Category: Venture Capital

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Myths around Startups and Business Ideas

In a number of recent conversations with friends outside of venture and “aspiring entrepreneurs”, a couple myths, which I’m going to loosely define here as popular beliefs held by many people, were brought to my attention. 4 in particular.

  1. If I have a great idea and build it, it’ll sell itself.
  2. That idea/startup is over-hyped.
  3. The startup/venture capital landscape is over-saturated.
  4. If it doesn’t make sense to me, it’s not a good idea.

Quite fortuitously, a question on Quora also inspired this post and discussion.

If I have a great idea and build it, it’ll sell itself.

Unfortunately, most times, it won’t. As Reid Hoffman puts it: “A good product with great distribution will almost always beat a great product with poor distribution.” As a founder, you have to think like a salesperson (for enterprise/B2B businesses) or a marketer (for consumer/B2C businesses). People have to know about what you’re building. ’Cause frankly you could build the world’s best time machine in your basement, but if no one knows, it’s just a time machine in your basement. Probably a great story to tell for Hollywood one day (even then you still need people to find out), but not for a business.

That idea/startup is over-hyped.

I’ll be honest. This really isn’t a myth, more of a common saying.

Maybe so, at the cross-section in time in which you’re looking at it. But if you rewind a couple months or a year or 2 years ago, they were under-hyped. In fact, there’s a good chance no one cared. While everyone has a different technical definition of over- and under-hyped, by the numbers, time will tell if it’ll be a sustainable business or not. If it’s keeping north of 40% retention even 6 months after the hype, we’re in for a breadwinner.

Take Zoom, for example. Pre-COVID, if you asked any rational tech investor, “would you invest in Slack or Zoom?” Most would say Slack. Zoom existed, but many weren’t extremely bullish on it. Today, well, that may be a different story. As of this morning (Oct. 12, 2020), while I’m editing this post before the market opens, the stock price of Zoom is $492 (and same change). Approximately 343% higher than it was on March 17th, the first day of the Bay Area shelter-in-place. And, right now, the price of Slack is $31. Approximately 56% up from the beginning of quarantine.

Neither are startups anymore, but the analogy holds. Also, a lesson that predictions, even by experts, can be wrong.

The startup/venture capital landscape is over-saturated.

“There’s too much money being invested (wasted) on startups.”

From the outside, it may very well look that way. Every day, every week we see this startup gets funded for $X million or that startup gets funded for $YY million. According to the National Venture Capital Association (NVCA), $133 billion were invested into startups last year. Yet, it pales in comparison to the capital that’s traded in the public markets.

VC funds see thousands of startup pitches a year. Per partner (most funds 2–3 partners), they each invest in 3–5 per year (aka about once per quarter). Meaning >99% of startups that a single VC sees are not getting funded by them. That doesn’t mean 99% never get funded, but it’s just to illustrate that proportionally, capital isn’t being spent willy-nilly.

If we look at it from a macro-economic perspective, if we are reaching saturation in the startup market, we should be getting closer to perfect competition. And in a perfectly competitive market, profit margins are zero. The thing is profits aren’t nearing zero in the startup/venture capital market. In fact, though the median fund isn’t returning much on invested capital. A good fund is returning 3–5x. A great one >5x. And well, if you were in Chris Sacca’s first fund, which included Uber, Twitter, and more, 250x MOIC. That’s $250 returned on every $1 invested.

If it doesn’t make sense to me, it’s not a good idea.

Finding Product-Market Fit and “Idea-Market Fit”

Revolutionary ideas aren’t meant to conform. If an idea is truly ground-breaking, people have yet to be conditioned to think that a startup idea is great or not. As Andy Rachleff, co-founder of Wealthfront and Benchmark Capital, puts it: “you want to be right on the non-consensus.” Think Uber and Airbnb in 2008. If you asked me to jump in a stranger’s car to go somewhere then, I would have thought you were crazy. Same with living in a stranger’s home. I write more about being right on the non-consensus here and in this blog post.

Frankly, you may not be the target market. You’re not the customer that startup is serving. The constant reminder we, on the venture capital side of the table, have is to stop thinking that we are the core user for a product. Most products are not made for us. Equally, when a founder comes to us pre-traction and asks us “Is this a good idea?”, most of the time I don’t know. The numbers (will) prove if it’s a good idea or not. Unless I am their target audience, I don’t have a lot to weigh in on. I can only check, from least important to most important:

  1. How big is the market + growth rate
  2. Does the founder(s) have a unique insight into the industry that all the other players are overlooking or underestimating or don’t know at all? And will this insight keep incumbents at bay at least until this startup reaches product-market fit?
  3. How obsessed about the problem space is the founder/team, which is a proxy for grit and resilience in the longer run? And obsession is an early sign of (1) their current level of domain expertise/navigating the “idea maze”, and (2) and their potential to gain more expertise. If we take the equation for a line, y = mx + b. As early-stage investors, we invest in “m’s” not “b’s”.

