Jeff is a partner at Renaissance Venture Capital an innovative venture capital fund of funds. Jeff’s diverse background in venture capital and technology and his experience working in various start-up ventures uniquely position him to advise startups. In addition, Jeff is quite active in the Michigan start-up community, volunteering his time to mentor young entrepreneurs, judge pitch competitions, and guest lecture student classes and organizations. Through Jeff’s work on the Fund, his volunteer efforts, and his role as the chair of the Michigan Venture Capital Association’s board of directors, his passion for fostering a productive environment for venture capital investment in the State of Michigan is evident.
Martin Tobias is the Managing Partner and Founder of Incisive Ventures, an early-stage venture capital firm focused on investing in the first institutional round of technology companies that reduce friction at scale.
Martin was previously at Accenture and Microsoft and is a former Venture Partner at Ignition Partners. Martin is a 3X venture-funded CEO rising over $500M as CEO with two IPOs who has also invested in hundreds of companies and is a limited partner in over a dozen VC funds. Martin was an early investor in Google, Docusign, OpenSea, and over a dozen Unicorns.
Martin is the father of 3 daughters, a cyclist, surfer, poker player, and life hacker. Martin tinkers with motorcycles on the weekends. He writes about Venture Capital on Incisive Ventures blog and Twitter.
[00:00] Introducing Jeff Rinvelt and Martin Tobias [04:14] What was Jeff’s pitch to their LPs for Renaissance Capital? [06:30] Why did Jeff pivot from being a founder to an LP? [08:10] Renaissance Capital’s portfolio construction model [13:00] Jeff’s involvement in non-profits [15:56] How did Martin become an angel investor? [18:03] The big lesson from being an LP in SV Angel’s Fund I and II [20:10] Why is Martin starting a fund now? [26:07] A lesson on variable check sizes [28:53] What is Martin’s value add to founders? [33:29] What stood out about Martin’s deck and email when it arrived in Jeff’s inbox? [35:43] The 2 biggest worries Martin had in sharing his deck with Jeff [36:47] What does Jeff think about generalists? [40:49] What held Jeff back from making an investment in Incisive Ventures? [42:37] What kinds of conversations does Martin usually have with LPs? [47:05] One of the greatest professional lessons Jeff picked up as a manager [49:07] Martin’s greatest lesson from his days as a CEO [51:57] Thank you to Alchemist Accelerator for sponsoring! [54:33] Like, comment and share if you enjoyed the episode
“One of the things a lot of investors don’t do is go back and be honest about where they got fucking lucky and where they had a thesis that they could potentially replicate in future investments.”
As people were coming back from the holidays, I had the chance to catch up with two friends earlier this week on two different occasions. One who built a company hundreds strong. The other is someone who’s seen the rise and fall of civilization again and again.
The former told me, “The greatest litmus test of a leader is their ability to train another leader.”
The latter told me something they had learned from a successful founder. “I lift as I climb.”
Both equally as profound. But to take it one at a time…
To train another
I’ve mentioned on this blog before that A-players hire A-players. And that B-players hire C-players. C’s hire D-players. And so on. A-players can tolerate working with B’s, but not C’s and D’s. So at the end of the day, the A’s leave, and all you’re left with are B’s and below.
While that statement makes sense in broad strokes, the truth is from an investor’s perspective — hell, just an outsider’s perspective — no one knows if you’re an A-player or not at first glance. Or at least it’s really hard to tell. Maybe there are people who are smarter than me out there who can tell at a glance. At the end of the day, seeing others execute is a great way to tell, but that takes more than one meeting usually.
And sometimes the easiest way to see is in doing reference checks. Seeing who else is on the team that they hired and trained. Seeing who they hired in previous roles. And if those other folks they’ve trained have gone to do amazing things, that’s usually a good sign that the person in question knows what an A-player looks like. And if it’s consistent enough, knows how to mint stellar leaders.
I lift as I climb
One of the greatest red flags I often see are founders hiring experienced (often expensive and brand-name) executives, sales reps, and product managers super-early in the startup lifecycle. Especially before product market fit. And often the biggest expectation for these early hires is to do:
What they themselves couldn’t do
And/or what they themselves don’t want to do
Both happen to be cardinal sins at the early stage. Why does the above matter?
Because if you’ve never done the job yourself, specifically building/managing the product and getting to your first customers:
You don’t know how to set realistic targets and benchmarks for that role
Given how crucial early customer feedback is to the product and the company, you’ll miss out on key customer insights if you’re not in the trenches yourself.
The goal of the afore-mentioned early hires is to refine your playbook, not build the playbook from scratch. And if that doesn’t appeal to you as the founder, then you might not be ready to be one.
And this is the exact reason I love the line “I lift as I climb.” For every time you figure something out, an inflection point for the company, a key customer discovery/insight, a sales script that closes twice as well as the last one, your rising tide raises all boats. But you cannot lift if you don’t climb first.
In closing
For those of you tuning in from the video and audio universes, you know I’ve been thinking a lot about succession planning as of late. Largely motivated by my conversations with Ben from Next Legacy.
So naturally, when I was catching up with both of my friends, their words found refuge in the questions I was seeking answers to.
