Category: Startup

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We’re More Similar Than You Think: The Founder and the Funder

Last weekend, I tuned into Samir Kaji’s recent episode with LPs (limited partners). Not once, but twice. And as you might’ve guessed, was damn inspired by their conversation. The more I listened to it, the more synonymous the paths of a founder and an emerging manager (EM) seemed to be. Or what I call the entrepreneur and the entrepreneurial VC. If you’re a regular here, you’ll know I love writing about the intellectual horsepower of both sides of the table. But in this post, rather than delineating the two, I’d love to share how similar founders and funders actually are.

Surprises suck, but pivots are okay

On Samir’s podcast, Guy Perelmuter of GRIDS Capital voiced: “There’s only one thing that LPs hate more than losing money. It’s surprises.”

Be transparent. Be clear on your expectations, and steer clear of left hooks. As a fund, something I’ve heard a number of GPs and LPs say is don’t deviate on your thesis. LPs invest in you for your strategy. But as soon as you deviate from that initial strategy, you become increasingly unpredictable.

Take, for example, you go to a steakhouse and order steak. But they serve you sushi instead. If it’s not good sushi, obviously you’re not coming back. Not only did they surprise you, but it was also a poorly executed one. This goes in the column of one-star Yelp reviews.

But, say it was great sushi. You had one great dining experience and you’re a happy customer. Some time in the future, you think of getting sushi again. And you remember what a great experience you had at the steakhouse. So you go back to the steakhouse, only to realize it was a fluke and the sushi wasn’t like the last time you’ve had it. Your inability to replicate surprises scares LPs, which limits your ability to raise a subsequent fund.

Nevertheless, these days markets are changing quickly. And sometimes your initial thesis may not serve you as well in today’s market as it did yesterday. As John Maynard Keynes, father of Keynesian economics, once said, “When the facts change, I change my mind.” But, if you do need to deviate, communicate it clearly, formulate a new strategy, and preemptively tell your LPs. Then at that point, it’s no longer a surprise, but a strategy. Great examples include:

  • Accelerators making discovery checks part of their core business
    • Note: LPs historically dislike GPs (general partners) writing discovery checks because they’re:
      1. Not investing via their fund strategy (i.e. typically ad hoc),
      2. Require less diligence and therefore less conviction,
      3. Send negative signals to other investors if the GP doesn’t do a follow-on check at the next round, and
      4. Because of (2) and (3) are usually cash sinks.
  • The On Deck Accelerator (ODX) – Backing founders at the earliest stages (i.e. pre-product, pre-revenue) as long as they have deep conviction in their own business.
  • The recent announcement of The Sequoia Fund – a systematic and predictable strategy to invest in not just startups, but venture funds backing incredible founders as well.

The same holds for founders. Don’t get me wrong. Startups pivot. And they should. Mike Maples Jr., founder of one of the best performing seed stage venture firms, recently shared: “Most investors are going to look at what the company does and evaluate the business for what it is, but 90% of our exit profits have come from pivots.” And just like fund managers, clearly convey why, how, and what you’re pivoting to to your shareholders. It’s always better to preempt these conversations than leave these as surprises. Often times, you’ll find your investors, having seen as many pivots as they have and knowing that is the name of the game, can offer you much more feedback and insight than you imagined for your pivot.

Optimize for the “Oh shit! moment*

In every conversation, your goal should just be to teach your investors something. An earned secret. A unique insight. What do you know that other people don’t, overlook, or underestimate? What do you know that other people would find it very hard to learn organically? This is especially true for consensus ideas – or obvious ideas. The best obvious products may seem obvious at first glance, but usually have non-obvious insights to back them up.

If you’re a fund, what is your insight – your access point – that’ll win you an asymmetric upside?

I’ve talked to too many founders and EMs that claim to be experts with X years of experience in a particular field. Yet after 30 minutes, I realized I learned nothing from them. I realize that for half an hour straight I ended up with a prep book full of buzzwords and vague jargon that would rival the SAT vocab section. But let’s be real. The SAT doesn’t get me excited to want to retake the test.

The best founders and funders out there are able to break down deep, technical, esoteric, and sometimes crazy concepts into simple bitesize ideas. The equivalent of taking the whole universe and simplifying it to its origin. A single point. The Big Bang.

I’ve also realized over the years that the world’s smartest teachers – and when you’re trying to convince people to join you in a non-obvious vision, you are teaching – lead with analogies. And the best analogies lead investors to that “Oh Shit! moment.”

