Last week I had the chance to sit with the one and only Steven Rosenblatt, former President at Foursquare and the one who got Apple into the advertising business, now Founding GP at Oceans. Of the many things I could have asked, I had one burning question. Something that I also knew Steven knew like the back of his hand. Hiring executives.
Particularly, I’ve always been curious, since I’ve never done so myself, but have watched many friends and founders do it — successfully and well… its polar opposite, best described with this meme.
And in fourteen words, I asked Steven: For a first-time founder, how does one go about hiring their first executive?
To which, Steven generously shared: “There are three questions that founding CEOs need to ask themselves.”
“What’s the most critical gap in the company that you need incredible leverage?” What are the holes you’re really failing at? That if you can hire, will dramatically increase the success of the company. If you don’t solve, you won’t have the right to raise the next round of funding. You don’t need to build a $100M company today; you need to build a $10M company today.
“What are the things you hate to do or suck at?” A lot of CEOs optimize for the question: What kind of CEO do I want to be? But what’s more powerful, as Steven shared, is: What kind of CEO do I NOT want to be? Are you sure your superpower as a founder is aligned with what you want to do?
“Is this person going to help me build the culture that I want at my company?” Sometimes someone is going to look great on paper, but the rest of the company and culture will outright reject them.
Culture, talent, and everything in between
As the saying goes, you look for the shimmer, but mine for the gold. (Yes, I made that up. But trust me, if I say it enough times, it’ll stick.) So, I’d be remiss to leave the jewel unexcavated. As such, in the double take, I asked: Tactically, how do you know if someone is a good culture fit?
“Write down the things that are important to you,” Steven shared, “What kind of team are you looking to build?” A results-oriented one or a process-oriented one? A culture of one-on-ones or not? Distributed or not? A family or a world-class orchestra?
“There’s no script for this,” elaborates Steven, “But think deeply about how you want to treat your employees, how you think about growth, and how you talk to investors. When I transitioned from Apple to Foursquare, on day one, while I was still only an advisor, Dennis invited me to an Exec meeting. I knew this was a culture of transparency. Additionally, at our weekly All-Hands, while Dennis led some of them, I would lead them as well as other execs. Something I found that our employees really really appreciated it. I went from a culture of secrets to one of transparency.
“So, to understand if someone is a good fit for your culture, after you write down what’s important to you, ask them:
What’s important to you? What haven’t you achieved that you want to achieve?
How do you do your best work? When do you feel the most motivated?
Why do you want to work here? Why are you excited to do so?
“These are multi-year relationships. And you need someone great to help you get to the next level. The truth is your first execs aren’t going to change; it’s who they are. And if they don’t live and breathe your values from the beginning, they won’t change their personality just for you.
“One thing I make sure to bring up is why they shouldn’t be here. ‘I’m not sure you really want to work here. Let me give you a bunch of examples of why you won’t want to be here. Let me tell why this is really, really hard.’ I then listen to how they react to it. In the early stages, you want someone who’s bought into the mission. After all, this is someone you’ll spend a lot of time with. Can you take this person out to brunch with your family?”
Now that you’ve hired a great candidate, I had to ask the man, “What does a great exec hire do in their first 90 days?”
There’s a saying that good things come in pairs. If I might add to that, it turns out great things come in triads. ‘Cause without skipping a beat, Steven said, “A great exec hire must do three things in their first 90 days: 1/ spend time with everyone; 2/ align with the founders, and 3/ build an action plan.”
1. Spend time with everyone
“Meet with everyone who’s at the company and really get to know them. Not just what they do at the company, but also why they choose to do what they do.”
Digging a level deeper, I asked: “So what questions do you ask your team members to really get to know them?” Steven, responded in kind, with his Rolodex of questions — a set I know I’m keeping in my 52-card deck:
What’s on your mind?
What does your day-to-day look like?
What inspires you?
And what’s holding you back? What’s stopping you from doing your best work?
If budget wasn’t an issue, what would you do? And what would you need to be able to get it done?
Of course, goalpost of everyone changes as your company scales. If someone is the first exec hire, talking to literally everyone makes sense. On the flip side, as Steven shared, “if you’re at a point, when you’re on a 100+ team — like a Series B company — you may not be able to talk to all 100 employees. In that case, 50-70 employees should suffice.”
2. Align with the founders
As important as it is to talk with the team, the conversations before and after the exec is hired are different only in the context that the latter goes much deeper. The best way for an exec to hit the ground running is to really understand the company’s past, present and future.
The past. “A great exec needs to understand what’s been built to date and why. What were some of the hard decisions we had to make? Where did we pivot? What did we stop doing? And what have we learned to date?
The present. “Who is using the product and who are our target customers? How are they using it? Gather as much product-related data as possible.”
The future. “Where do we think we want to be in the next 90 days? Six months? A year? Are there things that the exec would like to change? Where are we not aligned and why aren’t we?”
Within that three-month period, a great exec should have already figured out where they are going to prioritize their time. When putting it all together, a world-class exec is able to answer the question: Is the plan we want to execute on the same as the one our team is doing day-to-day? Is there any cognitive dissonance?
3. Build an action plan.
After they’ve talked to everyone, “the exec then comes back to management and lays it out. ‘Here’s where we need to get to to be fundable. I’ve talked to the employees, and here are the gaps we need to solve in the next few months. To help us get there, here are some of the hires I’m going to recruit.’
“In the prior conversations, you, the founder, have laid out that plan to fundability in the next 12 to 18 months. Does the exec agree with it? After all, the company’s KPIs are the exec’s KPIs.