And when all’s said and done, what I look for in a founder who’ll create a multi-generational company is the same in what I look for in an emerging manager who’s planning to build a multi-fund firm. And in a way, what a young professional might look at when betting their career on a startup.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
I wrote a blogpost last year, where I went a level deeper into my NTY thesis. In short, in what situations and in front of what kind of ideas do I ask founders: Why now? Why this? And why you?
But let’s go a step deeper. As I’m writing another blogpost slated to come out next year, I’ve had the chance to sit down with some amazing multi-cycle investors. And a common thread across all those conversations has been that they chose to be the first check in companies that would be big, if true.
Which got me thinking…
If ‘big if true’ is for the preposterous ideas out there, then possible ideas would be ‘big when true.’ And plausible ideas would be ‘big AND true.’
Let’s break it down.
Big AND true
Not too long ago, the amazing Chris Douvosshared with me that the prerequisite to being “right and alone”, where fortune and glory lie, is to be “wrong and alone.”
Imagine a two-by-two matrix. On one axis, right and wrong. On the other axis, alone and in the crowd. You obviously don’t want to be wrong and in the crowd. But you do want to be in the right and alone quadrant. Because that’s where fortune and glory are at. Most people think that to get there, you must first start in the right and in the crowd quadrant. But it’s important to note, that once you’re in the crowd, and you get the dopamine hits of validation, it’s really hard to stray away from the crowd. So really, the only way to get to fortune and glory is to be wrong and alone. To be willing to go against the grain.
Unfortunately, for big AND true, you’re in the crowd. And while you can usually make money on the margins, it’s hard to be world-defining. ‘Cause you’re too late.
The thing to be wary of here if it is any investor’s strategy to deploy capital here is to not be the last money in. Hype and compounding are dangerous. And for many companies that exist here, they have a short half life. If you’re the last one holding the bag, that’s it.
Big WHEN true
You know that saying, “It’s a matter of when, not if…” it’s just as true in the innovation space. There are some things in life that are bound to happen. Recessions. Hype cycles. Rain. First snowfall. Summer heat. Progress. Maturity. When one’s baby teeth fall out. Wrinkles. Gray hair. Some with more predictability than others.
These ideas are defined as those with early commercial traction, likely with a niche audience or only your 1000 true fans. And that’s okay. Usually happens to be some of the toughest pre-seed and seed rounds to raise. There’s clearly traction, but no clear sense of rocket ship growth.
Timing matters. Is the larger market ready to adopt the beliefs and culture and habits of the few?
For some investors, it’s why they target quality of life improvements to the wealthy made ready for the masses. Living a wealthy lifestyle is, after all, aspirational for many. On the flip side, if you have a niche audience and are looking to expand, are there underlying beliefs and traits that the broader market has but has instead applied those beliefs and habits in other parts of their life?
Big IF true
Sam Altman put out a blogpost just yesterday, titled “What I Wish Someone Had Told Me.” And out of the 17 lessons he shares, one in particular resonated the most with me:
“It is easier for a team to do a hard thing that really matters than to do an easy thing that doesn’t really matter; audacious ideas motivate people.”
While the stories of Airbnb or Coinbase or Canva seem to suggest that these are nigh impossible ideas to raise on, anecdotally, I seem to find that the most transcendent companies with CEOs who are able to acquire world-class talent to their companies have less trouble fundraising than the ‘big when true’ ideas. But more difficulty raising than the ‘big and true’ ideas.
That said, instead of many smaller checks, you just need to find one big believer. In other words, the Garry Tan for your Coinbase or the Fred Wilson for your Twitter. One way to look at it, though not the only way, is what Paul Grahamputs as the “reasonable domain expert proposing something that sounds wrong.” Crazy, but reasonable. Simply, why you?
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Earlier this week, I was listening to a fascinatingly thoughtful conversation between Tim Ferriss and Kindred’s Steve Jang, where Tim said one line that stood out in particular: “I’ve been paying a lot of attention, but I’ll be honest, I don’t know how to pay proper attention.”
And well, it got me thinking. About the difference between knowing what to look at and knowing how to look at it.
One of my favorite TED talks is by Will Guidara (quite honestly I think it deserves more views on YouTube than it has). Will is probably best known for co-founding one of New York’s hottest fine dining restaurants, Eleven Madison Park, and for writing the book, Unreasonable Hospitality. And in it, he talks about how just listening to the conversations that are happening at the tables and delivering these small, unexpected pockets of joy can create experiences that transcend money and time.
In the afore-mentioned talk, he talks about how there are four diners at Eleven Madison Park. That they went to all the top restaurants in NYC. Le Bernardin. Per se. And so on. And Eleven Madison Park was the last on their to-do list. But the only regret they had was that they never got to try a New York hot dog. Of course, upon hearing that, Will storms out the door to buy a $2 dog, brings it back to the kitchen and convinces the chef to serve it over the aged duck that took years to perfect. And when he finally delivered the next course on the menu as the hot dog he just bought, the four guests went bonkers. That despite on the multiple courses and the brilliant food, that their favorite dish was the NYC hot dog.
That it was because Will paid proper attention to his guests that he was able to deliver a truly unforgettable experience.
The truth is how to pay proper attention to anything that deserves our attention is the million-dollar question.