COVID made capital cheaper

Equally true for startups and funds. Capital is digital. If you think about capital in the frame of investor acquisition cost, you no longer have to travel to your investors to pitch to them. This means you can take far more meetings than before. Less travel and more meetings mean your investor acquisition cost goes down.

Founders no longer have to book a week to Sand Hill Road or South Park to have introductory conversations with investors. Only to have 80-90% turn down a second conversation. This becomes even more costly the earlier you are in your startup journey. You have to have a lot more first conversations as a pre-seed founder than you do as a founder raising an A. At the same time, you have many more options for raising capital today: accelerators, syndicates, equity crowdfunding, and roll-up vehicles (RUVs). While it’s not that these resources didn’t exist before COVID, the pandemic made it much more apparent that VC money didn’t have to be the only way to raise capital. And that you can also leverage speed and your community to help you grow.

Similarly, EMs no longer have to travel across the states to talk to institutional capital. Even more so, as an EM, you’re most likely raising from individual investors. Raising a rolling fund or a 506c lets you generally solicit investments, where you couldn’t with a 506b. Subsequently, Twitter and having a community became your superpower. Mac at Rarebreed, Packy’s Not Boring Fund I, and Harry at 20VC all raised during the time of COVID, leveraging the power of their following and community to do so.

Keep it simple

“There’s no favorable wind for the sailor who doesn’t know where to go.” – Seneca

Two Saturdays ago, I caught up with my ridiculously smart engineer friend from college – “Fred”. We were reminiscing about the “good ol’ days” when we first started punching above our weight class. Particularly in regards to cold outreaches to individuals we really admired. While I was an operator at two startups that shaped my entrepreneurial career, I spent many a night struggling on how to best position our products in the market. Many hours of copy and rephrasing and reframing. In both we were competing against the existing saturation of information and solutions on the market. How do we tell our customers and investors the reason we’re awesome is because of A and B and C, and also D?

Most people, friends, customers, and investors didn’t understand the value we thought we were obviously conveying. And subsequently, we were rejected more often than I would have liked to admit. In the early days, we didn’t lose on price nor on quality, but on brand and messaging. And while we thought and strove to prove we were better in areas that mattered, both startups eventually ended up having exceedingly simple one-liners.

On the other hand, “Fred” was working on something related to liquid fuel and cold fires. Something extremely technical. But he was able to win proportionally more yes’s than I was able to. When I asked him how, he said it was simple. “We’re putting a rocket into space. That’s it. And that’s really exciting.”

I made something extraordinarily simple into something extraordinarily complex. In all honesty, I sounded really, really smart. And I felt like I was the shit. Except no one else did. “Fred” took something extraordinarily complex and made it extraordinarily simple. He didn’t sound as smart. But celebrities, sponsors, companies – people just got it.

The true value of a product is usually exceedingly simple. The fallacy of including a Rolodex of esoteric jargon comes in two-fold. Either you’re trying to sound smarter than you actually are. Or you’re trying to cram too many things in too little space. As economist Herbert A. Simon said, “A wealth of information creates of poverty of attention.”

In closing

Whether you’re an entrepreneur or an emerging manager, you’re swinging for the fences. I was chatting with an investor yesterday who had an incredible analogy. “It’s like a pinball machine. The ball goes up, and you never know how it’ll fall down. You don’t know how many bounce pads and flippers it will hit. You don’t know how many points you’re going to get. But no matter how many points you’ll get, the ball has to go up first.” Similarly, whether you start a company or a fund, you have to step up to the plate to bat. You don’t know what the upside will be. You don’t know if you’re going to return your investors 2x, 5x or a 100x.

You’re taking an asymmetric bet on the compelling future you bring. Your valuation as a startup is not how much your startups is worth, which is why the 409a valuation is always different from the valuation your investors set for you. Your valuation is a bet your investors made that you will be as big as the major players in the market. If you’re valued at $10M today, your investors are saying you are 10 in 1000, or a 1% chance, to be a unicorn. And a 0.1% chance to be a decacorn.

Valuations might seem crazy today. VC firms are also raising larger and larger funds, which lead many to be skeptical on their ability to return capital. In fairness, most funds will return a modest 2-3x over their lifetime, if at all. Most startups are and will be overvalued. On the same token, the best ones, despite their crazy price, are still undervalued. Imagine if you were an investor who could invest in Facebook’s then-unicorn valuation. You’d have made a lot of money. But we’re in an optimistic market.