“If so, the question becomes: How will the exec spend their time? What part are they owning? You hired this person to either take something off your plate or do something you hate doing or are not good or mediocre at. The exec’s job is to free up the founders’ time to do what they’re great at. So, you can focus on things that are higher leverage.”
So it got me thinking about the validity of my own question, is 90 days really the right benchmark for an exec to go from 0 to 100. Turns out, it may not be. “Given that this is your first exec hire and you’re still early, 60 days is more than enough, ” said Steven, “As you go further down the road, it’ll take more time to ramp up.” When you have a real business going on — something that’s default alive, as opposed to default dead — that’s when 60 days of an onboarding period turns to 90.
Letting go
I was also curious of the counterfactual. What if your hire goes wrong? How do you let someone go?
“Unless they’re a new hire, the day you let them go should not be the first time they’re hearing about this. Ideally, there should be no surprises that things aren’t going right. As the CEO, you should be having several frequent and transparent conversations to help them course-correct. If it’s clear that this person is not working out, move swiftly to let the person go. The longer you wait, the more damage it will cause long-term.
“It should also not be a surprise to the team when you do let them go. People often play to the lowest common denominator. Never the highest. ‘I just need to be better than the worst.’ If someone is really weak in their role, people see that. And if you don’t do anything about that person, they will set the culture and the standard for everyone else. So if you let someone go, and everyone else breathes a sigh of relief, that sets the record straight and your team can move on.”
Paul Graham and Suhail Doshi have a similar approach. If you ask your co-founders to separately think of someone who should be fired, and if they all thought of the same person, it’s probably time to let them go.
I found early on just asking myself: “would I hire this person if I knew what i know now?” seemed to always produce the correct answer. Additionally can make all the founders put their answer in a hat and reveal at once. Do it for every person on the team.
To take this a level deeper, I love the words Matt Mochary uses and recently shared on an episode of Lenny Rachitsky’s podcast. “The best way to lay someone off is for them to hear it from their manager in a one-on-one.” And before you give them the lay of the land, preface these hard conversations with: “This is going to be a difficult conversation. Are you ready?”
After they say “Yes”, then you share: “I’m letting you go. And this is why.”
After you share the why, you follow up with: “My guess is that you’re feeling a lot of emotion, anger, and sadness. Am I right?” Then actively listen to their fear and pain.
After you’ve had the conversation, don’t ask the canonical “How can I help?” But actively step in and help them find a better home. At the same time, it’s worth giving some people the space and time to process the multitude of emotions and stimuli. So, this doesn’t have to the first conversation, but most likely the second or third post-announcement.
In closing
As we wrapped up our conversation, Steven left me with these closing words. “Don’t be scared to make that first executive hire. But also, don’t rush into it. Take the time to get it right.”
He’s right. As with all great things, take the time to get it right.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
I’m sure every founder has heard that line at least 50 times every time they’re in fundraising mode. Hell, even outside of it. Pshhh, I’m guilty of saying it myself, while I do try to catch myself when I do. You’d think being helpful is table stakes as an early-stage investor. Surprisingly, being helpful as an investor is actually a huge differentiator.
Most investors are only as helpful as their check size, despite pitching their value-adds a million and one times. Some investors are extremely helpful only within the funding window(s) they are participating in. For instance, a seed investor is largely helpful during the 12-18-month funding window between the seed and the Series A. Others are helpful when they are asked. And a small handful of investors are true champions by being proactively helpful.
One of my favorite stories when I was interviewing LPs for the emerging LP playbook was when Brent invested in a GP who had a track record for being proactively helpful. This GP “was one of [Brent’s] first investors. He would often come into our office, and without being prompted, proceed to write code against our APIs.” Unprompted. Unsolicited, but insanely helpful.
Earlier this week, I was also reading the October investor update from a founder I love, and in it, he was talking about how much he loved the team at Sequoia (who have yet to invest), and shared that he had learned more about product in the last “3 days than [he had] in the last 3 months.”
A big part of the reason I joined the On Deck Angels team last year was to be a part of a community bringing the world’s most helpful investors together. As such, I’ve been lucky enough to be a student to our community on how they’re helpful — whether they choose to invest or not. Some examples include:
Writing a 3-5 page bug report for every founder you take a meeting with. This teaches an investor two things: 1/ to be judicious of one’s time and only take meetings with founders that you are truly likely to invest in, since these take a while to research and write up, and 2/ to always think in a “give first” mentality.
Record a Loom breakdown of why you decided to pass and what would get you over the fence. I’ve shared this before, but one of my favorite VC quotes and has been since the day I learned of it is: “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
Being able to admit how you can’t be helpful. As an investor, you don’t have to be good at everything, just really, really good at one thing, or a small handful of things.
Sharing their memos publicly on why they’re excited about a startup. This helps build a startup’s reputation, and also your own brand as a thought leader.
Sharing your deal memos and founder asks with your LPs (if you run a fund or syndicate). For this, admittedly, it’s best to get the founders’ approval, given the confidential nature of certain details.
Make an intro for every pitch meeting you take. Intros are often extremely high leverage. It takes you 1-2 minutes to write something up and send a double-opt-in intro. And oftentimes, can save the founders from at least tens of thousands of dollars worth of decision-making mistakes or costs. Of course, that requires you to have either photographic memory (which I don’t have) or a really good CRM. For the latter I use Airtable, and I track small details like: ideal catch-up frequency, preferred medium of communication, chill factor (yes, some of my intro emails can get a bit wonky depending on the person), and what makes them the best dollar on a founder’s cap table.