Paying proper attention
There’s the famous selective attention test, where viewers are asked to count the number of times the ball is being passed between the players, only to fail to realize that there is gorilla that walks across the screen. We’re told to pay attention to the ball passes, but only by paying proper attention to the purpose of why the test is being administered, do we catch what is hiding in plain sight.
Similarly, Raymond Joseph Teller (or better known for being half of the dynamic magic duo Penn & Teller) did a fascinating talk a decade and a half ago about the illusion of expectation. That magic in all of its novel facets feeds off of the expectations of its onlookers. When one tries to pay attention to the coins that are “magically” jumping from one hand to the next, you might fail to catch the sleight of hand in between. But only after he reveals his secrets is the simple magic act all the more impressive. In other words, in the second half, he teaches you how to pay proper attention.
If you have eight minutes in your day, would highly recommend watching the below video.
I can’t speak for every topic, industry, relationship, and so on out there, but at least for the cottage industry of venture capital, why I choose to write an angel or an LP check is similar. I don’t really look for what will change. ‘Cause damn, it’s so hard to predict what will change and how things will change. If I knew, and if one day, I know, please invest in my public markets fund, which will be the best performing fund of all time. But I don’t. We, as pundits sitting around the table, might draw predictions. But even the smartest of us (not sure why I say us, ’cause not sure if I can put myself in that category yet) would be lying if we knew what would happen in foresight.
Instead, I look at what doesn’t change.
What doesn’t change?
The great Charlie Munger passed away last week at the age of 99. And without question, a great loss to the world we live in today. Just half a year prior, he and Warren Buffett were hosting their 2023 annual meeting. And just two weeks prior, he was still doing CNBC interviews. And one of my favorite lines from that May annual meeting was:
“Well, it’s so simple to spend less than you earn, and invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, et cetera, et cetera, and do a lot of deferred gratification because you prefer life that way. And if you do all those things, you are almost certain to succeed. If you don’t, you’re going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game where you’re very likely to win without having any unusual luck.”
In reducing the requirement to need luck, one of the most effective ways to find what is constant in life. That despite changing times and technologies, these stay true. Or as Morgan Housel and Naval Ravikantput it, If you lived your life 1000 times, what would be true in 999 of them? In investing jargon, pattern recognition. Across my investments and more, where have I seen outperformance? What characteristics do they all share? What about human nature won’t change?
In fairness, pattern recognition gets a bad rap. And for a lot of investors, that’s because they choose to only invest in their comfort zone, and what they know best. Their former colleagues. Their Stanford GSB classmates. People who look like them, think like them, act like them. But recognizing thematic threads stretch across all facets of our life. We learn that not brushing our teeth well can lead to cavities. We learn that after stubbing our toe on the kitchen counter numerous times, we take a wider turn before turning into the kitchen. And we learn that eating piping hot foods kills your tastebuds for the next few days.
The venture corollary
In venture, we’re always taught to look at the team, product, and market. And that all are important. But if you tell a new grad or an ex-founder or an emerging angel to do just that. To them, that means nothing. They wouldn’t know how to judge. They have no benchmarks, nor do they know what’s right versus wrong. Now I don’t want to sound like a broken record, but I do believe previous blogposts like this and this are quite comprehensive for how I pay proper attention as an investor.
Emerging LPs are not immune to the lack of perspective as well. My hope and my goal is for how to be just as important if not more than the what. And for the why to be just as or more important than the how. It’s because of that, I write essays like this and this. And of course, it’s why I started Superclusters because I, too, am looking for how to pay proper attention to the next generation of venture investors. (Stay tuned for the coming Monday for episode four where we unpack the bull and bear case of early distributions in a fund!)
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Recently, I’ve been chatting with a number of GPs and LPs looking to make their first hires. Many of whom hadn’t built a team prior. Now I’m no expert, nor would I ever claim to be one. But I’ve been very lucky to hire and work with some stellar talent.
They asked me how I think about interviewing, selecting, as well as onboarding. I’ll save the last of which for a future blogpost, but for the purpose of this one, if you frequent this blog, you’ll know I love good questions. And well, I get really really nerdy about them. So, as I shared my four favorite, nonobvious interview questions as of late with them (some I’ve used more than others), I will also share them with you.
I won’t cover the table stakes. Why are you excited to be here? What skills are you a B+/A- at? And what are you A+++ in? Why you? Etc.
If you had to hire everyone based only on you knowing how good they are at a certain video game, what video game would you pick?
I recently heard Patrick O’Shaughnessy ask that question to a guest on his podcast, and I found it inextricably profound. While the question was directed at Palmer Luckey, who has a past in video games, the words “video game” can easily be replaced by any other activity or topic of choice and be equally as revealing. Be it sports. Or an art form. Or how they grasp a certain topic. Even, putting them in front of a Nobel Prize winner and see how quickly they realize they’re in front of one.
The last example may be stretching it a bit, but has its origin in one of my favorite fun facts about the CRT — the cognitive reflection test. Effectively, a test designed to ask the minimum number of questions in order to determine someone’s intelligence. But in a parodical interpretation of the test, two of the smartest minds in the world, Daniel Kahneman and Amos Tversky, decided to make an even shorter version of the test to measure one’s intelligence. The test would be to see that if one were to put you in front of Amos Tversky, one of the most humble human beings out there despite his intelligence, how long it would take you to realize that the person sitting across from you was smarter than you. The shorter it took you, the smarter you were. But I digress (although there’s your fun fact for the day).