At the end of the day, both parties are just managing someone else’s capital. And as such, through a fiduciary responsibility, in that regard, both are cut from the same cloth.

Photo by Luke Leung on Unsplash

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#unfiltered #59 I Am The Worst Marketer Out There

billboard, marketing

Last week, after a lovely conversation with a startup operator, he asked if there was anything he could help me with. I defaulted to my usual. As I’m working on being a better writer, I asked him if time permitted, could he give me some feedback on my writing. For the sake of this blogpost, let’s call him “Alex.”

While I expected just general feedback on my style of content delivery, Alex gave me a full audit of this blog. He told me I should focus, until I’ve built up an audience. He also said that I should find my top 20 blogposts, figure which category they fall under and narrow down by writing more of those. On the same token, he recommended I reference Hubspot’s “topic clusters.” Which is an amazing piece about how to nail SEO in 2021, if I say so myself. Incredibly prescient. And incredibly true.

He also recommended I use Medium or Substack over my antiquated design of a website. And forgo the header image. Which you might have noticed I haven’t (yet).

The thing is… he’s 100% right. I’ve done little right, in the sense of marketing and branding. In fact, in the Google search engines, I probably am a mess to categorize, which means I exist in no category. Even in my own words, focusing on everything means focusing on nothing. While at the time of writing this post, a good majority of my content is based in startups and venture capital. If I focused on better branding, I would have doubled down on fundraising, or marketing. Or social experiments. But I haven’t.

Truth be told, I’ve stunted my growth, or my brand’s growth, by intentionally choosing otherwise. In turn, there are only two questions I optimize for in this blog.

  1. Will this make David from yesterday smarter?
  2. Is this still fun?

I started this blog writing for an audience of one. For the person I was yesterday. And if I know the me from yesterday would love it, then I have at least one happy customer.

I don’t write this blog for profit. This blog is my de-stressor. It is my entertainer, yet also my coach. It is my confidant. And it is just fun. The process of learning and thinking through writing – refining my thoughts – gets me really excited. I don’t want to end up dragging my feet through mud. Funnily enough, despite being an extremely, and I stress the former word, small blogger, I’ve had the occasional brand reach out to sponsor content. As you might have guessed, I said “no” to everyone so far. Either I didn’t believe that the product would make the world a better place or that I just didn’t get their product. This is not to say I won’t ever take on sponsors, but I just want to be really excited about it.

I’ve also had a number of folks reach out wanting to guest post on this blog, to which I’ve also said “no” to everyone so far. Because (a) it makes me lazy and defeats the purpose of me writing to think, and (b) I haven’t learned anything from them yet.

And because I write from a motivation of “psychic gratification,” borrowing the phrasing Tim Ferriss used in his recent episode, my writing is “very me,” to borrow the phrasing of readers and friends who’ve talked to me face-to-face before. I feel I can be genuine. And I can be unapologetically curious. I can learn what I want when I want how I want. I love each topic I write about, at least in the moment my pen touches paper. It excites me. It inspires me. And it pulls me with a force I want more of.

As a product of me being me, every so often, a random essay sees a momentary breath of fame. On average, it happens every 7th or 8th blogpost. I have these random spikes of several hundred views within 24 hours every so often. And don’t get me wrong. I would be lying if I said that wasn’t gratifying as well. Other times, some essays are far more perennial and see anywhere between two and ten views a day – almost every day. There are the ones that never make it onto the stage. And live somewhere in a virtual public graveyard.

I’m publicly logging my thought process here as a bookmark for future reference. And so that my future self can’t go back in time and write off my thought processes now in a grand motion of revisionist’s history.

I also know that this won’t be the last time I revisit this topic. My future mental model might differ greatly from what it is now. As John Maynard Keynes, father of Keynesian economics, once said, “When the facts change, I change my mind.” But it might stay the same. Who knows?

I’ll keep you updated.

Photo by Bram Naus 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!

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Speed As A Competitive Advantage

race car

Last week, I had an incredible fireside chat with GC’s Niko Bonatsos, who has played a key role in some incredible investments, from Livongo Health to Snap to Wag! and most recently, Saturn. In all honesty, I took much of that experience to scratch my own itch. As always, we ran out of time before we ran out of topics. But I was lucky enough to ask one of which I happened to be losing sleep over. “How do you balance speed and diligence in the increasingly competitive market of venture?”