Many of the above aren’t necessarily hard to do, but just requires a consistent commitment to do them well. And of all the many ways one can help, they all fall into three buckets:
Introductions
Strategy, decision-making, and tactical advice
Downstream and co-investment capital
The last is the most obvious. The second is easy to understand, but often the hardest to execute on, and often comes from being an active or former operator yourself. Hunter Walk of Homebrew has this line, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.” Advice is just as helpful as it is dangerous. Something I’ll likely dive into in a future blogpost.
But for the purpose of this one, I’ll focus on introductions.
Network liquidity
I was recently reading Shawn’s chronicled reflections from his time as a Partner at On Deck — someone I am deeply fortunate to have worked alongside. In it, one line immediately grabbed my attention:
“Network liquidity is table stakes. […] This refers to how successful we are at connecting founders to people that are relevant to their needs and asks. The most important dimensions to consider are accuracy (how relevant was an introduction) and speed (how fast did you deliver).”
In 2022, and I imagine even more so, in the next few decades, it’s not about who you know — ’cause frankly, everyone will know everyone else. Social media, the metaverse, web3, the Zoom-ification of everything, and the rush back to IRL will only make this easier. I don’t believe any investor — or in fact, anyone, period — will have a “proprietary network.” So instead of who you know, it’s about how well you know them, and your ability to leverage that relationship.
We see this especially in the venture markets. In my recent blogpost, Sapphire’s Beezer shared: “We have felt for a number of years now (including pre-COVID) that the concept of ‘proprietary deal flow’ is not really a thing. Proprietary access however is something we think is true, powerful and not simple to achieve (hence why powerful ).”
I wrote quite a relevant essay a few months ago about how to write email forwardables. In order to tap into someone else’s network liquidity, there are two things you must establish:
Your rapport with the person you’re asking it from
Their rapport with the person you want to get to know
Requester and matchmaker rapport
I can’t speak for everyone, but my willingness to make intros depends strongly on both of the above, especially the former. Selfishly speaking, even if I don’t know the person who will receive the intro nearly as well, to put it bluntly, if I know I can look good to that person when I make it, that’s a strong motivator to do so. For that to happen, I need to fall in love with something about you — the person who would like to be introed. It could be you (usually the greatest motivating factor) and your passion. Even better if your passion is contagious. It could be your product. Or your insight. Usually, it’s some permutation of the afore-mentioned.
I meet with 10-15 net new founders per week. 25-30, if it’s accelerator season. Given my job description, almost every single founder asks me for intros. Sometimes, even without context.
Matchmaker and intro recipient rapport
The other side of the equation is the rapport I have with the person you want to get to know. The truth is the world of intros is like any other asymmetric game. The most well-known, busiest, and often hardest-to-reach people are the ones bombarded with the most intro requests. But like any other human being on this planet, they only have 24 hours in a day.
As a matchmaker myself, I have to cognizant not to overwhelm incredibly busy individuals with a flood of intro requests. And it is my job to triage requests. Sometimes, it’s also helping, in the case of fundraising, founders recognize not what they say they want, but to help them figure out what they really need.
In making requests to famous friends
There are times when the busiest people I know are the only people are capable of fulfilling the ask. So, it also comes down to your accumulation of social capital with the intro recipient. I have two columns in my Airtable CRM, labelled:
Why I am useful to them
Is my usefulness a priority to them? (on a scale of 1-5)
With the former, have I given before I have taken? Have I helped them before? Additionally, is the intro request more of a give or a take? A great startup with a strong team and traction for an investor is more of a ‘give.’ It’s deal flow from them. On the flip side, a founder asking for free advice is more of a ‘take.’ In general, ‘takes’ require more social capital than ‘gives.’
With the latter, priorities change. You may be useful in one phase in their life, but no longer so, in another. For example, when an emerging manager is fundraising for their Fund I, I am someone who is extremely top of mind for them, but when they’re not, I slip in importance. But regardless of the phase in their life, if someone is kind and thoughtful AND you’ve helped with a major decision or inflection point in their life, they’ll always be around. That said, I never try to abuse that goodwill. Personally, I hate being in debt and having others be in my debt.
You can also be “useful” in many different ways. For instance, doing interesting things is one way. One of the most famous people I know with millions of followers across his socials is willing to entertain any ask I ask of him under the condition I invite him to every social experiment I host in LA.
In closing
The more relevant an ‘ask’ is to the recipient, the more likely they’ll respond positively. The more top of mind you are and the more social capital you have with someone, the faster they’re likely to respond. We live in a saturated market of attention. Everything in the world is asking for ours — social media, kids, friends, work, portfolio companies, chores, Netflix, and sleep. And by no means all encompassing.
As you scale yourself as an investor, it’s important to think critically about who is in your network and how well you know them. If you’re a syndicate lead with 500 LPs, how many of them are passive capital? How many of them want to actively help your portfolio?
If you’re an investor who’s a Xoogler and wants to leverage the Google network, who do you know will go out of their way to help you? How many of them have you on speed dial? Which vintage were you a part of?
The great Richard Feynman once said, “You must not fool yourself, and you are the easiest person to fool.” One of the greatest fallacies an investor or even a founder can make is to assume they have a larger leverageable network than they actually do. Only to realize that when you do need to draw on these connections, you’re unable to.
So, if you have the time this weekend or the next, sit down with a critical eye and ask yourself: How liquid is your network?
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
I’ve been asked by many founders over the years, “How do I know it’s time to let it go?” And every single person asks me for some length of time. When I tell them I don’t have an “optimal” length of time that would do the question justice, they ask: “When do you usually see other founders you work with let go?” To which, the answer spans as far as the Pacific Ocean. I’ve known folks who work on it for six months before they called it quits. Others for seven years, without external validation. And then some who continue at it past the decade.