The reality is that any activity that requires a great amount of detail, nuance, resilience, frustration and failure probably qualify to be mad-libbed into that question. Nevertheless, it’s quite interesting to see what someone would suggest, and a great way of:
Assessing how deep a candidate can go deep on a particular subject,
How well they can relay that depth of knowledge to a layperson, and
How they build a framework around that.
I hate surprises. Can you tell me something that might go wrong now so that I’m not surprised when it happens?
Simon Sinek has always been one for great soundbites. And the above question is no exception. It’s a great way of asking what is one of your weaknesses. Without asking what is your weakness? Most, if not all hiring managers are probably accustomed to getting a rose-tinted “weakness” that turns out is a strength when asking the weakness question to candidates. It is, after all, in the candidate’s best interest to appear the most suitable for the job description as possible. And the JD doesn’t include anything about having weaknesses. Only strengths… and responsibilities.
At the same time, while the weakness question makes sense, when there is an honest answer, I’ve seen as many hiring managers use the associated answer to discount a candidate’s ability to succeed in the role, before given the chance. While this is still throwing caution to the wind, for one to be open-minded when asking this question, at the very least, you’re more likely to get an honest one. At least until this question becomes extremely popular.
Another version, thought a lot more subtle, is: What three adjectives would you use to describe your sibling?
I won’t get into the nuances here, but if you’re curious for a deeper dive, would recommend reading this blogpost. The TL;DR is that when we describe others (especially those we know well), we often use adjectives that juxtapose how we see ourselves in relation to them.
What did you do in your last role that no one else in that role has ever done?
This is one of my favorite professors, Janet Brady’s, favorite questions, and ever since I learned of it, it’s been mine as well. Your mileage may vary. Of particular note, I look for talent with entrepreneurial natures to them. Most of what I work on are usually pre-product-market fit in nature. In other times, and not mutually exclusive to the former, requires us to re-examine the status quo. What got us here — as a team, as a company, as an industry, or as a citizen of the world — may not get us there.
And there is bias here in that I enjoy working with people who push the boundaries rather than let the boundaries push them. And I love people who have asked the question “What if?” in the past and has successfully executed against that, even if it meant they had to try, try again.
What haven’t you achieved that you want to achieve?
Steven Rosenblatt has always been world-class at hiring. By far, one of the best minds when it comes to scaling teams. For a deeper dive, and some of his other go-to questions, I highly recommend checking out this blogpost.
When you’re building a world-class team, you need people to self-select themselves in and out of the culture in which you want to build. Whether it’s Pulley’s culture of move fast and ruthlessly prioritize to build a high-performance “sports team or orchestra” or On Deck’s non-values, it’s about making it clear that you’re in not because you’re peeking through rose-tinted glasses, but that you know full well, that you will be confronted by reality, yet you still remain optimistic. To do that, you need:
A tight knit team who hold the same values
And folks with a chip on their shoulder
The latter is the essence of what Steven gets at with the above question. And does one’s selfish motivation align with where the company wants to go and what the role will entail.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
This past weekend, I ended rewatching a classic and one of my favorite Eddie Murphy movies, A Thousand Words. Eddie, who plays Jack McCall, a literary agent, is someone who will say anything to get what he wants. And the plot of the movie effectively revolves around him trying to sign his next author and the after effects of doing so.
At one point, Dr. Sinja, the author he’s trying to sign, tells Jack, after he exclaims that he tells his wife he loves her “all the time”, “Words? More words, Jack. You tell her, like meaningless leaves that fly off a dying tree?
“Words.
“Can’t you show her that you love her? Make peace. Show them that you love them. And be truthful.”
One of my favorite people in the world, my friend who I met by way of mutual friend introduction, also happens to be one of the more well-traveled people I know. While it’s not my intention to embarrass her by writing this blogpost, she’s someone I’m deeply grateful for — my pen pal.
Every time we text, we send these long passages to each other. Paragraphs long. It doesn’t happen super often, every 2-3 months or so. And at times, we go six months without texting each other. But what makes her awesome aren’t our virtual letters, while I do really enjoy writing and reading them. What makes her awesome is that every time we meet in-person, she brings me gifts from abroad.
And she did so, ever since the day we first met, and I, in a passing remark, mentioned I didn’t travel often. And because of my work, my school, the need for me to be close to take care of family, I’ve stayed in the cocoon of the Bay Area my whole life. As such, I really do enjoy when friends tell me in detail of their travels beyond the horizons. But she took it a step further, where she would:
Buy gifts, snacks and souvenirs from abroad to bring back
Mail me postcards from every trip, sharing the smells, sights, sounds, and feels of her surroundings as she writes them
And of course, bring me back tales from her adventures when we meet in person.
They’re small things. But despite being small, they mean a lot to me.
I’m luckier now to be able to travel more. And just like my pen pal brings back treasures when she travels, I do so for her now too.