COVID changed us

In the midst of the pandemic, COVID became a forcing function for investors to deploy capital without ever meeting founders in-person. Frankly, they couldn’t meet anyone in-person. Even if they wanted to, investors, like everyone else, was subject to a series of lockdowns, curfews, and eventually the vaccine.

Yet, as life returns to a sense of normality, many investors have gotten comfortable investing virtually. And for a handful, only virtually. At the same time, in today’s increasingly competitive venture market, capital’s become more of a commodity. And I’ve heard a number of LPs find speed to be a competitive advantage. As a product of speed, investors compete on shortened timelines. It’s a given for angels and super angels out there who have to have conviction on a fairly limited set of data. But how do top-tier funds compete in that same market yet maintain the same discipline as before?

I got my answer from Niko.

“We try to pre-empt the stuff we really care about. It basically translates to us being prepared, having frontloaded a lot of the diligence for the companies and opportunities we care about. We have a more educated conversation with the founders, and are the first ones to get to a term sheet than anyone else. That’s something we do a lot more often. And we’ve leaned into seed, which is the new series A.”

Moreover, with all the diligence they do prior to sourcing, funds, like General Catalyst and Founders Fund, have started to incubate startups where they couldn’t find solutions to problems they found.

Slowing things down

Earlier this week, over a lunch, I posed the same question to Fort Ross‘ Ratan Singh, from whom I got a slightly different variation. “VCs are doing their homework before every meeting and going in with a thesis so that they can deploy fast. VCs used to play catcher and do all their homework after the meeting. But now it’s changed, so they can say yes faster.

“While speed is a differentiator, things are moving too fast today. I met every founder I’ve invested in in-person. Even during the pandemic, I invested in seven founders, and every single one I’ve met in-person.”

To which, I had to ask, “What do you find out from meeting a founder in-person that a virtual meeting lacks in?”

Without missing a beat, Ratan said, “It’s in the small things. The way they interact with their teammates. The way they treat each other. As we finish our chat and walk back to the car, are they still an intelligent being outside of the script? A Zoom call is a 30-minute scripted call. There’s a deck. There’s the presentation they prepared. An in-person interaction is more than that.”

Ratan’s comment reminded me of something Sequoia’s Doug Leone said in his interview with Harry Stebbings recently. “It takes about thirty minutes for someone to relax, which is why I refuse to interview someone for thirty minutes.” Similarly, while a 30-minute coffee chat may just be 30 minutes, the time it takes to shake hands, order your cup of coffee, have the conversation, finish it, and walk back to your car or wait for your Uber helps anyone, not just a VC, understand so much more depth to your character.

In closing

In the words of my friend Ruben:

As if he didn’t drop enough mics in our lunch, Ratan left me with one last hot take, “In VC, you’re either asked to stay, or you’re asked to leave.” In today’s ever-changing climate, having deep domain expertise and pre-empting diligence keeps you if not ahead, at least on the curve of evolution. And for many investors, it’s one of their best bets to be asked to stay – either by the firm’s senior partners or your LPs.

Photo by toine G on Unsplash

Thank you Niko and Ratan for looking over earlier drafts.

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Why Product-Market Fit Is Found In Strategically Boring Markets

streets, ordinary, boring

In the past decade or two, there have been a surplus of talent coming into Silicon Valley. In large part, due to the opportunities that the Bay had to offer. If you wanted to work in tech, the SF Bay Area was the number one destination. If you wanted to raise venture money, being next door neighbors to your investors on Sand Hill Road yielded astounding benefits. Barring the past few months where there have been massive exoduses leaving the Bay to Miami or NYC, there’ve been this common thread that if you want to be in:

  • Entertainment, go to LA
  • Finance and fashion, go to NYC
  • Tech/startup ecosystem, go to the Valley.

While great, your early audience – the innovators on your product adoption curve – should not be overly concentrated there. All these markets carry anomalous traits and aren’t often representative of the wider population. Instead, your beachhead markets should be representative of the distribution of demographics and customer habits in your TAM (total addressable market).

While Keith Rabois could have very much built Opendoor in Silicon Valley, where more and more people were buying homes to be close to technological hubs, he led the early team to test their assumptions in Phoenix, Arizona. On the same token, Nikita Bier started tbh, not in the attention-hungry markets of LA, but in high schools in Georgia.

