Why the pitch deck might not work
As an armchair expert on films I like, my favorite films have never fit my rubric of the perfect story. Rather, my rubric of the perfect story was shaped by my favorite films.
A pitch deck, like any other rubric, is a pre-ordained set of words and pictures that follow “industry’s best practices”. The problem, solution/product, why now, market size, team, traction, competitors, business model, and financial projections. Most pitch decks don’t deviate too far from the afore-mentioned order. Nevertheless, at the end of the day, rubricsare lagging indicators of what worked. They rarely serve as predictors of what will work, yet we prescribe a disproportionately high amount of trust to their predictive qualities.
“Fundraising is hard”
“You can do everything right – you go through all the steps, do the CRM, get the emails, get the introductions, give the pitches – you do it textbook, and you won’t get a dollar. Fundraising is hard.”
Naturally, I had to ask James what he did to secure funding without sending the pitch deck. James shared, “I never really think about ‘fundraising’, like I mentioned when we chatted I do try to keep track of things but that’s more so that I don’t over-email folks. I never write one email and then send it to a lot of people. Every email I write, I write personally.”
Pitch with emotion
“How do you close somebody? It’s not with spreadsheets and numbers. It’s with emotion. A good pitch gets people over the activation energy [necessary] of actually investing in your business. There are plenty of companies who are making $10 million a month and didn’t raise a dollar. There are plenty of companies who didn’t make a dollar ever and raise a $100 million bucks.”
Every pitch is a story. And often times, the best narrative you can tell isn’t in a 10-megabyte presentation filled with numbers and letters or a Docsend link, based on a rubric that your audience decided. There’s rising and falling action. There’s also you, the underdog, who embarks on a hero’s journey to change the world. What does the world look like today? What will it look like without you tomorrow? Against seemingly impossible odds and guided by the fortune of luck (timing, why now?) and grit, why is the future you envision, with you in it, inevitable?
You can also see it in action in their pitch that got a16z to lead their $68M Series A.
“Always bring the value”
“People are busy, especially the people you’re pitching. Teach them something. They wanna learn. They wanna walk out of that meeting and remember you and make their life a little bit better. And one way to do this is to bring value that they didn’t have before.
“This is also a self-selector. If you don’t do this, they’re not going to call you back. You want to be interesting. You want the other person to walk away thinking that was fun.
“Unfortunately, this is what a lot of founders don’t do. They treat these meetings like work. ‘We’re going to walk in with a strategy. We’re going to stick to the script.’ The other people on the other side never ask any questions. They say ‘see ya later’ and you never hear from them ever again.”
In many ways, this is what many investors call the ‘secret sauce‘. Do you know something that the other person doesn’t? Can you connect the dots in a way that the other person has never thought about? Have you inspired the other person where after the meeting and the ‘A-ha!’ moment they do something about it?
For people who are obsessed and really passionate, their passion is often contagious. One doesn’t have to be an investor or a subject-matter expert to know and feel that. And when inspired, the other person acts as an extension of the energy you brought to the conversation. It could be in the form of work, writing, invites, or intros. These second-order effects might not always come immediately. But rather eventually. This is what James calls “manufacturing serendipity”.
On asking for intros
I asked James, “Did you ever ask for the intros or did they come quite organically?”
And what he shared truly set him apart from 99% of founders I’ve met with. “People always say ‘how can I help?’ Some don’t mean it. And this works for them too because quickly, you figure who’s who. But always have an answer. Not like ‘intro me to some people.’ But ‘hey, I saw you know so and so, and I’d love to chat with them – would you mind introducing me?’ Having one to two things is the sweet spot.
“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.” Provide the person making the introduction with all the context and reasons for the other person to say yes.
It echoes much of my personal template I tell folks if they want an intro to an investor that consists of three parts – no more, no less:
The one metric they’re nailing (ideally so much better than the rest of the industry
Short 1-2 lines on what you’re building and why
What makes that one investor the best dollar on your cap table – why it has to be her or him, and no one else
The metric gives the investor a reason to click open the email. The blurb shares the context. And the last, and, in my opinion, the most important part gives the investor the reason – the story – they need to be a hero. You might notice how much a founder is raising isn’t “required material”. Capital is secondary to the story you pitch. While based on some hard facts, startup investing is often an emotional decision. As James said, “Money doesn’t build products; people do.”
In closing
There’s a lesson I took from my time at SkyDeck, and have continued to preach ever since. “Always be fundraising.” And I don’t mean ask for money in every waking moment. In fact, you shouldn’t. Not only are you at risk in sounding like a broken record, you will end up sacrificing time you could be spending on building your product. But always be pitching. Always be getting other people excited about what you’re working on and why that’s so important. Not why should the world be excited about your product, but why that person in particular should be.
Build relationships. Build a fanbase before you need to fundraise. Add value in every conversation. And the ripple effects would come back tenfold. James went on to say, “I would meet with anyone, [and] still do. If they liked what I was doing, they’d intro me either to an investor that might be into it or another company that had an investor that might be into it.”
James truly has a magnetic energy. Every time we chat I learn something indispensable. After all, one of our conversations inspired this blogpost, which I imagine is the first of many more to come. So, it came as no surprise as he’s getting interest left and right on his new venture.
*Some quotes were edited for clarity and my lack of a photographic memory. Sorry.
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Not too long ago, I quoted Phil Libin, founder of All Turtles and mmhmm (which has been my favorite virtual camera in and most likely post-pandemic), who 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. It’ll shake it apart. In tech the hype cycles tend to be pretty intense.”
Hype is the difference in expectation and reality. Or more specifically, the disproportionate surplus of expectation. A month ago, Sarah Tavel at Benchmarkwrote: “Hype — the moment, either organic or manufactured, when the perception of a startup’s significance expands ahead of the startup’s lived reality — is an inevitability. And yet, it’s hard not to view hype with a mix of both awe and fear. Hype applied at the right moment can make a startup, while the wrong moment can doom it.”
Right now, we are in a hype market. And hype has taken the venture market by storm.
We’ve all been seeing this massive and increasing velocity and magnitude of capital deployment over the last few months. Startups are getting valued more and more. In the past, the pre-money valuations I was seeing ranged from 2-on-8 to 3-on-9. Or in not so esoteric VC jargon, $2M rounds on $8M pre-money valuations ($10M post-money) to $3M rounds on $9M pre-money valuations ($12M post-money). These days, I’ve been seeing 5-on-20 or 6-on-30. Some of which are still pre-traction, or even pre-product.
Founders love it. They’re getting capital on a discount. They’re getting greater sums of money for the same dilution. Investors who invested early love it. Their paper returns are going through the roof. When looking at IRR or TVPI (total value to paid-in capital – net measurement on realized and unrealized value), higher valuations in their portfolio companies are giving investors jet fuel to raise future funds. And greater exit values on acquisition or IPO mean great paydays for early investors. Elizabeth Yin of Hustle Fundsays “this incentivizes investors to throw cash at hyped up companies, instead of less buzzy startups that may be better run.”
Sarah further elaborated, “In the reality distortion field of hype, consumers lean in and invest in a platform with their time and engagement ahead of when they otherwise might have. They pursue status-seeking-work, not because they necessarily get the reward for it relative to other uses of their time, but because they expect to be rewarded for it in the future, either because of the typical rich-get-richer effect of networks, or just in the status of being an early adopter in something that ends up being big.” The same is true for investors investing in hyped startups. It’s status-seeking work.
Frankly, if you’re a founder, this is a good time to be fundraising.