And of course, this extends beyond friendships. The fundamentals for any relationship (friendship, romantic, customer, investor, or some other business relationship) are fulfilling promises. Too often, I meet folks, who like Jack McCall say more than they can deliver. Most times unintentionally. A large part due to society’s expectations to be nice.
I’ll give an example. How often do we hear “How can I help?” at the end of a conversation? If you’re anyone who has something that others want — connections, capital, or advice — the ones on the receiving end probably wish to pay you back in some way. But most people ask that, and when they get an answer back, they take it in like the passing wind. Personally, I’d rather people who can’t deliver on that not ask that question than ask and not deliver (if there is something the other could use help on).
To go beyond just a normal relationship means you need to deliver the unexpected — beyond the initial promise. That requires you to actually spend time caring. And when you do, actions will naturally follow words or perform independent of words.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
The other day, I had a super insightful conversation with one of my awesome teammates here at Alchemist Accelerator about access and exposure. The difference between accelerators and emerging early-stage managers.
I’ll preface that for investors, particularly emerging managers, the three things you need to win are sourcing, picking, winning. And to be a GP, you need at least two of the above three. But for the purpose of this blogpost, I’m only focusing on sourcing.
I’ll also preface with the fact that I may be biased. I started in venture at SkyDeck, an accelerator. Additionally, I advise at a bunch of studios, incubators and accelerators. Moreover, I worked at On Deck when we launched our accelerator. And now, I’m here at Alchemist Accelerator.
I truly love early-stage programs. The earlier the better.
Instacart’s recent IPO is a clear example of venture returns compared to the public market equivalent as a function of stage. The earlier you invest, the more alpha you generate to your most liquid comparable.
It’s the difference between a market maker and a market taker. A price maker and a price taker.
Though admittedly, one day, this too may become saturated, just like how venture capital went from 50-60 funds in ’07 and ’08 to now over 4000 in 2023. Do fact check me on exact numbers, but I believe I’m directionally accurate.
Let me give a more concrete example. Harvard is a phenomenal institution. And there’s a Wikipedia page full of breakout Harvard alums. But as an LP, if 50% of your managers, despite having different theses, all have half their portfolio as Harvard alums, then you as the LP are overexposed to the same underlying asset. The same is true for Stanford. Or seed or Series A funds investing in YC founders. All great institutions, but you’re not getting your buck’s worth of diversification.
The only caveat here is if you’re not looking for diversification. After all, the best performing fund would be the fund that invested a 100% of their fund in Google at the seed round. AND holding it till today. Realistically, they will have had to distribute on IPO.
The question is are you a fisher? Or are you a digger? One requires a fishing rod; the other a shovel. The latter requires more work, but you’re more likely to be the first to gold. Like Eniac was for mobile. Or Lux to deep tech.
So how do you know you’re fishing in someone else’s pond?
Easy. Your deal flow includes someone’s else’s brand. Whether that’s Sequoia or YC or SBIR. It’s not your own. You don’t own that pipeline. A lot of people have access to it. It’s no longer about proprietary deal flow, but about proprietary access to deals to borrow a framing from the amazing Beezer.
If your deal flow pipeline looks something like the graph below, you probably don’t have a sourcing advantage.
Now that’s not to say there aren’t a lot of nonobvious companies coming out of YC or these startup accelerators. Airbnb, Sendbird, Twitch (the last of which Ravi who I work with here at Alchemist happened to be one of the first institutional investor for, so have heard some of these stories), and more were all non-obvious coming out of YC. And have also seen the same for companies coming out of Techstars, 500, and Alchemist, where I call home now. But that’s a picking advantage, not a sourcing one.
The flip side is, how do you know you’re excavating your own pond?
I’ll preface by saying having your own Slack or Discord “community” is not enough. Or having your own podcast.
I put community in quotes simply because having XXX members in a large group chat isn’t indicative that their presence is really there. Is their seat warm or cold?
I love using a stadium analogy. Imagine you sold a couple thousand season tickets to a team. You can name whatever sport it is. Football (yes, the rough American kind). Soccer. Basketball. Baseball. You name it. But despite all the tickets you sell, a solid percentage of your seats each game is empty. Can you really say that your team has fans? All you did was sell a couple of cold seats.
You can make the same analogy with likes or comments on Instagram. Which seems to be a problem these days, when an influencer with a couple thousand likes per post starts hosting their fan meetups, only to realize they rented out an empty hall. In case, you’re wondering for the IG example, it’s due to bots.
All that said, I like to think about excavation in the lens of competition for attention. Everyone only has 24 hours in a day. 7 days in a week. 365 days in a year. And as someone who is expecting any level of engagement from others, you are fighting for attention with every other product, person, and habit out there.
Perks of being a consumer investor, I think about this a lot. But in the same way, having an unfair sourcing advantage is the same.
Is the greatest source of your deals tuning into you at least four of the seven calendar days in a week? Or if you have a professional audience (i.e. only product people, or only execs), are they engaging at least 3 workdays per week or 8 workdays per month? Are they spending more time reading/listening/engaging with you than with their best friend?
If you have a community, do you have solid product-market fit? Is your daily active to monthly active over 50%? You don’t need a massive audience, but for the people who are primary sources of your deal flow, are you top of mind? As Andrew Chensays, at that point, “it’s part of a daily habit.”