“Boring” virtual real estate

Strategically boring markets aren’t limited to just physical geographies. They’re equally applicable to underestimated virtual real estate. You don’t have to build a mansion on a new plot of land. Rent an Airbnb and see if you like the weather and people there first.

As Rupa Health‘s Tara Viswanathan said in a First Round interview, “Stripping the product down to the bare bones and getting it out in front of people for their reactions is critical. It’s rare for a product not to work because it was too minimal of an MVP — it’s because the idea wasn’t strong to begin with.”

As she goes on, “If you have to ask if you’re in love, you’re probably not in love. The same goes with product/market fit — if you have to ask if you have it, you probably don’t.”

Test your market first with the minimum lovable product, as Jiaona Zhang says. You don’t have to build the sexiest app out there. It could be a blog or a spreadsheet. For example, here are a few incredible companies that started as nothing more than a…

BlogsSpreadsheets
HubSpotNerdWallet
GlossierSkyscanner
GrouponStitch Fix
MattermarkFlexiple
Ghost

The greatest incumbents to most businesses out there really happen to be some of the simplest things. Spreadsheets. Blogs. Facebook groups. And now probably, Discord and Slack groups. There are a wealth of no-code tools out there today – Notion, Airtable, Webflow, Zapier, just to name a few. So building something quick without coding experience just to test the market has been easier than ever. Use that to your advantage.

Patrick Campbell once wrote, quoting Brian Balfour, CEO of Reforge, “It’s much easier to evolve with the market if your product is shaped to fit the market. That’s why you’ll achieve much better fit between these two components if you think market first, product second.”

Think like a designer, not like an artist

The biggest alphas are generated in non-obvious markets. Markets that are overlooked and underestimated. At the end of the day, in a market teeming with information and capital and starved of attention, think like a designer, not like an artist. Start from your audience, rather than from yourself. Start from what your audience needs, rather than what you want.

As ed-tech investor John Danner of Dunce Capital and board member at Lambda School, once wrote, “[the founders’] job is to find the absolute maximum demand in the space they are exploring. The best cadence is to run a new uncorrelated experiment every day. While demanding, the likelihood that you miss the point of highest demand with this approach is quite small. It is incredibly easy to abandon this kind of rigor and delayed gratification, eat the marshmallow and take a good idea and execute on it. Great founders resist that, and great investors do too.”

Spend more time researching and talking to your potential market, rather than focusing on where, how, and what you want your platform to look like. Obsess over split testing. Be scrappy.

Don’t fail the marshmallow test

We’re in a hype cycle now. Speed is the name of the game. And it’s become harder to differentiate signal from noise. Many founders instantly jump to geographically sexy markets. Anomalous markets like Silicon Valley and LA. But I believe what’ll set the winners from the losers in the long run is founder discipline. Discipline to spend time discovering signs of early virality, rather than scale.

For instance, if you’re operating a marketplace, your startup is more likely than not supply-constrained. To cite Brian Rothenberg, former VP of Growth at Eventbrite, focus on early growth loops where demand converts to supply. Ask your supply, “How did you hear about our product?” And watch for references of them being on the demand side before.

Don’t spend money to increase the rate of conversion until you see early signs of this growth dynamic. It doesn’t matter if it’s 5% or even 0.5%. Have the discipline to wait for organic conversion. It’s far easier to spend money to grow than to discover. Which is why startup life cycles are often broken down into two phases:

  • Zero to one, and
  • One to infinity

Nail the zero to one.

In an increasingly competitive world of ideas, many founders have failed the marshmallow test to rush to scale. As Patrick Campbell shared in the same afore-mentioned essay, “Product first, market second mentality meant that they had a solution, and then they were searching for the problem. This made it much, much more difficult to identify the market that really needed a solution and was willing to pay for the product.”

The more time you spend finding maximum demand for a big problem, the greater your TAM will be. The greater your market, the greater the value your company can provide. So, while building in anomalous markets with sexy apps will help you achieve quick early growth, it’s, unfortunately, unsustainable as you reach the early majority and the late majority of the adoption curve.

Photo by rawkkim on Unsplash

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DGQ 6: What three adjectives would you use to describe your sibling?

ocean, sibling

“Use three adjectives to describe your sibling. And describe yourself in comparison.”