Why?
Capital is increasingly digital.
There is more than one vehicle of early stage capital.
There are only two types of capital: Tactical capital and distribution capital.
1. Capital is increasingly digital.
Of the many things COVID did, the pandemic accelerated the timeline of the venture market. Pre-pandemic, when founders started fundraising, they’d book a week-long trip to the Bay Area to talk to investors sitting on Sand Hill Road. Most meetings that week would be intro meetings and coffee chats with a diverse cast of investors. Founders would then fly back to their home base and wait to hear back. And if they did, they would fly in once again. This process would inevitably repeat over and over, as the funnel grew tighter and tighter. And hopefully, at the end of a six-to-twelve month fundraise, they’d have one, maybe a few term sheets to choose from.
Over the past 18 months, every single investor took founder meetings over Zoom. And it caused many investors to realize that they can get deals done without ever having to meet founders in-person. Of course, the pandemic forced an overcorrection in investor habits. And now that we’re coming out of isolation, the future looks like: every intro meeting will now be over Zoom, but as founders get into the DD (due diligence) phases or in-depth conversations, then they’ll fly out to meet who they will marry.
It saves founders so much time, so they can focus on actually building and delivering their product to their customers. And,
VCs can meet many more founders than they previously thought possible.
This has enabled investors to invest across multiple geographies and build communities that breathe outside of their central hub or THE central hub – formerly the SF Bay Area. Rather, we’re seeing the growth of startup communities around the nation and around the world.
2. There is more than one vehicle for early stage capital.
While meetings have gone virtual, the past year has led to a proliferation of financing options in the market as well. Capital as jet fuel for your company is everywhere. Founders now have unprecedented optionality to fundraise on their terms. And that’s great!
Solo capitalists
Individual GPs who raise larger funds than angels and super angels, so that they can lead and price rounds. The best part is they make faster decisions that funds with multiple partners, which may require partner buy-in for investments.
Rolling funds
With their 506c general solicitation designation, emerging fund managers raise venture funds faster than ever and can start deploying capital sooner than traditional 506b funds.
Micro- and nano-VCs
Smaller venture funds with sub-ten million in fund size deploying strategic checks and often leverage deep GP expertise. No ownership targets, and can fill rounds fast after getting a lead investor.
Equity crowdfunding
Platforms, like Republic and SeedInvest, provide community-fueled capital to startups. Let your biggest fans and customers invest in the platform they want to see more of in the future. With recent regulations, you can also raise up to $5 million via non-accredited and accredited investors on these platforms.
Accelerators/incubators
Short three-month long programs, like Y Combinator, 500 Startups, and Techstars, that write small, fast checks (~$100K) to help you reach milestones. Little diligence and one to two interviews after the application. Often paired with an amazing investor and/or advisor network, workshops, powerful communities, and some, even opportunity funds to invest in your next round.
Syndicates/SPVs
Created for the purpose of making one investment into a company a syndicate lead loves, syndicates are another ad hoc way of raising capital from accredited investor fans, leveraging the brand of syndicate leads and deploying through SPVs. Or special purpose vehicles. I know… people in venture are really creative with their naming conventions. In turn, this increases discoverability and market awareness for your product.
SPACs and privates are going public again
Companies going public mean early employees have turned into overnight millionaires. In other words, accredited investors who are looking to grow their net worth further by investing in different asset classes. Because of the hype, investing in venture-scale businesses tend to be extremely lucrative. These investors also happen to have deep vertical expertise, high-value networks, as well as hiring networks to help startups grow faster. More investors, more early stage capital.
Growth and private equity are going upstream
Big players who usually sat downstream are moving earlier and earlier, raising or investing in venture funds and acceleration programs to capture venture returns. And as a function of such, LPs have increased percent distributions into the venture asset classes, just under different names.
Pipe
Pipe‘s existed before the pandemic, but founders have turned their eye towards different financing options, like Pipe. They turn your recurring revenue into upfront capital. Say a customer has an annual contract locked in with you, but is billed monthly. With Pipe, you can get all that promised revenue now to finance your startup’s growth, instead of having only bits and pieces of cash as your customers pay you monthly. Non-dilutive capital and low risk.
3. There are only two types of capital: Tactical capital and distribution capital.
There’s an increasingly barbell distribution in the market. Scott Kupor once toldMark Suster that: “The industry’s gonna bifurcate. You’re going to end up with the mega VCs. Let’s call them the Goldman Sachs of venture capital. Or the Blackrock of venture capital. And on the other end, you’re going to end up with niche. Little, small people who own some neighborhood whether it’s video, or payments, or physical security, cybersecurity, physical products, whatever. And people in the middle are going to get caught.”
Those “little, small” players have deep product and go-to-market expertise and networks. Their checks may be small. But for an early stage company still trying to figure out product-market fit, the resources, advice, and connections are invaluable to a startup’s growth. They’re often in the weeds with you. They check your blind side. And they genuinely empathize with the problems and frustrations you experience, having gone through them not too long ago themselves. Admittedly, many happen to be former or active operators and/or entrepreneurs.
On the flip side, you have the a16z’s and Sequoias on their 15th or 20th fund. Tried and true. Brilliant track record with funds consistently north of 25% IRR. Internal rate of return, or how fast their cash is appreciating annually. LPs love them because they know these funds are going to make them money. And as any investor knows, double down on your winners. More money for the same multiples means bigger returns.
The same is true for historical players, like Tiger, Coatue, and Insight, who wire you cash to scale. They assume far less risk. Which admittedly means a smaller multiple. And to compensate for a lower multiple, they invest large injections of capital. By the time you hit scale, you already know what strategies work. All you need is just more money in your winning strategies.
You find product-market fit with tactical capital. You find scale with distribution capital.
Product-market fit is the process of finding hype. When you stop pushing and start finding the pull in the market. Scale is the process of manufacturing hype.
The bear case
But there are downsides to hype. Last month, Nikhil, founding partner at Footwork, put it better than I ever could.
If I could add an 8th point to Nikhil’s analysis, it’d be that investors in today’s market are incentivized to “pump and dump” their investments. Early stage investors spike up the valuations, which leads to downstream investors like Tiger Global, Coatue, Insight, and Softbank doubling down on valuation bets. Once there’s a secondary market for private shares, early stage investors then liquidate their equity to growth investors who are seeking ownership targets, or just to get a slice of the pie. This creates an ecosystem of misaligned incentives, where early stage investors are no longer in it for the long run with founders. Great fund strategy that’ll make LPs happy campers, but it leaves founders with uncommitted, temporary partners.
Sundeep Peechu of Felicis Ventures has an amazing thread on how getting the right founder-investor fit right is a huge value add. And getting founder-investor fit takes time, and sometimes a trial by fire as well. After all, it’s a long-term marriage, rather than a one-night stand. Those who don’t spend enough time “dating” before “marriage” may find a rocky road ahead when things go south.
By my count, ~30% of Felicis companies that have done well had trouble raising Series As in some fashion.
As an example, Matterport which went public last week had little appetite at the A. Non-recurring revenue, hardware business and selling to real estate was a triple whammy.
On a 9th point, underrepresented and underestimated founders are often swept under the rug. In a hype market, VCs are forced to make faster decisions, partly due to FOMO. With faster decisions, investors do less diligence before investing. Which to the earlier point of misaligned incentives, has amplified the already-existing notion of buyer’s remorse.