Who’s right? Who’s wrong? If I were to be honest, I don’t know. Rather I’ve always believed the independent variable here shouldn’t be time, but rather your emotional state. I’ll elaborate.
The “ideal” emotion to quit with
There’s a timeless apologue about a boiling frog. If you put a frog in boiling water, it’ll jump straight out. But if you put a frog in lukewarm water and slowly increase the heat, it won’t realize it’s dying until it’s too late. It goes to say that the more time you spend in the forest, the harder it is to see the forest itself. As such, this essay is for everyone who is stuck in the forest.
Andy Rachleff of Benchmark and Wealthfront fame has this great line. “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.”
I really love this line because loving to kill something and hating to kill something are on two sides of a spectrum. Oftentimes, if you’d love to kill something, that means you haven’t spent enough time on it. It’s easy to give up on something you care little to nothing about. On the flip side, if you’d hate to kill something, you’ve spent too long on it. Often, an example of sunk cost fallacy. And it’s when these two distinct emotions meet at twilight that you know you’ve put your best effort in. It’s when you feel both of these emotions simultaneously that you can finally let it go.
As I rounding out this blogpost, I thought I’d post on Twitter to tap into the world’s greatest minds alive on Monday. And when my friend Sara shared the below line, I knew she had something better. Something I did not know that I would be remiss not to double click on.
My friend once looked me in the eyes and told me, “You know what your problem is? You’re not a quitter, but you needed to quit a long time ago.” I have a whole methodology about how not to end up back there again. Happy to share.
So I did. And I promise the next few paragraphs from deep within Sara’s mind will change the way you think about quitting.
“You’re not a quitter, but you needed to quit a long time ago.”
“One of the things I learned over the years is that your intuition is probably right. It’s hard to trust though, especially when there is a lot of chaos or noise. Anything unstable from market turbulence to a toxic relationship creates that noise. You need to find quiet time to let your mind relax enough to think clearly.
“Sometimes if you’re anxious, it is hard to be in a spot that’s quiet or still. Don’t feel obligated to be in Zen meditation mode. Personally, I’m not someone who can be still. Instead, I find my quiet time when I walk and think around the water, where I live a block from.
“When I find myself caught between a rock and a hard place, I find myself asking the below questions with neither judgement, shame or guilt:
“If this problem was a house fire, what is my first instinct? If I stay, am I going to get swallowed up in it? Do I want to get a hose to put it out or do I want to add gasoline to it?
“If the answer is gasoline, is it because you’re beyond frustrated? If the reaction is to dump more gasoline, roast marshmallows, and walk away, that means it’s the point of no return. It’s time to quit or bring in someone else to get a fresh perspective. In these situations, the individuals involved tend to want to pick fights out of frustration. They’re combative. They can’t see any way through the problem, and they’re exhausted. It’s time to step away at least temporarily.
“In scenario two, if I’m just sitting there and watching the fire burn while I think about it, I’m stuck in indecision. Create a list of pros and cons, and really think critically about it. If you’re in a team situation, you need to figure out where the rest of your team stands and what the core problem is that needs to be solved in order to be successful. Sometimes it’s a team shift. It’s just one person who wants to call it quits, and the others want to keep going. If you’re in a relationship, you need to be completely honest with yourself and each other about what you both need to do to get things back on track and if you actually want to. The hard part about a slow burn is if you just stay stuck, you have a hard time recognizing when it’s too late.
“Thirdly, there’s the situation where I am motivated to look for the hose. I want to fight the fire. You need to think about what you actually need to do in order to fix the problem. If you’re short on capital, can you extend your runway? Be it sales, outside capital, or cutting your burn. If you’re short on talent, can you bring in world-class talent? Other times, you need to ask yourself does the market really need your product in its current iteration? You need to be really honest and look at it from a third-party perspective. If you don’t know how to fix it, you can always ask others for help. It might not seem like it, but most people are willing to help.
“The takeaway from all of this is that you have to suspend your own judgment and ego. You have to be honest with yourself. The right answer is usually the first answer. Trust your gut with what’s right.
“Sometimes the honesty will hurt. If you’re running a company, at some point, that might mean you might not be the right CEO for your company anymore.”
In closing
The hardest parts about building anything – be it a house, business, relationship, career, family, or passion – are starting it… and ending it. If most people had to pick, they’d say the former is more difficult than the latter. But if you truly love or loved someone or something, the latter is always more difficult. And while the above may not solve all your problems, I hope when the nights are the darkest, that Andy and Sara’s thoughts may light the way.
Thank you Sara for sharing your thoughts with the broader world!
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
I want to preface; I don’t have all the cards laid out in front of me. In many ways, I am still trying to figure this out for myself. But I count myself lucky to be able to learn from some of the best in building communities. That said, the below are my views alone and are not representative of anyone or any organization.
A good friend recently asked me, “I’m about to start a community. Do you have any tips for how to start one with a bang?”
She’s not alone. Communities have been a hot topic for the past few years. A product of the crypto and NFT craze, and the isolation people felt when the world was forced to go virtual in 2020. At the same time, starting a community and maintaining/managing a community are different. Just like starting a company and growing a company are two different job descriptions. As such, this essay was written with the intention of addressing the former, rather than the latter.
Common traits of great communities
A great community has value and values.
