Category: Venture Capital

Posted on

Where Does The Team Slide Go In A Pitch Deck?

soccer, team

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

Why “why you” is important

First, let’s start from the “facts”.

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

I tweeted two days ago:

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

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

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

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

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

So, where does your team slide go?

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

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

In closing

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

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

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

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

Photo by Pascal Swier on Unsplash

*Edit: Added in second tweet

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!

Posted on

DGQ 5: What startups would I love to have in my anti-portfolio?

ice cream, mistake, anti portfolio

In the venture world, there’s this concept of the anti-portfolio. A portfolio for incredible startups you had the chance to invest in, but chose to pass on. Usually the startups that qualify to be in this anti-portfolio have already reached mainstream – either having gone public and/or have reached unicorn status. For anti-portfolio references, I highly recommend checking out Bessemer‘s or tuning into Samir Kaji’s Venture Unlocked podcast, where he asks each guest about their anti-portfolio.

But having chatted with a number of incredible investors, what’s more important than names on an excel sheet is the lesson or lessons we take away from passing on the greats. Those lessons are the very answer to one of the most insightful questions an LP (limited partner) can ask. “How does your anti-portfolio advise your current investment thesis?”

In a similar way, life is a mixed bag of engineered serendipity and endured scar tissue. Our past mistakes inform our future decisions. You learn how to handle kitchen cutlery after cutting yourself a few times. You learn to walk after stumbling. And you learn to communicate after making a fool of yourself. We are a product of the scar tissue we’ve accumulated.

I’m in my first inning in the venture world, and admittedly, way too early to have any true hall-of-famers in my anti-portfolio. So rather than looking into the past from the present, I thought I’d look into the “past” from the future. A “past” that has yet to come, but will be defining of my future. Something Mike Maples Jr calls backcasting. Starting from the future and making my way back to today, along the way, figuring out what I need to do to get to that future. If you’ve been following this blog for a while, you know I’m a big fan of his mental model. “The future doesn’t happen to us; it happens because of us. […] Breakthrough builders are visitors from the future, telling us what’s coming.”

Rather than what startups are in my anti-portfolio, what startups would I love to have in my anti-portfolio?

On a similar note, for non-investors: Ten years from now, what are mistakes you’d want to have made that you tell yourself that it was a decade well-spent?

Photo by Sarah Kilian on Unsplash

The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.

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

Posted on

Mentors and Investors

There is an incredible wealth of people in this world who self-proclaim to have insights or secrets to unlocking insights. From parents to teachers to the wise soul who lives down the street. From coaches to gurus to your friendly YouTube ad. To mentors. To investors. While there are a handful who do have incredibly insightful anecdotes, their stories should serve as reference points rather than edicts of the future. Another tool in the toolkit. No advice is unconditionally right nor unconditionally wrong. All are circumstantial.

After all, a friend once told me: All advice is autobiographical.

The same is true for anything I’ve ever written. Including this blogpost in itself.

Over the past two weeks, as a first-time mentor, I’ve had the incredible fortune of working alongside and talking to some amazing founders at Techstars LA. At the same time, I was able to observe some incredible mentors at work. And in this short span of time so far, I’ve gotten to understand something very acutely. The dichotomy between mentors and investors. For the purpose of this blogpost, I’m going to focus on startup mentors, rather than other kinds of mentors (i.e. personal mentors). Although I imagine the two cohorts of mentors are quite synonymous.

While the two categories aren’t mutually exclusive, there are differences. A great mentor can be a great investor, and vice versa. But they start from two fundamentally different mindsets.

Investors/mentors

An investor tries to fit a startup in the mold they’ve prescribed. A mentor fits themselves into the mold a startup prescribes.

An investor thinks “Will this succeed?” A mentor thinks “Assuming this will succeed, how do we get there?”

An investor starts with “Why you?” A mentor starts with “Why not you?”

An investor evaluates how your past will help you get to your future. A mentor helps you in the present to get to your future.

An investor has a fiduciary responsibility to their investors (i.e. LPs). A mentor doesn’t. Or a mentor, at least, has a temporal responsibility to their significant other. Then again, everyone does to the people close to them.