When VCs go back to habits of pattern recognition, they optimize for founder/startup traits they are already familiar with. And often times, their investment track record don’t include underrepresented populations. To play devil’s advocate, the good news is that there is also a simultaneous, but comparatively slow proliferation of diverse fund managers, who are more likely to take a deeper look at the problems that underestimated founders are tackling.
What kind of curve are we on?
When many others seem to think that this hype market will end soon, last week, I heard a very interesting take on the current venture market in a chat with Frank Wang, investor at Dell Technologies Capital. “VCs have been mispricing companies. We anchor ourselves on historical valuations. But these anchors could be wrong.
“We’re at the beginning of the hype and I don’t see it slowing down. VC has been so stagnant, and there hasn’t been any innovation in venture in a long time. Growth hasn’t slowed. And Tiger [Global] and Insight [Partners] is doing venture right. Hypothetically speaking, if you invest in everything, the IRR should be zero. They are returning 20% IRR because they seem to have found that VC rounds are mispriced. So, there can be an arbitrage.
“There will be a 20% market correction in the future, but we don’t know if that’s going to happen after 100% growth, or correct then grow again. The current hype is just another set of growing pains.”
Part of me is scared for the market correction. When many founders will be forced to raise flat or down rounds. The fact is we haven’t had a serious market correction since 2009. It’s going to happen. It’s not a question of “if” but rather “when” and “how much”, as Frank acutely points out.
Investors who deploy capital fast win on growing markets – on bull markets. Or investors who deploy across several years, or what the afore-mentioned Mark Suster defines as having “time diversity“, who win on correcting markets – bear markets. Think of the former as putting all your eggs in one basket. And if it’s the winning basket, you’re seen as an oracle. If not, well, you disappear into obscurity. Think of the latter as diversifying your risk appetite – a hedging strategy. More specifically, (1) being able to dollar-cost average, and (2) having exposure to multiple emerging trends and platforms. You’re not gonna lose massive amounts of capital even in a bear market, but you also will be losing out on the outsized returns on a bull market.
Only time will tell how seriously the market will correct and when. As well as who the “oracles” are.
In closing
At the end of the day, there are really smart capital allocators arguing for both sides of the hype market. Like with all progress, the windshield is often cloudier and more muddled than the rearview mirror. As Tim Urban once wrote, “You have to remember something about what it’s like to stand on a time graph: you can’t see what’s to your right.“
And as founders are going to some great term sheets from amazing investors, I love the way Ashmeet Sidana of Engineering Capitalframes it earlier this year. “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.”
Whether you, the founder, can live up to the hype or not depends on your ability to find distribution before your competitors do and before your incumbents find innovation. Unfortunately, great investors might help you get there with capital, but having them on your cap table doesn’t guarantee success.
Nevertheless, the interpretation of hype is always an interesting one. There will continue to be debates if a market, product, or trend is overhyped or underhyped. The former assumes that we are on track for a near-term logarithmic curve. The latter assumes an immediate future looking like an exponential curve. The interpretation is, in many ways, a Rorschach test of our perception of the future.
Over the course of human civilization, rather than an absolutely smooth distribution, we live something closer to what Tim Urban describes as:
If the regression line is the mean, then we’d see the ebbs and flows of hype looking something like a sinusoidal function. As Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.”
It won’t be a smooth ride. The world never is. But that’s what makes the now worth living through.
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There is an incredible wealth of people in this world who self-proclaim to have insights or secrets to unlocking insights. From parents to teachers to the wise soul who lives down the street. From coaches to gurus to your friendly YouTube ad. To mentors. To investors. While there are a handful who do have incredibly insightful anecdotes, their stories should serve as reference points rather than edicts of the future. Another tool in the toolkit. No advice is unconditionally right nor unconditionally wrong. All are circumstantial.
After all, a friend once told me: All advice is autobiographical.
The same is true for anything I’ve ever written. Including this blogpost in itself.
Over the past two weeks, as a first-time mentor, I’ve had the incredible fortune of working alongside and talking to some amazing founders at Techstars LA. At the same time, I was able to observe some incredible mentors at work. And in this short span of time so far, I’ve gotten to understand something very acutely. The dichotomy between mentors and investors. For the purpose of this blogpost, I’m going to focus on startup mentors, rather than other kinds of mentors (i.e. personal mentors). Although I imagine the two cohorts of mentors are quite synonymous.
While the two categories aren’t mutually exclusive, there are differences. A great mentor can be a great investor, and vice versa. But they start from two fundamentally different mindsets.
Investors/mentors
An investor tries to fit a startup in the mold they’ve prescribed. A mentor fits themselves into the mold a startup prescribes.
An investor thinks “Will this succeed?” A mentor thinks “Assuming this will succeed, how do we get there?”
An investor starts with “Why you?” A mentor starts with “Why not you?”
An investor evaluates how your past will help you get to your future. A mentor helps you in the present to get to your future.
An investor has a fiduciary responsibility to their investors (i.e. LPs). A mentor doesn’t. Or a mentor, at least, has a temporal responsibility to their significant other. Then again, everyone does to the people close to them.
An investor will be on your tail to hold you accountable because they’ve got skin in the game. A mentor might not.
You can’t fire your investor. You can theoretically “fire” your mentor. More likely, you’re going to switch between multiple mentors over the course of your founding journey.
An investor has a variable check size-to-helpfulness ratio. Who knows if this investor will be multiplicatively more helpful with intros, advice, operational know-how than the size of their check? A mentor has theoretically an infinite CS:H ratio. Check size, zero. Helpfulness, the sky’s the limit.
It’s also much harder to find a mentor than an investor, outside of startup communities, like On Deck and Indie Hackers, and acceleration and incubation programs, like Y Combinator and Techstars. Frankly, being a mentor is effectively doing free consultations over an extended period of time. And if you’re outside of these communities, the best way to bring on mentors is to bring them on as advisors with advisor equity. I would use Founder’s Institute’s FAST as a reference point. And Tim Ferriss‘ litmus test for bringing on advisors: If you could only ask 5-10 very specific questions to this person once every quarter, would they still be worth 0.5% of your company without a vesting schedule?
In closing
As I mentioned above, being a mentor and an investor isn’t mutually exclusive. The best investors are often incredible mentors. And some of the greatest mentors end up being investors into your startup as well. Having been in the venture world for a while, I’ve definitely seen all categories on this Venn diagram. Sometimes you need more of one than the other. Sometimes you need both. It’s a fluid cycle. And for the small minority of venture-scalable startups, it’s worth having both.
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Founders often ask me what makes a VC say yes. Or what they need to do for a VC to say yes. Or what they need to do for me to say yes. TL;DR: it depends. On firm, partner, thesis, active conversations, stealth investments, next fund fundraising schedules, reserve ratios, implicit biases, and more. In sum, a million reasons. And even if I knew all the above, I still can’t guarantee a term sheet.
So I can’t say what’ll guarantee a VC yes. A term sheet. If I could, I’d be the one writing them. Nevertheless I do my best to help brilliant founders get funded. On the flip side, here’s what aren’t educated guesses, but guarantees. Or as close as one can get to a guarantee. A guaranteed no. An anti-playbook, if I might call it that. If it doesn’t help, I hope, at the very minimum, it provides you a few minutes of entertainment.
Not treating me as a human. This is less of a reason for me to get myself worked up. There are discriminatory, dismissive, bigoted people in the world. I get it. This is more of a problem for the founder when they’re looking to scale the team. Being a dick limits your ability to grow and/or empathize with the market. If you’re fine with treating me this way, then you’re definitely going to not bat an eyelid with other future hires, team members, investors, and customers. Equally true for any VCs/angels/investors out there.