Value is the excuse to bring people together. Value answers the question: why should I join? And within the first week, they should also have the answer to: why should I stay? Two fundamentally different questions. Many communities frontload the value – provide great value at the beginning – facilitating intros, onboarding workshops and socials. Subsequently, answers the first question, but take the second for granted. A community is the gift that keeps on giving. Over time, as you want to be able to scale your time and as the community grows, you need others to help you provide the reason for Why should I stay. Invariably, it comes down to people. You have to pick uncompromisingly great people from the start. And they have to derive so much value from being a part of the community, that demands converts to supply.
They refer others.
They give back to the community – in the form of advice, hosting events, and more.
Value should also be niche – just like the beachhead market for any startup. You want people to self-select themselves out of it, and the only people who stick around are the ones who derive the most benefits from being in it. Take, for example, a community of founders isn’t niche. And there a dime a dozen of the above. A community of pre-seed female founders focused on getting to product-market fit, is.
Values, on the other hand, are the rules of engagement. Codify them early. Take no implicit agreement for granted. Better yet, make them explicit. Back in January 2020, I wrote about rules in the context of building startup culture. I find the same to be true when building communities. “Weak follow-through is another fallacy in creating the culture you want. What you let slide will define the new culture, with or without your approval.”
I don’t mean for you to be a hard-ass on everything. But figure out early on how much slack you’re willing to give, and how much you aren’t. I’ve written about this before. Every person will suck. Every organization will suck. And unsurprisingly, every community will suck. What differentiates a great community from a good community is that the great ones get to choose what they’re willing to suck at.
You should be exclusive
Moreover, my hot take is that you have to be exclusive. Or let me clarify… in the wealth of Slack groups and Discord servers, yet in the world where everyone still has a job (or two), friends, family, and other communities they’re already a part of that all already slice up their 24-hour day pie in so many different ways, you are competing for their attention. If you’re a community, you’re competing against Instagram, Twitter, TikTok, Friday happy hours, Saturday nights out with the girls, date night with their partner, eight hours of sleep, their workout routine, and so much more. And so, you have to be inclusive of those who have been excluded. As such, you have to exclude those who have historically been included.
I’m not saying that you should start a community for the underestimated just ’cause. It’s like starting a business because you want the title of CEO. Don’t do it. It’s not worth your time. It’s not worth your energy. But you have to be honest with yourself, are you adding more value in the world? Is there anyone else who would sacrifice their other commitments to belong in your community? And do you have the discipline and the drive to maintain this community in the long term? The worst thing you can do is create a new home for someone then take it away.
Building and rebuilding habits
When starting a community, you are asking individuals to build a new habit. One of your greatest competitors is the incumbent solution of existing habits and routine. Some research cites that it takes 21 days to break a habit. And about two months to build a new one. All in all, 90 days all things considered.
Elliot Berkman, Director of University of Oregon’s Social and Affective Neuroscience Laboratory, surmises that there are three factors to breaking a habit.
The availability of an alternative habit
Strength of motivation to change
Mental and physical ability to break the habit
To break down the above:
The availability of an alternative habit
How available is the replacement behavior? Are there other communities out there that do the exact same thing? How well known are they? What are their barriers to entry?
If there is a readily available alternative community, the first question you need to answer is: why bother making another? Realistically, any one person only has enough time and attention to be in 2-3 communities – total. The second question you need to answer is: how do people normally learn of that community? And subsequently, is there a market or audience who doesn’t have access to this distribution channel? If so, what channels occupy most of their attention? Target those.
Strength of motivation to change
There’s a saying in the world of marketing that goes something along the lines of: People don’t buy products. They buy better versions of themselves. Therefore, as a community, you need to nail the value you provide. Is it aspirational? Does it get people to jump out of their seats and scream yes?
A simple litmus test is if you were to share the reason you created the community, do they respond with “How do I sign up for this now?” or “Let me think about it.”? If the latter, you haven’t nailed your value proposition. In other words, what you’re selling isn’t aspirational. Or if it is, you’re either talking to the wrong demographic or the value proposition is a 10% improvement in people’s lives, not a 10x. Sarah Tavel‘s “10x better and cheaper” framework (albeit for startups) is a great mental model for nailing your value prop. Your community must be:
So much better than the incumbent solution or habit they regress to, and
Easy to jump on (i.e. switching costs must be low enough for it be a no-brainer) – Sometimes this means you need to manually onboard every individual into your community. And sometimes all one needs is an accountability partner. Everyone wants be THE number that matters, not just A number. Make people feel special.
Mental and physical ability to break the habit
This is admittedly the factor that is most outside of your immediate control. Here, I regress to the below nerdy formula I made up in the process of writing this blogpost:
(how much work you need to put into each member) ∝ 1/(# of members)
The amount of work you need to put into inspiring each member to join is indirectly proportional to the number of members you can accommodate in your community. In other words, the less you need to convince people to join your community, the more members you can accommodate. The more time you need to inspire enough activation energy for a person to build a new habit, the smaller the initial cohort of members you can tailor to.
This is why I love the concept of the idea maze so much. Has your target community members put in blood, sweat, and tears trying to find the value that you are providing? Why does this matter?
They’ve designed their life already around finding answers around your value prop. They’re going to be more engaged than the average individual. They’re intrinsically motivated to be curious.
Shared empathy. They know how tough finding an answer is, such that they’re more willing to help others going through similar problems.
The shared struggles that people collectively and synchronously go through together build camaraderie and trust. No matter how small or big. The bonds of a sports team are built upon the sweats and tears of brutal training regimens, losses and wins. The trust of a Navy Seals class is built through Hell Week, pain, exhaustion, adversity, and (the likelihood of) death. And, the friendships between college freshmen are built through the unfamiliar environment of a new and daunting chapter of their life.