An investor will be on your tail to hold you accountable because they’ve got skin in the game. A mentor might not.

You can’t fire your investor. You can theoretically “fire” your mentor. More likely, you’re going to switch between multiple mentors over the course of your founding journey.

An investor has a variable check size-to-helpfulness ratio. Who knows if this investor will be multiplicatively more helpful with intros, advice, operational know-how than the size of their check? A mentor has theoretically an infinite CS:H ratio. Check size, zero. Helpfulness, the sky’s the limit.

It’s also much harder to find a mentor than an investor, outside of startup communities, like On Deck and Indie Hackers, and acceleration and incubation programs, like Y Combinator and Techstars. Frankly, being a mentor is effectively doing free consultations over an extended period of time. And if you’re outside of these communities, the best way to bring on mentors is to bring them on as advisors with advisor equity. I would use Founder’s Institute’s FAST as a reference point. And Tim Ferriss‘ litmus test for bringing on advisors: If you could only ask 5-10 very specific questions to this person once every quarter, would they still be worth 0.5% of your company without a vesting schedule?

In closing

As I mentioned above, being a mentor and an investor isn’t mutually exclusive. The best investors are often incredible mentors. And some of the greatest mentors end up being investors into your startup as well. Having been in the venture world for a while, I’ve definitely seen all categories on this Venn diagram. Sometimes you need more of one than the other. Sometimes you need both. It’s a fluid cycle. And for the small minority of venture-scalable startups, it’s worth having both.

Photo by Robert Ruggiero on Unsplash

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!

Posted on

14 Reasons For Me Not to Source This Deal

Founders often ask me what makes a VC say yes. Or what they need to do for a VC to say yes. Or what they need to do for me to say yes. TL;DR: it depends. On firm, partner, thesis, active conversations, stealth investments, next fund fundraising schedules, reserve ratios, implicit biases, and more. In sum, a million reasons. And even if I knew all the above, I still can’t guarantee a term sheet.

So I can’t say what’ll guarantee a VC yes. A term sheet. If I could, I’d be the one writing them. Nevertheless I do my best to help brilliant founders get funded. On the flip side, here’s what aren’t educated guesses, but guarantees. Or as close as one can get to a guarantee. A guaranteed no. An anti-playbook, if I might call it that. If it doesn’t help, I hope, at the very minimum, it provides you a few minutes of entertainment.