Badmouthing others. This is more of a personal turnoff. We’re all intellectuals here. And it’s okay to have differing opinions of the world. But it’s not okay to talk behind others back. If you’re gonna badmouth others, I imagine the exact same for anyone else who gets on your bad side for whatever reason, including myself. Practice good social hygiene.
Complaining about your team/product. Complaining is a bit more nuanced. It’s fine from time to time, we’re human. I don’t expect you to be the perfect human, but a first meeting with me, as with any investor, is a first date. I want to hear about the bigger picture, the vision, the dream. Impress me. If you have time to complain during a 30-minute meeting, you’re probably not spending your time wisely. And if this is an intro meeting, you have yet to build up your social rapport with me to complain. Being frustrated about the market is fine. Being honest, introspective, and vulnerable is also fine. Your mileage may differ for the last part, but I love candid founders.
Lying. That goes without saying, if you’re lying about numbers or if I somehow find out that you are, then no. If you don’t know, you don’t know. If your numbers aren’t pretty, admit it. While I might not be able to help you get funded, I’ll do my best to help. If you don’t know something, admit it as well. And find out after. Going back to the earlier point, I love candid founders who have a bias to action.
Having an exit strategy slide. This is more true for larger $100M+ funds I send deals to. Having an exit makes sense for angels, and smaller funds, but larger funds need to look for fund returners and outsized winners, and an exit of XX/XXX million is not sexy at all.
Crazy, but not crazy and reasonable. This one is a new one, inspired by PG. It’s fairly rare, since I try to avoid putting myself in situations with crazy, especially cantankerous people. But it happens. If by any chance, you know your idea might err on the side of crazy, walk me through the logic of how you got there. Don’t just tell me “It makes sense to me” or “I know the industry better than you do.”
Lack of focus. It’s great if you want to do a million things, but saying you want to focus on everything means you’ll end up focusing on nothing. A lack of focus shows a lack of priorities. Focus and be able to back up why are you focusing on this at this point in time. I love Phil Libin‘s 4-year plan defined by one word for each year forward. You can find that plan here and here.
Asking for an intro without any context. “I saw you were connected with X on LinkedIn. Can you introduce us?” If that line pops up in the first 30 seconds of our first conversation, I’m running away. I need to know who you are, what you’re building, why it matters, and hell, why would this person you want to get introduced to is a good use of yours and their time. Build a relationship first. Don’t lead with the transaction. I am not an ATM machine. Neither are other people – investors or not.
Asking me to sign an NDA. Early on in my career, I admittedly signed a number of NDAs sent to me by founders. I love connecting brilliant people together, but if I have to get your permission each time I pass it to an investor or a potential advisor, it’s too much work for me. Frankly, I have other priorities. I get it; I’m a stranger. But I hope you can at least trust that I won’t run away with your idea or give it to a competitor. You have my word. If that isn’t enough for you, that’s fine. I’m just not your guy.
Asking the VC to do their work. “When we raise X dollars, we will do Y tasks.” I usually follow up on that statement with “What have you done so far to accomplish Y?” My least favorite founders are the ones who say something along the lines of, “We’ll worry about that when we get there.” Or “We were hoping our future investors will find someone for us.” We don’t expect you to know everything and everyone, nor do everything right, but we expect you to do some legwork to show you are learning. Show us that you’ve been scrappy, resourceful, and used what you had available to you.
Lack of self-awareness. “Where are you weak at?” If your answer is “Nothing” or “I’m good at everything”, that sends alarm bells to any investor. Which might also lead to a secondary question of “What do you need me for then?” A close cousin is one of my favorites: “What is your competition doing right?” If your answer is also “Nothing”, then you might need to do some market research and reconnaissance again. There’s a reason other customers are using your competitors’ and incumbents’ products. Find it out. On top of what they’re weak at. There’s a romanticized concept in Silicon Valley that every founder needs to be like Jobs with his reality distortion field. While it’s true you need to be able to help others see the future you’re seeing, you also have to deeply understand the realities of today of what’s stopping you from getting there.
Nothing’s changed since the last time we spoke. Investors invest on potential. A bet we make in a company is a bet that it has a chance to be as big as X tech giant in your space. Your ability to meet the demand in the market scales with the number of investment dollars in your company. That said, we expect movement. We expect deltas. And if your product really is inevitable in the market, you should be making progress with or without injections of capital. The latter, just at a slower pace. Venture capital is impatient capital. Also understand, 99% of businesses in the world don’t need VC dollars and operate incredibly well without venture investors.
You’re not obsessed about the product and the market. Building a scalable startup requires obsession. It requires you to lose sleep. You can’t just check out at 5 or 6pm. While I can’t measure that in the first meeting, a close proxy is how well you know the table stakes metrics of your business – net retention, CAC, LTV, growth, revenue, engagement rates – and more. In fact, obsessed founders usually tell me that they’ve already thought of and tried out the first 10 ideas I think of. Moreover they bring me back the results of their discovery. Obsession is contagious.
I have no idea what your product is or does. This is simple. If I walk out of our meeting and I still have no idea how to describe your product to others and why we need it in the world now, there’s no way I can confidently pitch your startup to the partners. Piggybacking off of the #14, if you’re obsessed about the product, you’ve told your story a million times and a million ways already. A few of which should have already resonated with select audiences. And even if it wasn’t to investors, you must’ve already told that same story to your customers. As a CEO/founder, you are the first and most important salesperson. In many ways, it means you have to push the sale. You have to get your customers to take action. I, admittedly, am a potential customer. A recipient of your sales strategy. And if I don’t get your pitch, it’s likely others might not as well. That said, for certain industries, like deep tech or biotech, I’m really, really dumb. So take my thoughts with a grain of salt.
This post was inspired by Jason Lemkin‘s blogpost, which I highly recommend checking out.
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Earlier this month, I saw quite the thought-provoking tweet from Ashley Brasier.
“I took a cue from General Patton, who thought that the greatest danger was not that the enemy would learn his plans, but that his own troops would not.”
-Trader Joe (aka Joe Coulombe) on the need to sell to everybody – not just to your customers, but also to your employees
Whether it’s a function of confirmation and availability bias or lesser-known leadership secret, I saw similar themes pop up everywhere from Phil Libin of Evernote and General Catalyst fame to Kelly Watkins at Abstract to Colleen McCreary at Credit Karma. And because of that, I thought it was a topic worth double-clicking on.
There’s the age-old saying: Leaders lead. Managers manage. And a CEO is frankly a marriage of both. While there are the canonical examples of Musk and Jobs, a CEO both leads with her/his vision but also manages expectations.
“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. It’ll shake it apart. In tech the hype cycles tend to be pretty intense. At mmhmm we are very much in the Venn diagram of two hype cycles. There’s a general hype cycle around video, which is going to be way up and down over the next few years. […]
“There is also a hype cycle around early and mid stage startup investment. It’s super volatile, now more than ever, because of potential changes in the tax laws, interest rates, and inflation. So you’ve got these two very volatile areas, video and startup investment, and we are sitting right in the bull’s eye of that. This means that my most important job is to isolate the team so that we don’t float based on the ups and downs of the current. Make sure we have enough mass and momentum to go through it, meaning we don’t change what we do based on the hype cycle.