I heard this question weeks ago from Doug Leone, Sequoia Capital‘s Global Managing Partner, on Harry Stebbings’ 20VC podcast. Known for having some of the best questions in venture and having led incredible investments into Meraki, Nubank, ServiceNow, and more, Doug loves to ask this question to founders he’s meeting for the first time. My initial response was “this doesn’t make any sense.” But in the podcast, he reveals why he loves the afore-mentioned question.

Before writing a check, an early-stage investor’s job is to answer three questions. Why now? Why this? And why you? The ‘why you’ question is admittedly one of the hardest questions to answer. Even for myself, I struggle from time to time to understand why I should scout a one founder over another over the same idea.

In a short 30 minute conversation, there’s only so much an investor can understand about a founder. There’s fundamentally a level of information asymmetry. Founders want to convince investors to take a bet on them. Yet, investors need more information to be comfortable making an asymmetric bet on them. We see echoes of a similar dilemma when recruiters interview applicants for jobs. Or when a property manager interviews a potential tenant.

Generally, recruiters, like most others, regress to questions like: “What are three of your strengths? Three weaknesses?” Having been asked so bluntly, interviewees, on the other hand, often have their guards up. They pick three strengths that would make them look the best. Equally so, they pick three weaknesses that show just enough honesty and vulnerability where they don’t get disqualified from the candidate pool. All of which exemplify pre-scripted answers.

Conversely, Doug found a way to do so without arming the interviewee’s, in this case, the founder’s, defenses. What three adjectives would you use to describe your sibling?

As Doug shares, “In a law of diversity, two siblings are less likely to be alike than two strangers. And so, how they usually describe their siblings is usually opposite of how they describe themselves. It’s a self-awareness question.”

You might realize the same principle holds when you describe a friend or a colleague or your spouse. The way you describe them often contrasts with your own disposition. “My friend is really curious.” Implicitly, you’re saying you’re not as curious.

So, the next time you talk about someone else, it’d be an interesting thought experiment to see how those same words relate or contrast with you.

Photo by Limor Zellermayer on Unsplash

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.

Subscribe to more of my shenaniganery. Warning: Not all of it will be worth the subscription. But hey, it’s free. But even if you don’t, you can always come back at your own pace.

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Where Does The Team Slide Go In A Pitch Deck?

soccer, team

There’s a comical number of debates around where the team slide goes in a pitch deck. In fact, this blogpost may end being more of a meme than have any substantive value. Nevertheless, here’s to hoping that by the end of this essay, there’s some semblance of a call-to-action for you. The “too-long-don’t read” answer for the order of your team slide is… it depends.

Why “why you” is important

First, let’s start from the “facts”.

  1. The earlier your company is, the more your team matters to an investor. The more mature your company is, the less it matters.
  2. If your investor doesn’t understand your answer to the “why you” question, you’re not winning any gold medals, much less a check.

I tweeted two days ago:

Investors have, effectively, three questions they want answered in the intro meeting.

  1. Why now?
  2. Why this?
  3. And, why you?

“Why now” tells an investor why they should look into the space. “Why this” tells an investor why they should look at the solution. But if we’re being completely honest, if an investor is a specialist and not a generalist, and even if they were the latter, you’re not the first person who’s brought up the exact same “why now” and “why this”. Even if you answer the first two questions perfectly, there’s still no reason as to why you should be the one to take this product to market. Investors, if they were more blunt, would just thank you for your market research.

On the other hand, if you can answer the “why you” question, you give them a reason to have a second conversation with you. And the whole goal of the intro meeting is to have the second meeting. Not to get the check. Don’t skip steps. As a footnote, your mileage will vary with angel investors and micro funds. For them, speed is their competitive advantage, not their check size nor possibly their network or resources. While they will try to be helpful, they’re not a platform – yet. If you answer the “why you”, in the worst case scenario, your investors won’t regret backing the startup. You just weren’t lucky. But they’d probably be willing to back you again if you started another business.

The reason why so many VCs regress back to metrics and traction is because you’ve failed to answer the “why you” question.

So, where does your team slide go?

Based on the above “facts”, the younger your startup is, the earlier you should put the team slide. To give investors context as to who you are. This matters a bit more for partnership meetings, as well as if this is a (relatively) cold pitch. That is, to say, if you AND your co-founders don’t have a prior relationship with the people you are pitching to, move the team slide to the beginning.

Eniac Ventures, an incredible seed-stage firm, recently wrote, “We believe that it should probably be slide 1 or 2. That’s because investors want to become familiar with the people behind the product early on, whether we’re flipping through the deck or you’re pitching us directly. When the team slide is second, it also gives you a great opportunity to walk investors through your background and impress upon them why your unique set of experiences makes you and your team the best one to build and scale the product.”