In closing
Starting a community is hard. 99% of communities (don’t quote me on this number, but I know I’m close to the mark) disappear into obsolescence after their founders lose their motivation. Oftentimes even prior. Not only are you cultivating a new habit yourself, but you are doing so for everyone else you want in your community. I hope the above was able to illuminate your thinking as much as it did for me. I continue to learn and iterate, and as such, will likely publish more content on this topic in the future. For now, this essay will be my thoughts encased in amber.
A big thank you to everyone who’s influenced and will continue to influence my thoughts on community, including but not limited to Sam, Andrew, Mishti, Jerel, Shuo, and most recently, Enzo.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Earlier this week, I came across a curious quote while reading Sammy Abdullah’s notes on the book eBoys by Randall Stross, chronicling the founding and early days of Benchmark. In it, the quote read: “What’s it like recruiting when the stock price is so high? Really hard. The options offered to new employees were certain to be valueless, as they would depend on the stock ascending still higher. I mean, it’s at such a ridiculous level, there’s going to be a big fall here. The question is sort of when and how.”
2022’s VC landscape
After an insane 1.5-year run, I’ve seen valuation multiples that were 100-200x a company’s revenue get funded. At the end of the day, venture capital is belief capital. And it is not my place to criticize someone else’s belief, but I know that same belief will falter in the coming months to year. We’ve already seen public market stocks fall and VC exit values plummet 90% in Q1 this year. Tiger Global fell 7% in 2021 – its first annual loss since 2016. $10,000 invested in the basket of IPOs for 2021 would be worth $5,500 today. We’re in a correction soon. Or as Martin who I’ve had the pleasure to meet via On Deck calls it, the “Great Asset Repricing.” When exactly? I don’t know.
That said, as a function of the great repricing, VCs are coming in with more aggressive terms to hedge their bets. Greater liquidation preferences. More aggressive anti-dilution provisions. For LPs into late-stage capital allocators, they’re expecting greater minimum hurdle rates. In other words, they expect investors to have an internal rate of return (IRR) of at least 20%. Every year, an investor’s assets need to be worth 20% more than the year before. This is up from 10-12% from back in 2021, which I cited in last week’s blogpost.
And as Martin surmises, we’ll see a lot more inside rounds (investors re-upping in their own portfolio) for two reasons:
Insiders have more information.
Insiders tend to be more conservative on valuation.
And “companies without significant traction to face a very tough fundraising environment in the near term.”
What the hell does all this esoteric jargon mean for employees?
The best private companies are still playing ball with the ball on their side of the court. They have leverage. But most companies that were funded in the past one and a half years won’t. As such, there are four things that will and have already started to happen:
You don’t raise. Cut your burn rate. Stay close to the money. Extend your runway, but set clear expectations. That’s what Alinea did at the start of the pandemic. Your team is in it for the long run. Many may choose to leave, but that is the reality.
You raise, but on a flat or down round. This is better for your employees that you plan to hire, since there is a better chance that their shares will appreciate in the next funding window. But you’re not getting any fancy press releases.
You raise on an up round. That’s great. You make the headlines on TC or Forbes. But it increases the pressure for both your current team members and new hires. VCs add in more aggressive terms. No one’s getting paid until investors get 2-3x their money back via a liquidity event or exit. As a founder, you have more pressure to shoot for a bigger exit than you would have needed to shoot for otherwise. Or else, the team that bled for you for years will get little to no upside for their time and effort.
Or, you go out. Monetarily, no one wins.
So what can you do as a startup employee? Or as a prospective startup employee?
Ask questions on revenue drivers. What do growth metrics look like for the last three months? How does churn and net retention look like? When do they plan to raise their next round? And simply, how much revenue is the company generating? Does the price-to-sales multiple make sense? For example, is the latest valuation of the company 200x the company’s revenue or 50x. The former is likely to come with more insane expectations from their investors. In December last year, Retool wrote a great piece why they chose to raise at a lower valuation and why that makes sense for their team members, which I highly recommend checking out.
Of course, as a startup employee, you want your shares to increase in value, but too much too quickly can be detrimental. We’ve seen the recent example with Fast. They were last valued at $580M according to Pitchbook, but were only making $600K in revenue, but was burning $10M a month. Almost a 1000x multiple!
A growth-stage startup grounded on fundamentals (i.e. traction) will likely still be able to raise. A startup funded on promises that has yet to deliver may not be able to. As Samir Kaji tweeted yesterday:
The late-stage market has definitely re-priced for net-new deals. For those that are expecting across the board big write-downs this year, you may have so many companies are still sitting on a lot of $, and won't need to access the capital markets this year. But next year…
Contrary to popular opinion, a company’s valuation is not how much a startup is worth, but rather it is a bet on the chance they will be as big as their incumbent competitor. Take Yuga Labs as an example. They recently raised $450M on a $4B valuation from a16z and a number of other incredible investors. With that capital injection, they are building Otherside, their take on the metaverse integrating their various NFT properties. Epic Games, on the other hand, is valued at $31.5B. $32 billion for ease of calculation. Yuga’s $4B valuation is a bet their investors are taking that Yuga has a 12.5% chance (4/32) to be as big as Epic, and by transitive property, Fortnite.
As an employee, the bet you make is not with capital, but with time – the world’s scarcest resource. We’re coming into a world soon where cash is king. Make your judgments accordingly.
To close, I had to cite Brian Rumao‘s tweet, early investor in Fast. He boiled it down beautifully in 280 characters.
Lesson 8: Investors lose at most 1x their capital. Employees lose much more.