In closing

While I know not everyone echoes these thoughts, hopefully, this post can provide more context to some of the entrepreneurial motions we’re seeing today. Of course, take it all with a grain of salt. I’m an optimist by nature and by function of my job. Just as a VC I respect told me when I first started 4 years back,

“If you’re going to pursue a career in venture, by nature of the job, you have to be an optimist.”

Happened to also be one of the VCs who shared his thoughts for my little research project on inspiration and frustration last week.

Photo by K. Mitch Hodge on Unsplash

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How to Identify Market Opportunity and Recognize Market Inefficiencies

round gold colored pocket watch

I was raised a swimmer. From 4 years old, my parents sent me to take swimming classes for 2 primary reasons:

  1. Learn how to not drown.
  2. If we (my parents) are ever going to drown, you’re going to save us.*

*Note: I’d like to point out the irony is that both of parents know how to swim themselves. Not at a competitive stage, but enough to survive from drowning.

Oddly enough, I learned how to swim by drowning. Over the years, like many other children around me, on top of swimming, I also played ball in its various sizes and ran. And I learned that swimming and running are of the 2 purest forms of athleticism and exercise out there. There’s very little margin for error, if any. A tenth of a second is the difference between Olympic gold and not even qualifying for the semifinals. Because of that, in swimming, we’re taught to be efficient. We learned to maximize for our distance per stroke (DPS). And I believe in running, it’s distance per stride.

Efficiency. The ability to do more with less.

The market of efficiency

These days, getting from point A to B isn’t as difficult as it used to be. Cars made travelling miles easier. Planes, for hundreds to thousands of miles. Bikes and scooters, for last mile transportation – distances too close to drive, but take twice as long to walk. Outside of transportation, career development, information and skill acquisition have all seen massive developments not only in the last hundred years, but especially in the last 10 years. Online platforms, like Coursera, Masterclass, Google, and Wikipedia, helped us all shave off months, years, even generations of legwork and information acquisition. They made so many things more accessible.

Accessibility

Accessibility is platformitizing and democratizing information. What Yellow Pages did for services. Reddit for knowledge acquisition. Amazon for shopping. Google for information. And Food Network and food media did for cooks. The average person today is more knowledgeable about the culinary process and its accessories than someone two decades back. Laughable now, but 8 years ago, it’s how I learned not to burn frozen pizza. I could go on and on.

But, in the next ten years, accessibility may not be enough. Though there are many populations in this world who still have yet to access the knowledge I can readily find on my laptop, accessibility provides people with the tools, but not the means to use those tools effectively.

Ease

Ease does. Lower the barriers to entry and bundle the entire knowledge acquisition, or otherwise, what I would call onboarding, in an intuitive manner. Like what WordPress did for websites. Instagram for photos. Opendoor for home-buying/selling. TurboTax for, well, tax.

It’s a messy web of information out there. As economist Herbert A. Simon puts it:

“A wealth of information creates a poverty of attention.”

Here’s an easy way to tell which industries and processes lack ease. Find where people have created hacks to solve a problem.

  • Using multiple tools/software to solve a single problem;
  • Using a “temporary” solution to solve a repetitive problem. Like a basin to catch the rainwater that leaks through the roof;
  • A public forum, like Reddit or a Facebook group or multiple similar questions on Quora, where people share their “life hacks”.
  • A How-to YouTube video that has tens/hundreds of thousands, if not millions, of views.

And to know if you hit the nail on the head, you’ve got crazy pull. Product-market fit. PMF. When you don’t even have the luxury of time to worry if you have PMF ’cause your customer success inbox/sales inbox is filled to the brim. Or you’re getting so many new users that you’re figuring out how to upgrade your servers before your servers go blank. For more on PMF, I highly recommend checking out Lenny Rachitsky‘s recent post surveying 25 of the most successful companies on when they realized they had PMF.

In closing

Tools and platforms that make it easier for an individual to go the distance, to be more efficient, carry 2 traits: accessibility and ease. With each stroke, with each action one takes, they can go further. They can do more. With less. Technology, in the incoming years, will further do so.