In closing

But, that might not be the case for you. The investors you pitch might have a different set of priorities. I always go back to the question: When going into the meeting, if the investor could only ask one question, what is the one question they need the answer for to give them enough of a reason to take the second meeting?

Then your pitch deck should be in that order of priority.

If you’re tackling a problem most people care little about or where it’s non-obvious, talk about the problem first.

If it’s not a revolutionary product and it already makes sense, talk about why you and your team are the best equipped to tackle this problem.

Photo by Pascal Swier on Unsplash

*Edit: Added in second tweet

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Why You Should Hire For Expertise, Not Experience

looking forward, sailing

I recently read Fable‘s Padmasree Warrior‘s breakdown of leadership lessons. Prior to Fable, she held executive positions at Motorola, Cisco, and NIO and currently serves on Microsoft and Spotify’s board. Out of all the insights she shared, I couldn’t help but reach out on one intriguing point she brought up: “Hire for expertise, not experience.”

Expertise ≠ Experience

Before reading the blogpost on her, I had never thought of expertise and experience as two separate wheelhouses of knowledge. While there is definitely some overlap, as Holly Liu, founder of Kabam, says:

Expertise and experience are similar, but not the same. It is to no surprise most people often conflate the two, myself included. Experience is a record of past events. Expertise is your ability to leverage experience to positively influence the outcome of future events.

I’m reminded of something Henry Ford once said. “If I had asked people what they wanted, they would have said faster horses.” Experience would have dictated faster horses. Expertise would have dictated why we once chose horses over other modes of transportation. And the framework to think about transportation in the next century.

Hiring for expertise

When I asked Padma, “What kinds of questions do you ask potential hires to measure on expertise rather than experience?”

She responded: “I usually as ‘if X happened what would you do?’ ‘If there is nothing here… how would you start a product?'”

I followed up with a David classic: “If I can be completely selfish one more time, and I understand if you don’t have the time, for the question, ‘if there is nothing here, how would you start a product?’ or similar ones, what differentiates between a good answer and a great answer?”

Padma added: “If someone says ‘I did this at such and such’ – wrong answer. I look for ‘I would start with … then do… then grow’.”

Everyone’s guilty of a bit of revisionist’s history when looking in hindsight. It’s in our DNA. We are the only species that create narratives from seemingly disparate data points. After talking with multiple recruiters, executives, and CEOs on the topic, I realized there is often a tendency for people connect their past achievements together and sound like they knew exactly what they were doing all along. But in foresight, that often isn’t true. There’s a lot of guesswork and uncertainty when looking through the windshield, compared to images that often seem closer in the rearview mirror.

To follow up on Padma’s thoughts, I had to ask my former professor, Janet Brady, the former Head of Marketing and Head of Human Resources for Clorox, about hiring for expertise. “I’m a big fan of situational interviewing, where I ask ‘What would you do if…?’ In the process, I am looking for (a) how would this come up, and (b) how would they approach the problem. It’s easy to make the puzzle pieces fit and make up narratives in the past, but much harder when given a situation to deal with on the spot.”

As with any matter, things are not as binary as they first seem to be. She concedes that there is validity in asking about experience as well. But the context around experience is often more insightful than the experience itself. Brady shared, “You never do something alone. If you see a turtle on top of a fence post, you don’t know how it got there, but you know it had help.” How many people were on your team? What was your role on the team? What problems did you run into? And how did you deal with those problems?

But one of her interview questions in particular stood above the crowd for me. “What did you do in this role that no one else in this role has done?” While past achievements aren’t always predictors of future progress, in this case, what you’re looking for aren’t anecdotes but general themes in life, specifically, the ability to question the status quo and act on it.

Echoing Brady’s questions on problems a hire has faced, what might be more interesting is what didn’t work out in the past. The scar tissue someone’s accumulated over the years. Marco Zappacosta of Thumbtack loves the question: “What’s your biggest professional regret?”. And he elaborates, “I’m under no illusions that I’m hiring perfect people, but I want to make sure I’m hiring people who are self-aware of being imperfect.”

Put into practice

SaaStr’s Jason Lemkin shared a great example in his blogpost. How the expertise of VPs of Marketing differ depending on what stage of a company’s maturity they earned their stripes. A corporate marketer’s experience might translate poorly to running marketing at a startup. Equally so, a seed-stage startup marketer’s job might carry much less significance in a Fortune 500 role.