I feel for Fast employees who lost their jobs and equity overnight.
Most startups don't fail this fast after raising $100M+. Remind yourself that the shutdown is more painful for employees than angels.
Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”
“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”
“I don’t think we’ll make it, David. How do we break it to our team?”
It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.
Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.
Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.
I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:
Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.
Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!
To preface, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
On fundraising…
1/ Some useful benchmarks and goals for stages of funding:
<$1M: pre-seed
Find what PMF looks like and how to measure it
$1-5M: seed
$2-4M – you found PMF already and you’re gearing up to scale
$5M – you’re ready for the A
$5-20: Series A *timestamped mid-2021, your mileage may vary in different fundraising climates
2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly. *timestamped mid-2021, your mileage may vary in different fundraising climates
3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.
4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.
5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.
6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys *Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.
7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?
Pitch deck + appendix slides
Current round investment docs
Use of funds
Current and proforma cap table
Pilot usage data, if any
References + links to everyone’s LinkedIn:
Key members of management
1-2 customers, if any
1-2 investors, if any
Financials: annual + YTD P&L + projections
Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
List of all FAQ investor questions throughout the fundraising process
Press, if any
Legal stuff: Patents, trademarks, IP assignments, articles of incorporation
8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.
9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.
10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.
11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.
12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“
13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.
Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.
It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.
14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.
15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitorslides.
16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.
17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.
18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”
19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.
20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.
21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.
22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.
23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.
24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.
25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.
26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky
27/ If you want money, ask for advice. If you want advice, ask for money.
28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.
29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.
30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.
31/ A good distribution of your company’s early angel investors include:
32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.
33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao
On managing team/culture…
34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)
35/ Please pay yourself as a founder. Some useful founder salary benchmarks:
Seed stage – lowest paid employee
Series A or when you find product-market fit (PMF) – lowest paid engineer
When you hit scale – mid-level engineer
When you’ve reached market dominance – market rate pay for CEOs
If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again
36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.
One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eaterinterview, time-stamped at the start of the pandemic.
37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.
38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libinbefore, when he said, “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.
39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.
40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.
41/ James Currier has a great list of ways to compensate your team and/or community.
Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
Cash (e.g. USD, EUR)
Equity shares (traditional)
Discounted fees
Premier placement and traffic/attention
Status symbols
Early access
Some voting and/or decision making, ability to edit/change
Premier software features
Membership to a valuable clique of other nodes
Real world perks like dinner/tickets to the ball game
Belief in the mission (right-brain, intrinsic)
Commitment to a set of human relationships (right-brain, intrinsic)
Tokens (fungible)
Non-Fungible Tokens
42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.
43/ “Outliers create bad mental models for founders.” – Founder Collective
44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.
45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.
46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.
47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.
48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.
49/ “The founder’s job is to make the receptionist rich.” – Doug Leone
50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.
52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.
53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.
54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.
55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.
56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.
57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.
58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.
59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.
On governance…
60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.
61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.
62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.
63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.
64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:
(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation) *based on what you believe their salary would be **typically 1-2 years
65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.
66/ Monthly/quarterly investor updates should include, and probably in the below order:
Your ask
Brief summary of what you do
Key metrics, cash flow, revenue
Key hires
New product features/offerings (if applicable)
67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.
69/ “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.
70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman
71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.
72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.
73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”
74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham
On building communities…
75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.
76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”
77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.
On pricing…
78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?
Customers will try to negotiate for earlier renewal, longer contract periods.
When you waive the price increases, customers feel like they’re winning.
You can upsell them more easily to more features.
79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.
80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.
On product/strategy…
81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:
Product discipline, through priorities, where company leaders have to think months in advance for, and
Expectations and motivates team members to help showcase a new product.
82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.
83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.
84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.
85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
86/ Good founders are great product builders. Great founders are great company builders.
87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.
88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani
89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.
90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.
91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”
92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.
93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.
For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.
94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.
On market insight and competitive analysis…
95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.
96/ Have a contrarian point of view. Traits of a top-tier contrarian view:
People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
It’s iterative. Be willing to change your mind when the facts change.
97/ Falling in love with the problem is more powerful than falling in love with the solution.
98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.
99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
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”.
The earlier your company is, the more your team matters to an investor. The more mature your company is, the less it matters.
If your investor doesn’t understand your answer to the “why you” question, you’re not winning any gold medals, much less a check.
Investors have, effectively, three questions they want answered in the intro meeting.
Why now?
Why this?
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.
Founders haven't sold them on the "why you" so they regress to finding answers for "why this" and "why now", which typically come in the form of lagging indicators like rev and traction
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.
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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.
Bottoms up SaaS founder to Enterprise sales founder:
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?
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Earlier this month, I saw quite the thought-provoking tweet from Ashley Brasier.
“I took a cue from General Patton, who thought that the greatest danger was not that the enemy would learn his plans, but that his own troops would not.”
-Trader Joe (aka Joe Coulombe) on the need to sell to everybody – not just to your customers, but also to your employees
Whether it’s a function of confirmation and availability bias or lesser-known leadership secret, I saw similar themes pop up everywhere from Phil Libin of Evernote and General Catalyst fame to Kelly Watkins at Abstract to Colleen McCreary at Credit Karma. And because of that, I thought it was a topic worth double-clicking on.
There’s the age-old saying: Leaders lead. Managers manage. And a CEO is frankly a marriage of both. While there are the canonical examples of Musk and Jobs, a CEO both leads with her/his vision but also manages expectations.