“And that takes capital, which is why we have to raise some capital to do this. It also takes understanding of where you’re trying to go and knowing where you’re going is not based on the hype cycle. You have to have a long term conviction about that. You may be wrong. The conviction could turn out to be wrong, but you’re not going to know that based on day to day fluctuations of excitement or month to month. So have a clear direction of where you are going and then make sure the ship has enough momentum so it doesn’t matter what the waves are doing, you’re still going relatively straight.”
Kelly Watkins, CEO of Abstract, also said in an interview: “People might think the job of the CEO is to make a lot of decisions, but I see my job as setting the tone for the company. People look to leaders to gauge their own reactions in a situation. So if I’m running around like a headless chicken or my tone is on a really high frequency, people graft off of that.”
Similarly, I wrote an essay a year and a half ago. On Sun Tzu and how a leader’s job is setting the tone for her/his company. In short, your team follows you and is a direct function of:
How much they trust you, and
How well they understand a leader’s commands (the why, the how, and the what)
As a caveat, one might disagree with the what, and maybe the how, but a strong team believes in the same why.
In another interview, Colleen McCreary of Credit Karma once said: “Founders, in particular, are always looking to move onto the next thing, but people don’t come along the journey that quickly. So you have to slow down to be consistent, stay on message and tell employees how they’re going to define success. Because if you don’t focus on what really matters, people will hang their hat on an IPO or the stock price as being the determinant of success, and it’s just hard to unwind.”
And why does all this matter?
As Ben Horowitz wrote in his book What You Do Is Who You Are, “Culture is a strategic investment in the company doing things the right way when you are not looking.”
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Though I’ve spent a minute in venture capital, I’ve never raised a fund. So I’m not going to pretend I know everything. Because I don’t. Every single idea here is one I’ve borrowed from someone with more miles on their odometer in this industry.
When does an emerging fund manager turn into an emerged fund manager? I’ve always heard the general rule of thumb is by Fund III. But in all honesty, I took that for granted and never knew why.
“The other [successful trait in fund managers] that we see a lot of is really having a defined strategy, and really sticking to it and executing on it. Straying away from your strategy is one of the best ways to create issues for you down the road. Yes, it might be successful and it might create returns for you today, but it will create difficulties down the road when you’re looking to raise that next fund. Because that’s what you’re selling to me at the end of the day.
“Fund I, basically what you’re selling is a promise. You’re selling a dream. You’re selling the concept around the strategy.
“Fund II, you’re selling the execution on that strategy. Depending at what stage you’re investing at, for the most part, you’re not going to have returns to be pointing to. You’re going to be selling your ability to execute on that strategy.
“Fund III, you’re selling the returns on Fund I.”
Samir then follows up: “Fund III’s are the hardest [to raise] because by then, it’s four, five, six years in and you have to show something. It is return-based.”
Phil Libin, co-founder and CEO of All Turtles, mmhmm, and Evernote, and former Managing Director at General Catalyst, in his recent interview with Tyler Swartz, said: “We don’t need scale to make a good product, in fact, it’s a distraction if you focus on scale prematurely.” In venture, your fund is your product. And like an entrepreneur, an emerging manager shouldn’t worry about scaling the size of their fund in the Fund I and II days. Stay small. Focus on delivering on the strategy and promise you made to your LPs. After all, it’s much easier to return a $10M fund than it is to return a $100M fund. Especially since a 3-5x multiple means you’re just average these days. As Mike Maples Jr. of Floodgate says, “Your fund size is your strategy.”
By the time you get to Fund III, you now have a track record of financial return (or not). And by then, you and the market should have a good idea if you have a longer time horizon in venture or not.
And even if not, many former VCs go back to the operating side of the table, armed with the knowledge, skills, and relationships they gain on the VC side.
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By far, this is one of my favorite and most recurring questions over the years. And not just in the scope of founders, I’ve asked the same question for a multitude of titles:
Investors
On a similar note, I’ve asked investors: What’s the difference between a great investor and a great board member?
And it yielded some insightful answers.
Leaders
Managers
Executive hire
Marketers
Chefs (both since I was co-hosting a cooking competition in 2019 and 2020, but also for culinary tips to improve my own cooking)
Artists
Software engineers (when you’re hiring folks who are in a field you don’t have a strong competence in)
Auto mechanics (yes, when you drive a 2009 mommy van, it visits the shop more often than you’d like, but also funnily enough, one of the most reliable cars)
Friend versus best friend
Life partner
… just to name a few.
I love this question since its counterpart is often asked: What is the difference between a bad and a good founder? Unfortunately, the “bad vs good” dichotomy usually ends up being a vanity question. You don’t need a trained eye and years of experience for the average person to differentiate between a bad and a good. If you’re reasonably logical, you can tell the difference between a bad and a good in any industry. There are a few exceptions, like art, especially modern or abstract art. But the case holds for most other cases.
On the flip side, to be able to differentiate:
The good – top quartile (25%)
The great – top decile (10%)
And the epic – top percentile (1%)
… becomes increasingly more and more difficult the higher up you’re going. As the power law and the Pareto principle goes, the top 20% accounts for 80% of the results. In other words, the small top-performing minority account for the vast majority of the returns. For instance, the top 20% of VCs account for 80% of the industry’s returns. And the higher you go up in differentiation – from good to great to epic – the smaller the delta in inputs between the tiers. There is a far smaller difference in inputs between the top 1% and the top 2%, compared to the same percentile difference between the 50th and the 49th percentile.
Having said that, to a layperson, the most insightful answer you can get that will save you years of mistakes and failures and industry know-how is the differential between the top performers. As such, usually, I get answers that would have otherwise required a keener eye, much smarter brain, a more resilient body, and a more differentiated path than I have.
For example, here are some answers I’ve learned over the years that differentiate the good from the great:
VP Sales hire. Their ability to hire two rock-star directors from their network within 1-2 months of being hired.
Chef. Their morning routine, starting from how they set their palate in the morning to how they build a robust supply network.
Founder. Their ability to raise their team members’ potential and how close of a pulse they keep to their operating expenses/burn rate.
Manager. How radically candid they can be.
Of course, it’s one thing to know what are the differentiators and another thing to understand the differentiators. The latter requires you to internalize and cut your teeth so that you can understand the true value behind the answers to the above question.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
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For today’s blogpost I’m going to try something new. It was requested by a reader of this blog, which for anonymity’s sake, I’ll call P. For those who live a busy life, prefer audio over text, or just find my font choice appalling, I thought I’d record myself reading the below text. Think of it like the audiobook version of this essay.
If you love or hate this format, I’d love to hear what you think. Feel free to comment below, or DM me across any of my channels. Any and all feedback welcome with open arms.
Over the years, I’ve used many different versions of the question: What would you do if you knew you would fail? Or, What would you do regardless of the outcome of the endeavor? And as long as the reason for doing so contains any combination of:
Skill acquisition
Invaluable experience
Or relationship/friendship that I value more than the project itself
… it’s a “Yes” for me. The “Yes” becomes an exploration of depth. An optimization strategy for my strengths. My superpowers. It’s something I learned from quite a few of my mentors over the years – both in an official and unofficial capacity.
Subsequently, I’ve had this belief for a long time, which will probably cause some uproar somewhere, that we shouldn’t optimize our life around reducing our weaknesses. But rather, focus our time on maximizing our strengths. That doesn’t mean we shouldn’t ever work to ameliorate our incompetencies. But:
Just enough that we meaningfully reduce our risk of ruin. Any more, there are diminishing returns over time. Forgiving my esoteric economic jargon, we should only work on our weaknesses so that we don’t lose our ability to survive. For example, if you don’t know how to cook, you shouldn’t aim to be the best Michelin-starred chef in the world, but just enough so that you don’t starve to death. Assuming your goal in life isn’t in the culinary world.