  1. Not treating me as a human. This is less of a reason for me to get myself worked up. There are discriminatory, dismissive, bigoted people in the world. I get it. This is more of a problem for the founder when they’re looking to scale the team. Being a dick limits your ability to grow and/or empathize with the market. If you’re fine with treating me this way, then you’re definitely going to not bat an eyelid with other future hires, team members, investors, and customers. Equally true for any VCs/angels/investors out there.
  2. Badmouthing others. This is more of a personal turnoff. We’re all intellectuals here. And it’s okay to have differing opinions of the world. But it’s not okay to talk behind others back. If you’re gonna badmouth others, I imagine the exact same for anyone else who gets on your bad side for whatever reason, including myself. Practice good social hygiene.
  3. Complaining about your team/product. Complaining is a bit more nuanced. It’s fine from time to time, we’re human. I don’t expect you to be the perfect human, but a first meeting with me, as with any investor, is a first date. I want to hear about the bigger picture, the vision, the dream. Impress me. If you have time to complain during a 30-minute meeting, you’re probably not spending your time wisely. And if this is an intro meeting, you have yet to build up your social rapport with me to complain. Being frustrated about the market is fine. Being honest, introspective, and vulnerable is also fine. Your mileage may differ for the last part, but I love candid founders.
  4. Lying. That goes without saying, if you’re lying about numbers or if I somehow find out that you are, then no. If you don’t know, you don’t know. If your numbers aren’t pretty, admit it. While I might not be able to help you get funded, I’ll do my best to help. If you don’t know something, admit it as well. And find out after. Going back to the earlier point, I love candid founders who have a bias to action.
  5. Having an exit strategy slide. This is more true for larger $100M+ funds I send deals to. Having an exit makes sense for angels, and smaller funds, but larger funds need to look for fund returners and outsized winners, and an exit of XX/XXX million is not sexy at all.
  6. Crazy, but not crazy and reasonable. This one is a new one, inspired by PG. It’s fairly rare, since I try to avoid putting myself in situations with crazy, especially cantankerous people. But it happens. If by any chance, you know your idea might err on the side of crazy, walk me through the logic of how you got there. Don’t just tell me “It makes sense to me” or “I know the industry better than you do.”
  7. Lack of focus. It’s great if you want to do a million things, but saying you want to focus on everything means you’ll end up focusing on nothing. A lack of focus shows a lack of priorities. Focus and be able to back up why are you focusing on this at this point in time. I love Phil Libin‘s 4-year plan defined by one word for each year forward. You can find that plan here and here.
  8. Asking for an intro without any context. “I saw you were connected with X on LinkedIn. Can you introduce us?” If that line pops up in the first 30 seconds of our first conversation, I’m running away. I need to know who you are, what you’re building, why it matters, and hell, why would this person you want to get introduced to is a good use of yours and their time. Build a relationship first. Don’t lead with the transaction. I am not an ATM machine. Neither are other people – investors or not.
  9. Asking me to sign an NDA. Early on in my career, I admittedly signed a number of NDAs sent to me by founders. I love connecting brilliant people together, but if I have to get your permission each time I pass it to an investor or a potential advisor, it’s too much work for me. Frankly, I have other priorities. I get it; I’m a stranger. But I hope you can at least trust that I won’t run away with your idea or give it to a competitor. You have my word. If that isn’t enough for you, that’s fine. I’m just not your guy.
  10. Asking the VC to do their work. “When we raise X dollars, we will do Y tasks.” I usually follow up on that statement with “What have you done so far to accomplish Y?” My least favorite founders are the ones who say something along the lines of, “We’ll worry about that when we get there.” Or “We were hoping our future investors will find someone for us.” We don’t expect you to know everything and everyone, nor do everything right, but we expect you to do some legwork to show you are learning. Show us that you’ve been scrappy, resourceful, and used what you had available to you.
  11. Lack of self-awareness. “Where are you weak at?” If your answer is “Nothing” or “I’m good at everything”, that sends alarm bells to any investor. Which might also lead to a secondary question of “What do you need me for then?” A close cousin is one of my favorites: “What is your competition doing right?” If your answer is also “Nothing”, then you might need to do some market research and reconnaissance again. There’s a reason other customers are using your competitors’ and incumbents’ products. Find it out. On top of what they’re weak at. There’s a romanticized concept in Silicon Valley that every founder needs to be like Jobs with his reality distortion field. While it’s true you need to be able to help others see the future you’re seeing, you also have to deeply understand the realities of today of what’s stopping you from getting there.
  12. Nothing’s changed since the last time we spoke. Investors invest on potential. A bet we make in a company is a bet that it has a chance to be as big as X tech giant in your space. Your ability to meet the demand in the market scales with the number of investment dollars in your company. That said, we expect movement. We expect deltas. And if your product really is inevitable in the market, you should be making progress with or without injections of capital. The latter, just at a slower pace. Venture capital is impatient capital. Also understand, 99% of businesses in the world don’t need VC dollars and operate incredibly well without venture investors.
  13. You’re not obsessed about the product and the market. Building a scalable startup requires obsession. It requires you to lose sleep. You can’t just check out at 5 or 6pm. While I can’t measure that in the first meeting, a close proxy is how well you know the table stakes metrics of your business – net retention, CAC, LTV, growth, revenue, engagement rates – and more. In fact, obsessed founders usually tell me that they’ve already thought of and tried out the first 10 ideas I think of. Moreover they bring me back the results of their discovery. Obsession is contagious.
  14. I have no idea what your product is or does. This is simple. If I walk out of our meeting and I still have no idea how to describe your product to others and why we need it in the world now, there’s no way I can confidently pitch your startup to the partners. Piggybacking off of the #14, if you’re obsessed about the product, you’ve told your story a million times and a million ways already. A few of which should have already resonated with select audiences. And even if it wasn’t to investors, you must’ve already told that same story to your customers. As a CEO/founder, you are the first and most important salesperson. In many ways, it means you have to push the sale. You have to get your customers to take action. I, admittedly, am a potential customer. A recipient of your sales strategy. And if I don’t get your pitch, it’s likely others might not as well. That said, for certain industries, like deep tech or biotech, I’m really, really dumb. So take my thoughts with a grain of salt.