“I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company. It’ll shake it apart. In tech the hype cycles tend to be pretty intense. At mmhmm we are very much in the Venn diagram of two hype cycles. There’s a general hype cycle around video, which is going to be way up and down over the next few years. […]
“There is also a hype cycle around early and mid stage startup investment. It’s super volatile, now more than ever, because of potential changes in the tax laws, interest rates, and inflation. So you’ve got these two very volatile areas, video and startup investment, and we are sitting right in the bull’s eye of that. This means that my most important job is to isolate the team so that we don’t float based on the ups and downs of the current. Make sure we have enough mass and momentum to go through it, meaning we don’t change what we do based on the hype cycle.
“And that takes capital, which is why we have to raise some capital to do this. It also takes understanding of where you’re trying to go and knowing where you’re going is not based on the hype cycle. You have to have a long term conviction about that. You may be wrong. The conviction could turn out to be wrong, but you’re not going to know that based on day to day fluctuations of excitement or month to month. So have a clear direction of where you are going and then make sure the ship has enough momentum so it doesn’t matter what the waves are doing, you’re still going relatively straight.”
Kelly Watkins, CEO of Abstract, also said in an interview: “People might think the job of the CEO is to make a lot of decisions, but I see my job as setting the tone for the company. People look to leaders to gauge their own reactions in a situation. So if I’m running around like a headless chicken or my tone is on a really high frequency, people graft off of that.”
Similarly, I wrote an essay a year and a half ago. On Sun Tzu and how a leader’s job is setting the tone for her/his company. In short, your team follows you and is a direct function of:
How much they trust you, and
How well they understand a leader’s commands (the why, the how, and the what)
As a caveat, one might disagree with the what, and maybe the how, but a strong team believes in the same why.
In another interview, Colleen McCreary of Credit Karma once said: “Founders, in particular, are always looking to move onto the next thing, but people don’t come along the journey that quickly. So you have to slow down to be consistent, stay on message and tell employees how they’re going to define success. Because if you don’t focus on what really matters, people will hang their hat on an IPO or the stock price as being the determinant of success, and it’s just hard to unwind.”
And why does all this matter?
As Ben Horowitz wrote in his book What You Do Is Who You Are, “Culture is a strategic investment in the company doing things the right way when you are not looking.”
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The amazing Paul “PG” Graham came out with an essay this month on crazy new ideas. And the thing I’ve learned over the years, being in Silicon Valley, is if PG writes, you read. In it, one section in particular stood out:
“Most implausible-sounding ideas are in fact bad and could be safely dismissed. But not when they’re proposed by reasonable domain experts. If the person proposing the idea is reasonable, then they know how implausible it sounds. And yet they’re proposing it anyway. That suggests they know something you don’t. And if they have deep domain expertise, that’s probably the source of it.
“Such ideas are not merely unsafe to dismiss, but disproportionately likely to be interesting.”
I’ve written a number of essays about crazy ideas. Here. Also here. The last of which you’ll need to Ctrl F “crazy”, if you don’t want to read through all of it. And also, most recently, here. But that’s besides the point. The common theme between all of these is that crazy ideas are not hard to come by. Crazy good ideas are. Good implies that you’re right when everyone else thinks you’re crazy. When you’re in the minority. And the smaller of the minority you are in, the greater the margin on the upside. Potential upside, to be fair.
As investors, we hear crazy pitches every so often. David Cowan at Bessemer even wrote a satire on it all. For the crazy pitches, go to episode five. The question is: How do we differentiate the crazy ideas from the crazy good ideas? But as PG says, if it’s coming from someone we know is a subject-matter expert (SME) and they’re usually grounded on logic and reasoning, then we spend time listening. Asking questions. And listening. ‘Cause they most likely know something we don’t.
That was true for Brian Armstrong, who recently brought his company, Coinbase, public. He worked on fraud detection for Airbnb in its early days prior. And he knew he was getting into the deep end with crypto back in 2012. But he realized how unscalable crypto transactions were and how frustrated he was. Garry Tan, then at YC and part-time at Initialized, saw exactly that in him. A reasonable SME with a crazy idea. Garry just released an amazing interview between him and Brian too, if you want to tune into the full story.
What if some of the variables in the equation are missing?
But most of the time the founders you’re talking to aren’t subject-matter experts with deep domain expertise. Or at least, they haven’t left an online breadcrumb trail of whether they’re a thought leader or if they’re reasonable human beings. So subsequently, in the little time I have with founders in a first or second meeting, I look for proxies.
For proxies on domain expertise, I go back to first principles. What are the underlying assumptions you are making? Why are they true? How did you arrive at them? What are the growing trends (i.e. market, economic, social, tech, etc.) that have primed your startup to succeed in the market? Does timing work out?
To see if they’re “reasonable” under PG’s definition, I seek creative conflict. How do you disagree with people? If I brought in a contrarian opinion you don’t agree with, how do you enlighten me? How do you disagree with your co-founders?
In closing
To be fair, we’re not always right. In fact, we’re rarely right. On average, in a hypothetical portfolio of 10 startups, five to six go to zero. One to two break even. Another one to two make a 2-3x on investment. That is to say, they return to the investor $2-3 for every $1 invested. And hopefully, one, just one, kills it, and becomes that fund returner. Fund returner – what we call an investment that returns the whole fund and maybe more. Of course, every time a VC invests, they’re aiming for the fences every time. As a VC once told me, “it’s not about the batting average but the magnitude of the home runs you hit.” And even in those 10 investments, it’s a stretch to say that all of them are “crazy” ideas.
But the hope is that even if we’re wrong on the idea, we’re right on the people.
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