Mitigate our weaknesses that are the most adjacent to our core strengths. For instance, in my opinion, one of my greatest relative strengths is my ability to ask questions. I am by no means the best, but compared to the rest of my skills, this is one I find myself shining in a bit more than my peers. Which effectively meant I was always interested in what others were up to and how they thought. A mentor figure told me years ago that it didn’t matter how interested I was in others, no one had a reason to be interested in me. Which meant that one of my greatest and most adjacent weaknesses was to be interesting.
People who have superpowers often carry super-weaknesses. The greater their superpower, usually the greater their weakness. Humans aren’t great multitaskers. We were never designed to be. If you’re saying yes to one thing, you’re saying no to a hundred other things. Are you willing to shoulder that opportunity cost? Sometimes you are, but be very deliberate about it.
Fairly recently, I was presenting to an amazing cast of board members in a board meeting. There was a general consensus around the fact that we lacked focus as an organization, yet we were sitting on a wealth of talent. To which, one of our board members redirected us to Steve Jobs’ infamous speech when we returned to Apple in 1997. One line in particular stood out to me: “Apple is executing wonderfully on many of the wrong things.“
He follows up to say: “The ability of the organization to execute is really high though. I mean, I’ve met some extraordinary people at Apple. There’s a lot of great people at Apple. They’re doing some of the wrong things because the plan has been wrong.”
Taking a step back, as humans, as working professionals, as entrepreneurs in each and every one of our own rights, we often “execute wonderfully on many of the wrong things.” Often times, that’s on our own weaknesses, rather than our strengths.
Living in a simulation
Imagine that we live in a simulation – an MMORPG. Or, massively multiplayer online role-playing game. We start off with a finite number of stat points. The starting number of stat points varies from person to person, depending on your socio-economic class and your given genetic code. You can allocate those stat points however you want.
You can spread them all out evenly, where you’ll never have any true weakness, but neither any true strength. You’ve hedged your risk of ruin. It’s going to be really hard for you to lose, but you can never really win.
On the flip side of the token, you can minmax your build, using gaming terminology. Double down on a stat, to achieve the equivalent of a superpower, compared to your peers. But often times, if you are maximizing on a superpower, you’ve minimized your proficiency in another area. Luckily, as in any game, and as in reality, you can pick up tools and make friendships along the way that will supplement your weaknesses with their strengths.
Of course, as all analogies go, there are exceptions. But as far as I know, there are far fewer exceptions than those that fit into this analogy. And, technically, our ability to level up is infinite. The only upper limit is that, like everyone else, we have 24 hours in a day and a finite number of years to live.
So, where am I going with this?
Super-tools for (super)weaknesses
What do you not want or don’t care to have a superpower in? For the skills and tasks you use everyday, but don’t care to be the best in the world for, leverage software and tools to automate your work, so you only need to spend the minimal amount of time or energy to make sure it doesn’t become a stressor for your day. In the above gaming analogy, you use items to compensate for specific stat deficiencies. The more efficient the “item”/tool, the less energy you need to expend to make up for a super-weakness.
Here are the tools I use to supercharge my day, so I can spend more time enhancing my superpowers and less time mitigating my super-weaknesses.
Descript
Descript makes me feel like a god. As much as I love Adobe Premiere Pro, it had an incredibly high learning curve. But once you got it, they have some of the most robust tools on the market. On Descript, I love how I can edit an audio or video clip just by deleting words in the transcript. And if I mess up, and I do quite a bit, I can always voiceover in the editing process to make myself sound smarter than I actually am. Even better, I can drag and drop music, video and sound effects. If you’re listening to the audio version of this essay, you might have noticed I don’t have any of the afore-mentioned effects. The goal here was just to get you my thoughts as quickly as possible, without trapping myself in audio perfectionism.
If the Adobe Creative Suite is the endgame, Descript is the early game. And it helps you ace it remarkably well.
Notion
Notion is a dark horse (for me). I’ve seen startup data rooms, personal blogs, internal wikis, and even VC investment theses and fund strategies being produced on Notion. It always seemed like a nice-to-have. In all fairness, I didn’t give it the benefit of the doubt it deserved until late last year. Its greatest ability isn’t the ability to create a robust website or the prettiest blog. Its greatest ability is that it gets people to put ideas and thoughts on paper as quickly as possible. The barrier to entry is so low that its greatest competitors are note-taking apps, like Evernote or Google Keep, for early users. Then, you can go from notes to fully functional site in minutes.
And ever since, I’ve been a geek over it. There’s this great thread on Twitter by @empirepowder about all the applications you can build using Notion extremely quickly – from creating a blog from scratch to publishing a course to tracking analytics on your page to the ultimate tweet tracking tool.
For many of us, the hardest part about doing anything is starting. Notion solves that.
Undock
Take scheduling as another example. I know very few people, if at all, who want to be the best scheduler in the world. I know I don’t. But I find myself spending an undeserving amount of time trying to schedule meetings, rather than actually having meetings or being productive. Enter Undock. “The fastest way to find time to meet with anyone.” That’s from their website. And it’s true. When I’m in my Gmail scheduling calls/meetings with founders or investors, I never leave my email tab nor do I ever touch my mouse. No matter how many people are on the email thread, I can find time for a meeting, on average, in two seconds. That’s no joke. I timed myself.
Meetings are about communication, connection and collaboration. But maybe you’re just exhausted from scheduling them. Look, Undock is actually not “just another scheduling app”. We’re a super calendar and we come in peace.
Having and empowering others to have superpowers is literally in their DNA.
Superhuman
I’ve heard many great things about Superhuman, and about a quarter as many bad things about the platform. Superhuman’s claim to fame is being able to get you to inbox zero via one of the most seamless and fastest email experiences ever – through shortcut keys, follow-up reminders, and social media insights just to name a few. Their user interface makes it incredibly easy to respond from one email to the next, even when you’re offline. They have this 100ms rule, where every interaction should be faster than 100ms to make communication feel instantaneous. And they do deliver.
Many of its customers include investors and founders. Busy people who have more unread emails in their inbox than they care to count. Most of the bad reviews I hear from friends and colleagues are that $30/month is just too expensive.
There are many ways to look at the $30 price tag. It’s $12 more than Netflix’s premium plan, and Netflix serves you new content you might not have access to otherwise. Superhuman serves you the same content that would have been yours anyway, just in a new light. On the flip side, $30/month is $1/day. Less than a cup of coffee a day, assuming you buy your coffee every day. But even if you only bought $3 coffee twice a week, $30/month would still be cheaper.
Or in a different lens, Superhuman’s core audience – founders, investors, busy people who have hundreds of emails a week, if not a day – their time is worth at or more than $30/hour. So, if on a 160-work month, Superhuman collectively saves their customers more than an hour of time every month, then it’s worth it to them.
The way I look at it, it’s a bargain. But I don’t use it. Why? It’s not because it’s too expensive. Neither because I don’t have enough emails to go through. But rather, I happened to optimize my email workflow before I even heard of Superhuman. I’ll save that topic for a later blogpost. But if you don’t have a way to get to inbox zero (unless you don’t care. I have a number of friends who have tens of thousands of unread in their inbox. That scares me)… but if you do care about the piling mound of emails, Superhuman’s really got it in the bag.