This post was inspired by Jason Lemkin‘s blogpost, which I highly recommend checking out.

Photo by Markus Spiske on Unsplash

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

Posted on

Writing Discovery Checks

There’s a notion in the venture market that LPs typically dislike GPs writing discovery checks. Though I’ve written about VCs writing more discovery checks (here and here) in the past two years, discovery checks have often been a function of investor FOMO (fear of missing out) and not playing their core game. The returns of any established fund are largely realized on big checks with ownership targets.

Of course, rolling funds, micro-VCs, and angels optimize for a different game. They’re spreading their net thinner, but also leveraging their relationships to get into oversubscribed rounds or putting really small bets into hopefuls. Proportionally speaking, if they make bad bets, they lose the same percentage of money, but on an absolute dollar amount, they lose far less. And, well, it’s much easier to return a $1M fund than a $100M fund. It’s also far less committal for LPs to invest in a small fund than a big fund intended to make their incredible returns. The small fund is the bet. The large fund for an LP is the money-making machine.

I was talking with a Venture Partner of a name-brand accelerator yesterday, and he offered a second perspective.

The reason discovery checks by larger funds don’t make any money is because it’s irregular and inconsistent. There often is no fund strategy behind it. That said, if you make discovery checks your core business, that means a fundamentally different strategy. Is that strategy consistent, predictable, and scalable? For accelerators, they’ve made writing discovery checks part of their fund strategy. Their game, at the end of the day, is “buying options.”

It’s a call option. Accelerators invest $100K for 5-10% to buy the rights for the next round. The money is being made in the follow-on, not on the initial bet. And if there’s a fund strategy to deploy 100 checks of a $100K, there’s a systematic approach to writing discovery checks. This is why many accelerators include a provision for pro rata of $0.5-1M in a future round. And they’re unwilling to budge on that, even if a founder comes back and wants to seed that allocation to downstream investors.

Why would an entrepreneur take the $100K that comes with the $500K-$1M option down the road? Accelerators and a lot of angel funds out there are willing to write you, the founder, the check faster and with less debate than other investors on the market.

There’s also a reason many accelerators focus on software rather than other potential areas of investment. A $100K check will get you much further for an asset-lite software company than a deep tech or hardware company. The same amount of cash can bring a software company to market, while a hardware company stays in R&D.

Photo by Mael BALLAND on Unsplash

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

Posted on

The Fastest Scout Workflow Yet

racecar, speed, fastest workflow

Charles Hudson at Precursor told Monique Woodward of Cake Ventures, when she was first raising, “You’re not just raising for Fund I; you’re raising for the first three funds. And act accordingly.” In other words, build long-term relationships. As someone who lives and breathes in the entrepreneurial ecosystem, it’s about giving first. There are many things I have yet to do, but are on my life’s roadmap. And given my humble, but curious beginnings, two of the greatest gifts I can give right now at this point in my career, are:

  1. Time
  2. Valuable connections

… which led me to be a scout years ago. Or as the folks at Techstars say, give first. On a similar wavelength, one of my mentor figures told me when I first jumped into venture, “Think three careers in advance.” You’re laying the groundwork for your future success. Or, as I have sometimes heard it described, the tailwind of your 10-year overnight success.

I try to be helpful to everyone who takes time out of their day to talk to me – be it outbound or inbound. Of course, over time, it’s been much harder for me to meaningfully add value to every person who comes my way. Though my blog is one way to scale and share my knowledge capital, I’m always looking for new ways. So if anyone has any recommendations, I’m all ears. After all, I’m still in my first inning.

Want to get the latest CoZ insights?