Is it easy for them to share your content, what you’re doing, who you are with others? Does sharing you or your content generate dopamine and social capital for them? Do you embody something aspirational? Is your viral coefficient greater than 0.5? Even better if it’s 1, then you’re ready to go viral.
And do people stick around? Do the seats stay warm? Is your community self-propagating? Is your content evergreen? Or do you produce content at a voracious pace that it doesn’t have to be? Do you live rent free in people’s brain?
And once you do invest, are you the weapon in the arsenal of choice? For instance, 65% of Signalfire’s portfolio use their platform weekly to learn and get advice. But more on the winning side in a future essay.
In closing
To truly have a sourcing advantage, you need to be building your own platform that is impressionable and regularly take mind space from the founder audience. But if you don’t, that’s okay. You just need to be really good at picking and winning.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
All cards on the table, I love conferences. It’s a great exchange of ideas. And every once in a while, you meet some really cool people. In fact, I’ve met quite a few of my now-great friends via large events. And hell, I love swag! Like, frickin’ love them! Arguably too much so.
I also love events, and have deep respect for not only the magnitude, the effort, but also the creativity that goes into making great events great. And if you’re a regular fan of this humble piece of internet real estate, you’ve seen me write about it. If not, would recommend searching up “social experiment”, “community”, or “events” in the righthand side bar. But I digress.
So, all of this transpired, when a founder asked me publicly in a Slack community, “Is TechCrunch Disrupt worth going to, to meet investors?”
I love TC, and all it stands for! But if you’re looking to raise and meet VCs who’ll be interested in listening to you pitch, your bang for buck is better elsewhere. Not saying it’s not possible, but if you’re not on stage, it’s just a lot of wasted effort. Why?
VCs who are there are not looking there for deal flow, at least the good ones who have great pipelines.
‘Cause most people who are there are looking for investors as well. You’re not getting as much facetime with the right people as you would like. The ones you wanna get in front of are always the most popular ones.
On the flip side…
Why I think TC (or similar) is worth attending?
Conversion. Conferences should not be top of funnel for you. ‘Cause if it is, you’re one step too late. Maybe two steps. Use it as a conversion tool. Set up Zooms with investors prior. Then use IRL time to convert them into fans or reinforce why you’re awesome. I mean, have you ever been to a networking event where strangers intro themselves to you and you forget their name within 5 seconds? The same is true for most investors unless you have a story that’ll make you go viral. If that’s the case, then you really don’t need conferences anyway. (Unless you’re on stage.)
Hosting your own event/happy hour/fireside chat. Better to be a host of even a small intimate 6-8 person dinner than to be a participant. Participants are for the most part, forgettable. As a host, you’ll be able to live rent-free in someone’s mind for at least a few weeks.
Or purely for fun. Then yes, go have fun. Everything else is a cherry on top. Did I mention conference swag is usually really awesome?
In closing
Do I personally go to conferences?
No. Usually. This doesn’t have any bearing to a conference’s quality. In fact, I think events like Saastr’s, Upfront’s, All-In, just to name a few are very well-organized.
I’m just too busy.
I enjoy intimate conversations more. I’m an introvert, what can I say.
I like letting my creativity run wild by hosting my own.
So if you’re a founder fundraising, hopefully the above might be some helpful context when you are next at a crossroads in relation to event attendance. And yes, I find the above to be true if you’re an emerging manager fundraising as well.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
It’s fundraising season again. For founders. And for investors.
It may have been a product of the content I’ve been writing and the events I’ve been hosting. It could also be a product of my job title. But in the last few months, I’ve met a great deal of fund managers — from Fund I to Fund XIII. With a strong skew to the right. In other words, vastly Fund I through III.
And given the current market, there is the same pressing question from all: How should I pitch my fund?
And subsequent to that, who should I talk to? Or can you intro me to any LPs?
And in all these conversations, I’m reminded of a great piece Jason Lemkin once wrote on hiring the right VP of Marketing. I won’t go too much into depth since I’ve written about it here. But if you have a spare five minutes, I highly recommend the read. As such, the framework I share with fund managers is:
Fund I and II, it’s all about lead generation.
Fund III and IV, it’s about product marketing. The product is the fund. The product is the partners’ decision making.
Fund V and onwards, it’s all about brand marketing.
I’ll elaborate.
Now I’ll preface with most emerging funds won’t have the capacity to bring on an investor relations person, so the onus lies with the founding partners themselves.
Lead generation
Barely anyone knows you exist. You need to be out there. You’re pre-product-market fit. And you need to sell why you are the best sub-$50 million fund to return three times your LPs’ money back. Five times if you’re pre-seed or seed. LPs are looking for GP-thesis fit. But more importantly for you, this looks very much like a sales game, not a marketing game.
Generating demand where there is none is key. How do you best tell a story no one’s heard of?
You have to break an arm and a leg to close LPs outside of your initial friends and family. You have to show you care. Or as Mark Suster recently said (quoting Zig Ziglar), “People don’t care how much you know until they know how much you care.”