In closing
And maybe this post might serve helpful in reframing on how you can live your most optimal life. Supercharge your strengths. And find the best tools and mental models you can to protect your downside. It’s okay if you’re not the best at the latter; you don’t have to be.
I mentioned a few of the tools I use, but your mileage may and probably should vary.
While there are tools out there that supercharge your ability to execute and perform, equally so, you’ll find there are amazing people out there that complement your weaknesses. Friends, colleagues, co-founders, life partners. In the words of Steve Jobs, find and meet “extraordinary people.” To do so, as my mentor told me, you’ll have to be interested and interesting.
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I was reading Sammy Abdullah of Blossom Street Ventures‘ Medium post not too long ago about the value of auto-price increases in a context I’ve never really thought about. Quoting one of his portfolio companies’ founders:
“We started including auto-price increases in our renewals at the start of this year and it’s been surprisingly effective. Our starting point is 10% and we get it more often than not; some customers negotiate us down to the 3–5% range.
“The automatic price increases are a beautiful thing because they give us leverage:
we can trade an automatic price increase for an earlier renewal, longer contract period, or upselling to more features; and
when we do waive price increases, the customer walks away satisfied. They feel like they’re winning.”
It’s a great way to win on net retention. But as I’ve written about before, the net retention equation is comprised of the upgrades, downgrades, and churn variables.
Or convert more users into customers, if you’re running a freemium model
Reduce the number of customers downgrading to lower tiers
Reduce churn – customers leaving your platform
Some permutation of the above variables
Leveling up upgrades
Shivani Berry, founder of Ascend’s Leadership Program, once wrote: “Buy-in is the result of showing your team why your idea achieves their goals.” In a similar sense, buy-in is the result of showing your customers why your product achieves their goals. The best thing is that their goals will change over time. As so, your product must contain increasingly more value to your customers as they level up in their lifecycle. As they grow, you have product offerings that grow with their needs.
Take, for example, one of my favorite startups these days, Pulley, a cap table management tool for startups. Don’t worry, this isn’t a sponsored blogpost. Although it’d be nice if it was. I have no chips in the bag; I just like them. They have three tiers of pricing. The lowest for startups with 25 stakeholders. The middle for startups with 40. And the highest is for larger businesses.
Why 25? The average seed-stage startup has about 25 stakeholders. Subsequently, top of mind for them is what SAFEs and convertible notes look like on their cap table and how to structure early equity pools.
As a startup levels up to 40 stakeholders, they’re probably jumping into their first priced round. As such, they’ll need a 409A valuation to appraise their fair market value, as well as finally putting together their first official board.
Every time founders raise another round of funding, the more complicated their cap table becomes. The more they need Pulley’s software. And it so happens, the less price sensitive they become. For Pulley, that means they can charge more as their customers have greater purchasing power.
You also always want an enterprise pricing tier, where pricing is custom. Don’t be afraid to charge more. As I mentioned in a previous essay, when Intercom was only charging IBM $49, an IBM exec once told the Intercom team, “You know, I go on a coffee run for the team that costs a lot more than your product. That’s why we’re wary of investing too much more in you. We just don’t see how you’re going to survive.” If it helps as a reference point, the median ACV (annual contract value) for public SaaS companies is $27,000.
Do note that the more you charge, the longer the sales cycle will be. For ACVs over $20K, expect 4-6 months of a sales cycle. For contracts over $100K, expect 6-9 months. Of course, the contrapositive would be that the lower the price point, the easier and faster it takes to make a decision.
Reducing downgrades and churn
I’ve been in love with Clayton Christensen’s “jobs-to-be-done” (JTBD) framework ever since I learned of it a few years ago. At the end of the day, you’re delivering value. Value in the form of doing a job. As Christensen says, “when we buy a product, we essentially ‘hire’ it to help us do a job. If it does the job well, the next time we’re confronted with the same job, we tend to hire that product again. And if it does a crummy job, we ‘fire’ it and look for an alternative.”
The better it can do the job your customer needs to get done, the more you can optimize for the variables in the net retention equation. Sunita Mohanty, Product Lead at Facebook, shared an amazing JTBD framework they use back at Facebook and Instagram:
When I… (context) But… (barrier) Help me… (goal) So I… (outcome)
Here’s another way to look at it:
What features should we have that would make our product great?
What features should this product have that would make it a no-brainer purchase for our customers?
The “no-brainer” part especially matters. And to be a “no-brainer”, you have to deliver the best-in-class. Your features have to solve a fundamental job that your customer is trying to solve. The difference between a “great product” and a “no-brainer” is the difference between a 5 out of 5-star rating and a 6-star out of a 5-star rating. Effectively, the outcome in Facebook’s JTBD framework exceeds the goal, which makes the barrier irrelevant. As David Rubin, CMO of The New York Times and former Head of Global Brand at Pinterest once said: “Your service shouldn’t lead with ‘saving money’. You must create an offering that is so compelling, it stands by itself in the consumer’s mind.”
In closing
At the end of the day, in the words of Alex Rampell, building a startup is “a race where the startup is trying to get distribution before the incumbent gets innovation.”
You’re in a race against time. You’re trying to reach critical mass and growth before your incumbents realize your space is a money-making machine. And growth comes in two parts: acquisition and retention. While many founders seemed to have over-indexed on acquisition over the last couple of years, the pandemic has reawakened many that retention is often times much more difficult to attain than acquisition. While it may not be true for every type of business, hopefully, the above is another tool in your toolkit.
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As I am co-leading a VC fellowship with DECODE (and here’s another shameless plug), a few fellows asked me if I had a repository of questions to ask founders. Unfortunately, I didn’t. But it got me thinking.
There’s a certain element of “Gotcha!” when an investor asks a founder a question they don’t expect. A question out of left field that tests how well the founders know their product, team or market. In a way, that’s the sadist inside of me. But it’s not my job, nor the job of any investor, to force founders to stumble. It’s my job to help founders change the world for the better. By reducing friction and barriers to entry where I can, but still preparing them as best as I can for the challenges to come.
I’m going to spare you the usual questions you can find via a quick Google search, like:
What is your product? And who is your target audience?
How big is your market? What is your CAGR?
What is your traction so far?
How are you making money? What is your revenue model?
And many more where those come from.
Below are the nine questions I find the most insightful answers to. As well as my rationale behind each. Some are tried and true. Others reframe the perspective, but better help me reach a conclusion. I do want to note that the below questions are described in compartmentalized incidents, so your mileage may vary.
Here’s to forcing myself into obsolescence, but hopefully, empowering the founders reading this humble blog of mine to go further and faster.
The questions
I categorize each of the below questions into three categories:
The market (Why Now)
The product (Why This)
And, the team (Why You)
Together, they form my NTY thesis. The three letters ordered in such a way that it helps me recall my own thesis, in an unfortunate case of Alzheimer’s.
Why Now
What are your competitors doing right?
This is the lesser-known cousin of “What are your product’s differentiators?” and “Why and how do you offer a better solution than your competitors?”. Founders are usually prepared to answer both of the above questions. I love this question because it tests for market awareness. Too often are founders trapped in the narratives they create from their reality distortion fields. If you really understand your market, you’ll know where your weaknesses are, as well as where your competitors’ strengths are.
There have been a few times I’ve asked this question to founders, and they’d have an “A-ha!” moment when replying. “My competitors are killing it in X and Y-… Oh wait, Y is our value proposition. Maybe I should be prioritizing our company’s resources for Z.”
Why is now the perfect time for your product to enter the market?