Fast, Simple, Awesome

In the theme of scaling myself, I recently shared with the fellows in our VC fellowship about my workflow as a scout. And, I thought it’d be just as valuable to you my readers as well.

I find myself living in my inbox for at least 3-4 hours a day, with hundreds of email chains by the end of the week. What I needed most was operational efficiency. And, at the end of the day, efficiency is results divided by your efforts.

E = Result/Effort

First things first, tune your email settings, which I first picked up from Blake Robbins‘ blog:

  1. If you have more than one inbox, enable multiple inboxes.
  2. Enable compact view versus default view.
  3. Enable keyboard shortcuts.
    • The only ones you really need are: E to archive, V to move an email
  4. Enable auto-advance. So that you move on to the next email automatically after performing an action on the previous.

Then, the best thing is you only need three folders: Action Needed, Read Later, and Pending Response.

For any email that takes longer than a minute or two to reply, it goes in the Action Needed folder, like long-form advice/feedback or being stalled by waiting on a reply for a double-opt in. When my day frees up a bit more, usually later in the day, I revisit this folder to address all the other action items.

Read Later includes the mountain of blogs, newsletters, news outlets I’ve subscribed to, but didn’t have time to start reading until later in the day. Occasionally, it includes a founder’s monthly investor update. For the latter, I usually just scroll straight to the asks and see if I can help or not. If not, I read and move on.

For the emails I send out but expect a response in return, Pending Response is the perfect folder for that. This next part is completely optional. But, under the Nudges category, enable Suggest emails to follow up on. Because of Google’s algorithm, it can occasionally end up adding to the clutter when it surfaces up an email that doesn’t need to be followed up on. But if that’s the case, it goes straight into the archive folder.

And yes, for everything else, that don’t go in the above three folders, goes into Archives.

I used to have a million and one folders for startups, jobs, VCs, events, saved articles/newsletters, and more. Which looks great when you’re organizing material and when the inbox search algorithm wasn’t as great as it is now, but it doesn’t speed up the workflow. In fact, it often slowed me down – as I tried to put items in the appropriate folder before responding to my next email. And sometimes, they fit in multiple folders.

For mobile, the only thing you need to change are the Mail swipe actions. Swipe right to archive. And swipe left to Move to [folder].

You can either do the above, or use Superhuman, which has all the above functions. The faster I can get back to people who need my help, the better. Whether it’s me, or someone smarter than me, I try to point founders in the right direction.

Tracking the data

Separately, on an excel sheet, though I don’t track every startup I talk to, I track deals I refer/intro, with the following columns:

  • Startup
  • Founder(s)
  • Date
  • Stage
  • Industry
  • Deck [link]
  • Referral Source
  • Who’d I refer to
  • Secret Sauce – Differentiator/Reason for referral
  • Result of referral (Pending, Talking, Rejected, Invested, Will revisit)
  • Date of action [result of referral]
  • Check size (if applicable)
  • Round size (if applicable)

I also color-code so that’s it’s easier on the eyes. With the above, I can track:

  • Most intros/investments/rejections, by:
    • Industry
    • Partner
    • Stage
    • Referral source
  • Response Rate
  • Average Time:
    • Between intro and investment, per VC
    • Between intro and conversation
  • Average check size (per fiscal year)
  • Average round rise (per fiscal year)
  • % breakdown by types of compensation
  • % referral sources from founders who successfully fundraised (via me)
    • Founders who didn’t successfully fundraise (via me)

In closing

As one of my favorite VC quotes go: “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.” I’ve had the fortune of working with some amazing founders over the years – a number of them who I was never able to help with the limitations of my own knowledge, but through the people I sent them to. Luckily, I largely attribute to my ability to help founders quickly through the above workflow. Hopefully, it can be as useful to you as it has been for me.

Photo by George Brynzan on Unsplash

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

Posted on

Why Career VCs Emerge at Fund III

fund administration fund management

Though I’ve spent a minute in venture capital, I’ve never raised a fund. So I’m not going to pretend I know everything. Because I don’t. Every single idea here is one I’ve borrowed from someone with more miles on their odometer in this industry.