You’re going to events. Trade-show equivalents. You’re hosting your own. Your asking co-investors to be your LPs. You’re asking for LP intros to largely high net-worth individuals, who’ll be your beachhead “customers” before you prove the promise you’re selling capital allocators. And just as much as they’re looking for the right people to marry for the next 10 years or 20 years (latter if you’re working together for at least three funds), you need to qualify them as well. And while yes, it’s important to keep your funnel wide, you need to have a strong idea of who’s a good fit and who isn’t from the very beginning. If it helps, here are some of my favorite pre-qualifying questions.
You’ve now gotten to a stage where your strategy is known. Founders and LPs self-select themselves into investing in you or not. For instance, if you know you can win on a diversified strategy betting with portfolio sizes north of 50, all the LPs that look for concentrated portfolios or strong reserve strategies will turn the cheek.
You’ve built a strategy off of the scare tissue from Fund I. Now you’re selling that strategy. Are you fishing in ponds that other GPs are not? In other words, is it differentiated? And how?
It’s an interesting exercise but it’s usually not the first thing you think of, but the third. When you really dig into your fund’s soul. Why do founders come for you? Why will they choose you over all the other 4000 VC fund options out there? Equally as helpful to do a “Why did you choose me” survey with your founders.
The big question for LPs now is: Is this repeatable?
Why? Your initial LPs for Fund I, maybe II, are smaller checkwriters, given the size of most Fund I’s and II’s. A lot of them know, even innately, that as you scale in assets under management, you will eventually graduate from their check size. But starting from Fund III, and maybe even Fund II, you’re targeting sophisticated and larger LPs, who are looking to build that 20+ year relationship. And for them repeatability and consistency is important.
Brand marketing
When you’ve finally settled into your quartile, which usually takes at least 6-7 years of track record, you’re now focused on largely selling the returns on your previous fund. Your product works. For some funds, they diversify into other product offerings, or bring on new partners to manage new verticals and initiatives.
Just like a Super Bowl ad needs to be played at least seven times or in the marketing world the 7-11-4 strategy (you need at least seven hours of interaction, 11 touchpoints, and in four separate locations) before one remembers and hopefully buys your product, you’re trying to help LPs keep you top of mind. Again not hard and fast rules, but a useful reference point of just how much work it takes to stay top of mind.
That could mean a focus on content — a newsletter, podcast, great/frequent LP updates, social media and so on. Or great AGMs (annual general meetings). And hosting events. Or being that awesome co-investor that pops up other emerging managers’ pitch decks. Strong communication is key — either directly or indirectly — so that when you raise your next fund, your LPs are ready and have pre-allocated to re-up in your fund.
In closing
Now the purpose of all this segmentation isn’t to just be snotty about it, but that the focus for pitching and closing LPs varies per the number of your fund. Don’t try to do everything at the same time. It’s not worth it, and neither do you have the resources, time or bandwidth. Stick to one strategy and get really good at it.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
I’ve had multiple conversations with emerging managers currently fundraising over the past few weeks, and the common theme, outside of the usual no’s, seems to be that larger LPs are saying, “If you were raising a larger fund, we would invest.”
And so there’s this catch 22 in the market right now. In one Fund I GP’s words, “either raise a larger fund and be told by the large checks that they don’t do Fund I’s. Or do a smaller fund, and be told by the high quality LPs that they’re too small.”
As a note, for the uninitiated, most large, seasoned LPs usually don’t want their check to be more than 10% of the fund. Why? Too much exposure in a single asset. And the need to diversify. Every year, there are really 20 great companies that are made. Or on the higher end, as Allocate’s Samir Kajirecently wrote, “30-50 companies drive the majority of returns.” Your goal as an LP, is to get as much exposure to those as possible. And they rarely all come out of just 1-2 funds.
If LPs are open to taking up more than 10% of the fund, they usually come with rather aggressive terms. For instance, investing into the GP stake, as opposed the to the LP. That’s a conversation for another day though.
As such, I’ve seen many a manager play both angles. They call it the “toggle.” If we raise a target of $10M fund, we’ll only do pre-seed. We’ll also have no reserves. If we raise a $25M fund, we’ll have 20% reserves and more seed checks. But if we’re able to close a $50M fund, we’ll have 33% reserves and do 50% pre-seed and 50% seed. The deltas between some fund managers’ targets and caps have grown as wide as the Grand Canyon. I was chatting with a Fund I GP yesterday who had a $10M target with $40M cap. Still relatively reasonable. Another GP raising their Fund I two weeks ago told me he had a $15M target and $70M cap. Far less reasonable. In fact, I might even say, a $15M fund and a $70M fund are two completely different strategies.
So begs the question, as a Fund I or II GP, is it worth raising a larger fund to possibly close large LPs or staying disciplined in your pre-product-market fit fund?
Spoiler alert… I don’t have the silver bullet. So if you’re looking for one, this blogpost isn’t worth your time.
But if you’re not, here’s how I’ve been thinking about it.
The short answer is really, whoever’s willing to give you money. Not the most sophisticated answer, but if you know large LPs well and they’re willing to invest in you, go bigger. Otherwise, you need to consider a more grassroots approach.
If you have a strong, portable, relevant track record that’s either returned good distributions already OR that has persisted for at least 6-7 years, larger LPs may be more open to investing in you. If not, you may need to play the numbers game with smaller LPs, that are liquidity-constrained as of now. And for that, you either take smaller checks, or prove you are the best option for their $250K LP check, that it somehow outcompetes the S&P, 3-year treasury bonds (because of interest rates), real estate and so on.