As great as some ideas are, if the market isn’t ripe for disruption, there’s really no business to be made here… at least, not yet. What are the underlying political, technological, socio-economical trends that can catapult this idea into mass adoption?
For Uber, it was the smartphone and GPS. For WordPress and Squarespace, it was the dotcom boom. And, for Shopify, it was the gig economy. For many others, it could be user habits coming out of this pandemic that may have started during this black swan event, but will only proliferate in the future. As Winston Churchill once said, “Never let a good crisis go to waste.”
A great way to show this is with numbers. Especially your own product’s adoption and retention metrics. Numbers don’t lie.
What did your customers do/use before your product?
What are the incumbent solutions? Have those solutions become habitual practices already? How much time did/do they spend on such problems? What are your incumbents’ NPS scores? In answering the above questions, you’re measuring indirectly how willing they are to pay for such a product. If at all. Is it a need or a nice-to-have? A 10x better solution on a hypothetical problem won’t motivate anyone to pay for it. A 10x on an existing solution means there’s money to be made.
Before we can paint the picture of a Hawaiian paradise, there must have been several formative volcanic eruptions. It’s rare for companies to create new habits where there weren’t any before, or at least a breadcrumb trail that might lead to “new” habits. As Mark Twain says, “History doesn’t repeat itself, but it often rhymes.”
Why This
What does product-market fit look like to you?
Most founders I talk to are pre-product-market fit (PMF). The funny thing about PMF is that when you don’t have it, you know. People aren’t sticking around, and retention falls. Deals fall through. You feel you’re constantly trying to force the product into your users’ hands. It feels as if you’re the only person/team in the world who believes in your vision.
On the flip side, when you do have PMF, you also know it. Users are downloading your product left and right. People can’t stop using and talking about you. Reporters are calling in. Bigger players want to acquire you. The market pulls you. As Marc Andreessen, the namesake for a16z, wrote, “the market pulls product out of the startup.”
The problem is it’s often hard to define that cliff when pre- becomes post-PMF. While PMF is an art, it is also a science. Through this question, I try to figure out what metrics they are using to track their growth, and inevitably what could be the pull that draws customers in. What metric(s) are you optimizing for? I wouldn’t go for anything more than 2-3 metrics. If you’re focusing on everything, you’re focusing on nothing. And of these 1-3 metrics, what benchmark are you looking at that will illustrate PMF to you?
For example, Rahul Vohra of Superhuman defines PMF with a fresh take on the NPS score, which he borrows from Sean Ellis. In feedback forms, his team asks: “How would you feel if you could no longer use the product?” Users would have three choices: “very disappointed”, “somewhat disappointed”, and “not disappointed”. If 40% or more of the users said “very disappointed”, then you’ve got your PMF.
Founders don’t have to be 100% accurate in their forecasts. But you have to be able to explain why and how you are measuring these metrics. As well as how fluctuations in these metrics describe user habits. If founders are starting from first principles and measuring their value metric(s), they’ll have their priorities down for execution. Can you connect quantitative and qualitative data to tell a compelling narrative? How does your ability to recognize patterns rank against the best founders I’ve met?
If in 18 months, this product fails. What is the most likely reason why?
This isn’t exactly an original one. I don’t remember exactly where I stumbled across this question, but I remember it clicking right away. There are a million and one risks in starting a business. But as a founder, your greatest weakness is your distraction – a line in which the attribution goes to Tim Ferriss. Knowing how to prioritize your time and your resources is one of the greatest superpowers you can have. Not all risks are made equal.
As Alex Soktold me a while back, “You can’t win in the first quarter, but you can lose in the first quarter.” The inability to prioritize has been and will continue to be one of the key reasons a startup folds. Sometimes, I also walk down the second and third most likely reason as well, just to build some context and see if there are direct parallels as to what the potential investment will be used for.
On the flip side, one of my favorite follow-ups is: If in 18 months, this product wildly succeeds. What were its greatest contributing factors?
Similar to the former assessing the biggest threats to the business, the latter assesses the greatest strengths and opportunities of this business. Is there something here that I missed from just reading the pitch deck?
What has been some of the customer feedback? And when did you last iterate on them?
I’m zeroing in on two world-class traits:
Open-mindedness and a willingness to iterate based on your market’s feedback. As I mentioned earlier with Marc Andreessen’s line, “the market pulls product out of the startup.” Your product is rarely ever perfect from the get-go, but is an evolving beast that becomes more robust the better you can address your customer’s needs.
Product velocity. How fast are your iteration cycles? The shorter and faster the feedback loop the better. One of the greatest strengths to any startup is its speed. Your incumbents are juggernauts. They’ll need a massive push for them to even get the ball rolling. And almost all will be quite risk-averse. They won’t jump until they see where they can land. Use that to your advantage. Can you reach critical mass and product love before your incumbents double down with their seemingly endless supply of resources?
Why You
What do you know that everyone else doesn’t know, is underestimating, or is overlooking?
Are you a critical thinker? Do you have contrarian viewpoints that make sense? Here, I’m betting on the non-consensus – the non-obvious. While it’s usually too early to tell if it’s right or not, I love founders who break down how they arrived at that conclusion. But if it’s already commonly accepted wisdom, while they may be right, it may be too late to make a meaningful financial return from that insight.
But if you do have something contrarian, how did you learn that? I’m not looking for X years of experience, while that would be nice, but not necessary. What I’m looking for is how deep founders have gone into the idea maze and what goodies they’ve emerged with.
Why did you start this business?
Here, unsurprisingly, I’m looking for two traits:
Your motivation. I’m measuring not just for passion, but for obsession and the likelihood of long-term grit. In other words, if there is founder-market fit. Do you have a chip on your shoulder? What are you trying to prove? And to whom? Do you have any regrets that you’re looking to undo?
Most people underestimate how bad it’s going to get, while overestimating the upside. The latter is fine since you are manifesting the upside that the wider population does not see yet. But when the going gets tough, you need something to that’ll still give you a line of sight to the light at the end of the tunnel. Selfless motivations keep you going on your best days. Selfish motivations keep you going on your worst days.
Your ability to tell stories. Before I even attempt to be sold by your product or your market, I want to be sold on you. I want to be your biggest champion, but I need a reason to believe in the product of you. You are the product I’m investing in. You’re constantly going to be selling – to customers, to potential hires, and to investors. As the leader of a business, you’re going to be the first and most important salesperson of the business.
What do you and your co-founders fundamentally disagree on?
No matter how similar you and your co-founders are, you all aren’t the same person. While many of your priorities will align, not all will. My greatest fear is when founders say they’ve never disagreed (because they agree on everything). To me, that sounds like a fragile relationship. Or a ticking time bomb. You might not have disagreed yet, but having a mental calculus of how you’ll reach a conclusion is important for your sanity, as well as the that of your team members. Do you default on the pecking order? Does the largest stakeholder in the project get the final say after listening to everyone’s thoughts?
Co-founder and CEO of Twilio, Jeff Lawson, once said: “If your exec team isn’t arguing, you’re not prioritizing.”
I find First Round’s recent interview with Dennis Yu, Chime’s VP of Program Management, useful. While his advice centers around high-impact managers, it’s equally as prescient for founding teams. Provide an onboarding guide to your co-founders as to what kind of person are you, as well as what kind of manager/leader you are. What does your work style look like? What motivates you? As well as, what are your values and expectations for the company? What feedback are you working through right now?
In closing
Whether you’re a founder or investor, I hope these questions and their respective rationale serve as insightful for you as they did for me. Godspeed!
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