When does an emerging fund manager turn into an emerged fund manager? I’ve always heard the general rule of thumb is by Fund III. But in all honesty, I took that for granted and never knew why.

I found out why this week. Samir Kaji has this great conversation on his podcast with Braughm Ricke of Aduro Advisors and former CFO at True Ventures. And Braughm says:

“The other [successful trait in fund managers] that we see a lot of is really having a defined strategy, and really sticking to it and executing on it. Straying away from your strategy is one of the best ways to create issues for you down the road. Yes, it might be successful and it might create returns for you today, but it will create difficulties down the road when you’re looking to raise that next fund. Because that’s what you’re selling to me at the end of the day.

“Fund I, basically what you’re selling is a promise. You’re selling a dream. You’re selling the concept around the strategy.

“Fund II, you’re selling the execution on that strategy. Depending at what stage you’re investing at, for the most part, you’re not going to have returns to be pointing to. You’re going to be selling your ability to execute on that strategy.

“Fund III, you’re selling the returns on Fund I.”

Samir then follows up: “Fund III’s are the hardest [to raise] because by then, it’s four, five, six years in and you have to show something. It is return-based.”

Phil Libin, co-founder and CEO of All Turtles, mmhmm, and Evernote, and former Managing Director at General Catalyst, in his recent interview with Tyler Swartz, said: “We don’t need scale to make a good product, in fact, it’s a distraction if you focus on scale prematurely.” In venture, your fund is your product. And like an entrepreneur, an emerging manager shouldn’t worry about scaling the size of their fund in the Fund I and II days. Stay small. Focus on delivering on the strategy and promise you made to your LPs. After all, it’s much easier to return a $10M fund than it is to return a $100M fund. Especially since a 3-5x multiple means you’re just average these days. As Mike Maples Jr. of Floodgate says, “Your fund size is your strategy.”

By the time you get to Fund III, you now have a track record of financial return (or not). And by then, you and the market should have a good idea if you have a longer time horizon in venture or not.

And even if not, many former VCs go back to the operating side of the table, armed with the knowledge, skills, and relationships they gain on the VC side.

Photo by Markus Winkler on Unsplash

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

Posted on

Expert + Reasonable + Crazy Idea = Crazy Good

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.

Photo by Àlex Rodriguez on Unsplash

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

Posted on

Creativity is a Luxury

“Creativity is a residue of time wasted.”

I recently came across the above quote – the attribution to Einstein. And I found it extremely prescient. In the world last year. And in the years ahead.

Creativity is the ability to find inner peace in a busy world. To weave cacophony into symphony. The ability to recognize and chart patterns between the pixels and decibels around us. A guiding, focusing, and metaphorical – and I mean metaphorical in its truest form – principle that abstracts you from the literal shackles of your current situation. Now before I get to abstract…

I’ve written about where I find my inspiration on numerous occasions, including while I’m:

  • Exercising
  • Driving
  • Cooking
  • Showering
  • Listening to podcasts
  • Washing the dishes

… just to name a few. In each of the above, I give myself the intellectual bandwidth and the time to ponder. Simply ponder. With no goal or predestination in mind. Frankly, this blog is a product of such intellectual adventures.

And I know I’m not alone. In the world coming out of the pandemic, this may cause a new revolution of creativity.

Our grassroots

Hundreds of thousands of years ago, we transitioned from a nomadic to a more specialized lifestyle. The transition to specialized roles in a hunter-gatherer society allowed hominids to share the responsibility of survival. As we learn in the basics of economics, economies that have comparative advantages who trade can create a larger global supply of goods and services. In this case, it was the cooperation among the citizens of the same society that freed individuals’ bandwidths to explore other interests, including, but not limited to:

  • Controlled use of fire
  • Adaptability to colder climates
  • Specialized hunting tools, like fishhooks, bow and arrows, harpoons and bone and ivory needles
  • Intricate knowledge of edible plants

While hand-built shelters likely go as far back as 400,000 years ago, and huts made of wood, rock and bone as far back as 50,000 years ago, it wasn’t until the Neolithic Revolution that agricultural culture became a permanent habitual change. In the emergence of an agricultural lifestyle, humans now freed up time they would have otherwise spent on migration or hunting. And with that same free time, they invented more creative means of living, not just survival, like the means to combat disease and increased agricultural knowledge. Economists Douglass North and Robert Paul Thomas call this Neolithic Revolution the “first economic revolution“. The two state this was the result of “a decline in the productivity of labour in hunting, a rise in the productivity of labour in agriculture, or [an] … expansion of the size of the labour-force”.