Also, remember that LPs are always nice in meeting #1. I’ve heard of very few instances where they’re not. A lot are just in exploratory mode. No pressure to commit. You will also need a great barometer of what nice looks like and what kindness looks like. Otherwise, you will waste a lot of time.
What does that mean? It is easier for a large LP to tell you “I will invest if your fund was bigger” than to tell you “No.” It’s the equivalent of VCs telling founders, “You’re too early for me.” And the same as recruiters and hiring managers telling job candidates “We have a highly competitive pool, and while we loved meeting you and you’re great…” There might be some truth to it, but a lot of smokes and mirrors, and a fear to offend people. I get it. We’re all people.
Just don’t lie to yourself.
Taking the hard road, which will be true for the vast majority of managers raising now, is to keep the fund size small and disciplined. Aim for a minimum viable fund. And deploy.
The minimum viable fund
Simply put, what is the minimum you need to execute your strategy? To set yourself up to raise a larger fund 1-2 funds from now?
What assumptions are you trying to prove?
What does your ideal Fund III look like? And What does fund-market fit look like to you? Be as detailed as you can. It could be that you’re getting four high quality deals per quarter. And that you have $30-40M to deploy per senior partner. That you’re leading rounds for target post-money valuations between $10-20M. That you have early DPI from Fund I by then. And so on.
Then work backwards. If that’s what Fund III looks like, what does Fund II look like? What does Fund I look like? As you’re backcasting, to borrow a Mike Maples Jr. term, each fund when you work backwards in time is focused on testing 1-2 key assumptions that you and LPs need to get conviction on. Assumptions that require data.
I’ll give an example of one kind of assumption. Your ability to win allocation.
If Fund III is where you lead pre-seed and seed rounds and have strong ownership targets, then Fund II is where you have to test if founders and other downstream investors will let you take pro rata for more than one round. And, if you can win or negotiate for that pro rata. It all comes down to, will a founder pick you over another awesome, possibly brand-name VC? And if so, why?
Some LPs prefer co-investment opportunities. And while it is helpful for them to go direct, part of the reason for it, is even if your fund can’t execute on the pro rata, just the ability to negotiate that is powerful for the day you need to lead. And if that’s Fund II, Fund I may be, can you win allocation in hot rounds and/or can you discover non-obvious companies before they become obvious?
Let’s say your Fund I is focused on the latter. You’re probably investing on $5-10M post-money valuations, and you’re going to try to maintain 5% ownership till the A-round. That’s $250-500K checks. $250K would be your base check, trying to get at least 30 shots on goal. That’s a $9-10M minimum viable fund, hoping for more than a 2% outlier rate in the generalist market, or north of a 10% outlier rate in bio, hard sciences, healthcare, or deep tech space.
Any less than 30 companies, you’re going for the hyper-concentrated portfolio and it’s a lot more about ownership and the greater the pressure, you need to pick well. But the goal is to get to a 3x net minimum for your fund by the time you get to a Fund III.
I heard from LPs with more miles on their odometer that once upon a time, it was normal for GPs to give undeployed capital back to their LPs. Circa 2002-2005 vintage funds. Where GPs don’t execute on 50% of their capital calls. But we don’t live in that era anymore. For better or worse.
Some LPs don’t even want their capital back early because then they need to pay taxes AND find another asset that compounds at the same or better rate your fund currently is. Say 25% IRR or CAGR. That’s hard. Because minus the inflated marks of the last 5 years, 25% is a hard benchmark to hit for the vast majority of funds.
So sometimes to be the best fiduciary, that means raising a small fund today (easier to return too) to set you best up for tomorrow.
The questions to ask
If you are in the midst of conversation and trying to court a large LP, do ask the following:
Have you invested in an emerging manager in the last two years? — If not, you’re unlikely to be their first. If you’re not seeing demonstrable progress from intro to partnership meeting to diligence within three meetings, move on. If they did so, 20 years ago, doesn’t count. That means investing in emerging managers is not top of mind for them.
What is your minimum check size? And how often, if ever do you deviate from it? If so, why was the last time you did so? — Multiply this number by 10. If it’s greater than your fund size, you might find more success elsewhere.
What is the typical process look like? — Find out what their process is and see if you’re progressing forward. If not, very clear they may not be interested.
(If the person you are talking to does seem to really like you) What are the questions you’re being asking in your investment committee? — Figure out the bottlenecks as soon as you can. And determine if that’s something you can solve for in the near future or not. If it’s track record, you realistically can’t.
What is the thing you hated most in the last few years? — Understand their red flags early on in the process. And cross your fingers, it’s not something that’s relevant to you or your fund. If it is, move on.
Of course, the above, while useful pre-qualifying questions, are mentioned in broad strokes. Your mileage may vary. Have there been examples of large LPs betting on small funds? Yes. But far and few in between. But don’t expect you will change many minds.
In closing
Fundraising is all about momentum and time you’re in market. You can theoretically spend six months trying to close one large LP, but your time might be better spent closing smaller checks in the beginning from people who believe in you and strong referenceable names. And if you so choose, come back to the large LP in the second half of your fundraise.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