Corporates focus on corporate marketing and brand marketing. A form of marketing that’s “all about protecting and reinforcing the brand once you are way past scale.” It’s less about getting your brand recognized since customers have already heard of your brand. It’s about getting potential customers over the activation energy required before making a buying decision. As Jason puts it, “the brand creates so many leads and customers all on its own.”

Startups, on the other hand, are all about demand generation. In other words, generating leads. It’s a numbers game. Spend X dollars to get Y leads, that generate five times of $X of revenue. The equivalent of an LTV-to-CAC ratio of 5x. At the same time, he notes that “brand marketing is very expensive in the early days – and frustratingly, generates zero leads.”

Someone with Z years of marketing experience might have a lot of scar tissue, but might not be able to solve the marketing problem for your startup. Demand gen folks can’t hide anywhere if they don’t get results, but corporate marketing folks can hide behind a brand. Focus on finding the expertise you need rather than the years of experience that might look sexy on a resume or on a pitch deck. As always they’re not mutually exclusive, but it’s important to know the difference.

Who knows? Maybe the next generation of lead gen is all about Twitter presence and memes, as a16z’s Andrew Chen recently tweeted.

Taking a step back

On a bigger picture, the process of sales and marketing is a form of free education for a customer base. The better you can get your users to understand what you’re building, the more likely they will buy. Memes are just another medium of analogy and education. Better yet, of storytelling.

The better you can weave together seemingly disparate data points to create a compelling narrative without confounding extraneous variables, the greater your level of expertise. As Packy McCormick, one of my favorite writers, wrote on an a16z blogpost on expertise, “We live in a world where expertise can be justly claimed by anyone who can continue to prove it. Synthesis and storytelling are the keys to navigating that world. In a world with so much information available and fewer unquestioned experts, the ability to let large amounts of information wash over you, figure out where to dive deep, pull out the most compelling bits, and tie them all together is key.”

In closing

Hiring great talent across all levels breaks down to less of how many years of experience, but more so how you can leverage those experiences to understand and use unique and seemingly disparate data points going forward. Fall forward; don’t fall backward. An expert hire might not have all the answers to your problems, but will have built stress-tested mental models that’ll help in finding the answers for the questions you have.

Back when I was at SkyDeck, Caroline taught me that great entrepreneurs follow the “scientific method of entrepreneurship.” If I were to analogize her idea to expertise, an expert is a champion of the “scientific method of application.”

Of all the experts I’ve met – a title which is often one that society has deemed rather than being self-prescribed – they’ve almost always had an answer or multiple to a certain question. What proof would it take for you to change your mind?

Photo by Markos Mant on Unsplash

Thank you Janet for looking over early drafts.

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How to Pitch VCs Without Ever Having to Send the Pitch Deck

pitching, emotion

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, rubrics are 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.”

James’ comment reminded me of a LinkedIn post from Chewy‘s VP of Merchandising, Andreas von der Heydt, recently.

Source: Andreas von der Heydt‘s LinkedIn post

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?

Sandbox VR‘s Siqi Chen has an amazing presentation on how to pitch appealing to emotion.

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:

  1. The one metric they’re nailing (ideally so much better than the rest of the industry
  2. Short 1-2 lines on what you’re building and why
  3. 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.

Photo by Tengyart on Unsplash

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The Hype Rorschach Test: How To Interpret Startup Hype When Everything’s Hyped

abstract, rorschach, hype, color

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 Benchmark wrote: “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 Fund says “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?

  1. Capital is increasingly digital.
  2. There is more than one vehicle of early stage capital.
  3. 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.

  1. It saves founders so much time, so they can focus on actually building and delivering their product to their customers. And,
  2. 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 told Mark 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.

Source: Nikhil Basu Trivedi on next big thing

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.

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.“

Edge
Source: Tim Urban’s “The AI Revolution: The Road to Superintelligence“

And as founders are going to some great term sheets from amazing investors, I love the way Ashmeet Sidana of Engineering Capital frames 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:

S-Curves
Source: Tim Urban’s “The AI Revolution: The Road to Superintelligence“

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.

Photo by Jené Stephaniuk on Unsplash

Thank you Frank for looking over earlier drafts.

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Mentors and Investors

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.

Photo by Robert Ruggiero on Unsplash

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