Maslow’s Hierarchy

If we look at Maslow’s Hierarchy of Needs, the evolution of free time, and therefore creativity, makes complete sense. Psychologist Abraham Maslow wrote in 1943 that humans make decisions motivated five tiers of psychological needs.

Maslow’s Hierarchy of Needs

A person’s most basic, tangible needs are at the bottom, whereas the intangibles reside at the top. And according to Maslow, you cannot begin to fathom the higher echelons of your needs, like esteem and self-actualization, until you’ve fulfilled the tiers underneath. Maslow also calls self-actualization “growth needs” and the lower tiers “deficiency needs”. In a very real sense, when you’re struggling to find food and shelter or job security, you don’t have the mental capacity or free time to entertain how high your potential can go. Time, specifically leisure time, is a luxury for people who have fulfilled all their deficiency needs. And that leisure time is what creatives need.

Asking the best

Of course if I was to write anything on creativity, I had to ask my buddy, DJ Welch (IG, LI) – one of the most creative minds I know. Not only did he grow his YouTube channel to 370,000 subscribers in less than three years, he was also an artist for Lucasfilm, Instagram, Cartoon Network and more. Now, he’s working on a new project – Primoral Descent – one that I’ve been excited for the public to finally see.

“As a child, my parents let me have a lot of free time. They let me make my own choices. They let me be imaginative. That’s when you come up with innovation. Creativity is a river above everyone’s head.”

When I asked him to unpack that, he said, “Good ideas are gifts from the universe – fish that swim in that river. All you have to do is learn how to reach up and fish for them. And just like fishing, if you stick around long enough – if you’re patient enough, you’ll be able to catch a few. But you never know what fish you’ll reel in. Just that you will.”

Toys for adults

We see the same with entrepreneurs and creatives. They have time to think. Time to reach into that river and pull out an idea. They are investors and the medium of investment is their time. In fact, you can argue they’ve dedicated almost every waking hour to optimize themselves to offer a creative solution or perspective into the market. They’ve made it their job to be innovative. After all, innovation, by definition, is a creative solution. Under Einstein’s definition, we could call them professional time wasters.

As Chris Dixon says, “The next big thing will start out looking like a toy.” Today, we see the rise of NFTs, VR/AR, content creation, e-sports, and much more. Not too long ago, we had the telephone, and eventually the smartphone, as well as the internet. All of which had their origins as toys. And I know I’m only scratching the surface here. In order to have time to create toys, or for that matter, even play with toys, you need leisure time.

With that same time, more and more people are pursuing their interests and passions, creating, what Li Jin at Atelier Ventures dubbed, the “passion economy“. Similarly, more people are dabbling into new hobbies. In the pandemic, the average person saved 28 minutes of time that would have been spent on going to work. An hour on average for the round trip. Some people used that time saved to get more work done. Others used their time saved to discover new passions – be it baking, starting a podcast, hiking, or gaming. For many Americans, that extra time was paired with stimulus checks and communities coming together to cause political and economic shifts – for better or worse.

As Tal Shachar, former Chief Digital Officer at Immortals, said, “The next big thing in 2021 is the YOLO economy. Consumers will be more open to trying new products/services and spending on novel experiences, particularly with friends, as we emerge from the pandemic with pent up demand and few routines.” In the process of trying, you will inevitably uncover more surface area to expand on.

In closing

In 2021 and onwards, as entrepreneurship and solo-preneurship lowers its barriers to entry, we’re lowering the Gini Index equivalent for creativity. More people will have increased access to time – time to self-actualize. Time to challenge our status quo.

I love this line in Kevin Kelly‘s “99 Additional Bits of Unsolicited Advice“: “The greatest rewards come from working on something that nobody has a name for. If you possibly can, work where there are no words for what you do.” If you can succinctly describe what you’re working on, then you’re not really pushing the envelope.

Later in that same essay, Kelly writes, “A multitude of bad ideas is necessary for one good idea.” And to have ideas, you need time. As DJ and I were wrapping up our conversation, I asked, “So, DJ, how do you optimize for creative moments?”

And he responded with some great food for thought. “I nap. Sleeping is how I process information. As I go lay down for a nap, right in that lucid moment, I come up with my ideas. I quickly scribble them down, then go back to sleep. When I finally wake up, I go work on them. The great Winston Churchill’s naps were a non-negotiable part of his day. In fact, during WWII, he had a bed set up in the War Rooms so he could take his daily afternoon naps. Similarly, I often take 20-minute power naps around 2-3PM. And I’ve never pulled all-nighters. Thinking isn’t hard for me. Thinking is the part ‘efficient people’ [who work straight through the day] get stuck on.”

Cover Photo by Jr Korpa on Unsplash

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

Posted on

Should You Make Investors Sign NDAs?

Years ago, when I first started in venture at SkyDeck, I met a founder who made me sign an NDA before he pitched. At the time, I had no idea that it wasn’t the norm. So, I ended up signing it without a second thought. It wasn’t my first time I signed one, and certainly not the last. He spent 20 minutes pitching his idea to me. I don’t remember the exact details of the pitch, but I remember it being an intriguing pre-launch idea outside of my realm of expertise.

In our last five minutes, out of curiosity, I asked him why he had me sign an NDA – something I’d never been asked to do since I jumped into VC.

He said, “I can’t afford to have you take my idea.”

Nevertheless, I had a couple names in mind that might be useful to him. At least more useful to him than I could be. But given the NDA, I needed written consent for every person I wanted to send his startup to. As well as consent for what I could and could not tell them. After two weeks of back and forth emails, he only allowed me to pass his idea to one other person. Even so, in a very limited scope. With very little context. Far from enough for my investor friend to say yes to a meeting. All in all, regrettably, the long slog of asynchronous communication heavily drained my willingness to help. And at the end of the two weeks, I was happy to get that load off my chest.

It was a lesson for myself. Ever since then, I err on the side of not making people sign NDAs. Why?

  1. Most people don’t care enough about your problem space to pursue the idea you’re going for. If they were, they’d have pursued the idea/solution already.
  2. Sharing your idea helps you more than it helps them. You get free advice and feedback, all of which are ammunition to further your idea. The more you share, the faster you learn, the faster you can iterate and grow your startup.
  3. If you make a potential partner sign an NDA, it implicitly shows a lack of trust in the partnership, and there could lead to future friction between you 2, which would detract you from focusing on actually building the business. I’ve seen it happen. And I’ve seen businesses crumble because of a lack of trust. And it could start from the smallest thing and exacerbate into a full-blown drama.
  4. On the off chance, they do take your idea and run with it to the market, they become a competitor to your business. And if you’re scared of competition, you’re probably in the wrong industry. Or if you want to run a lifestyle business (one at your own pace) – like a side hustle or one you find great joy in doing, it really doesn’t matter what other people are doing.

The success of a business is determined by how well you can execute. The first mover advantage is about who can get to product-market fit first, not who birthed the idea first. Before Google, AltaVista, Aliweb, and Yahoo! existed, just to name a few. Equally so, Myspace and Friendster started before Facebook.

A week after my intro, my investor friend hit me up again to tell me he turned down that founder before the founder even pitched. He told me, “It’s unnecessary red tape and not worth my time. And I’m not short on deal flow.”

Almost a year after that, in an effort to keep a complete record of the deals I’ve sent to investors, I revisited that startup. A quick LinkedIn search told me they’d closed up shop. I never checked back in with them to ask why. It could have been trouble in their go-to-market motions. It could have been co-founder disputes. Or it could have been their inability to find investment. I don’t know. But I imagine that their inability to find investors contributed to their closure.

Photo by Scott Graham on Unsplash

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

Proudly powered by WordPress