And as a VC scout, I look for, what I call – distance per action. Or DPA, for short. So, if you’re working on something that will enable people to have higher and greater DPAs, I wanna talk.

Photo by David Bartus on Pexels.com

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The Punchline

comedy, the punchline, fundraising, vc

“Hey, y’all wanna hear a joke?” one of my teammates in my lane asks during warm-up. If there was the equivalent of a class clown in the pool, that’d be him.

“Why not?” the rest of us answer, hoping to spice up the impending 2-hour practice.

“So, there’s this guy who’s about to ask this girl out to the school dance. But to do so, he’s gotta ask her out on Valentine’s Day. So the day before, he goes to buy a Valentine’s gram during lunch. Turns out – there’s a long, long line.”

Our coach blows the whistle, and we sprint off. When we touch again, he goes on, “And there’s a separate line to buy the roses. So, he heads over, and turns out – there’s a long, long line.”

Again, the whistle goes off, and upon return, “So, he finishes buying his gram and roses. On the fateful day, she gets it all and says yes. Super excited, the guy prepares for the school dance. First he goes to buy his tux. When he arrives at the tailor-“. He pauses, beckoning us to finish his sentence.

“There’s a long, long line,” we chime in. In the distance we hear, “Lane 1. Stop talking!” Whistle blows, and we go…

And return. “He gets his suit tailored. Now he goes to Office Depot to buy his cue cards and markers to ask her out. But when he gets to the cash register…”

“There’s a long, long line.” And a kickboard comes flying in and smacks two of us in the face. “Quiet!” a distant shout.

“Day of the ask, he assembles all his friends, lines them up for a dramatic prom ask. And what do you know?”

“There’s a long, long line.” Another one of us feels the sting of hard foam across our face.

“The girl says yes. And now, finally the day of the prom arrives, and he picks her up. Together, they take pictures with everyone else, in a-“

“Long, long line.”

“Then they all drive to the destination of prom. But turns out they’re not the first ones there. Ahead-“

“There’s a long, long line.” At this point we were too vested in the joke. Each of us with bruises across our face – just short of our coach dragging us out of the water to discipline us.

“So the boy and girl finally make it into the dance hall, and while they’re waiting for the dance floor to open up, the boy asks us the girl, ‘Can I get you something to drink?’ And she says, ‘Sure.’ So, he goes over to where the fruit punch is. And, turns out…”

“There’s a long, long-“

“Nope, there’s no punch line.”

The bigger picture

I hear so many founders tell me they’re pursuing this billion dollar market. Or even a trillion dollar one with a capital T. And how they plan to capture 10% of this huge market in 5 years. I mean, c’mon, how awesome would 10% of this billion dollar market sound for our returns?

For an investment of anywhere between $1 and $10 million, let’s say $1 million (’cause this is usually something people raising a pre-seed/seed say), 10% of $100B market is $10B. And for the ease of calculation, let’s say by the time the founders exit, we still have 10%, 10% of $10B is $1B. For only $1M invested, $1B is a 1000x return. Wowza!

The true let-down happens when they finally share what their solution is. And it turns out to only address a small fraction of their total addressable market (TAM). Here’s a hypothetical example. A team is tackling a TAM for events of $1.1 trillion (2018 number). They talk about how awesome a CAGR of over 10% is. And how virtual events are the new trend and might accelerate that number even more. I’m thinking, “Hell ya, this’ll be epic.”

Then their product – the punchline… an app that streamlines coffee service at events in 2020. While this may or may not be an exaggeration, many startups find their pitches in a similar format. On one end, as a founder, you want to tackle the biggest market you can – to attract investors hoping to make large returns. On the other end, you want to be realistic with your expectations, as well as your investors’. Often times, it’s a fine line. I get it, which is why I suggest approaching market-sizing from the angle of pragmatic optimism.

The GTM strategy

After you share such a lofty goal, the inevitable question comes along: “What is your go-to-market (GTM) strategy?” The usual answer is some permutation of the below:

  • Google/Facebook/other ads,
  • Get it on the App Store (and/or Play Store),
  • (Pay for) SEO,
  • Hire a C_O (fill in the blank)
  • Hire a growth hacker,
  • Or more engineers, or for that matter, anyone,
  • We were hoping you (the investor) could help us with that, once you fund us. 🙁

But who are we kidding? No one. While none of the above answers are unilaterally incorrect, all the above show characteristics of someone who isn’t a hustler, who isn’t scrappy, and who probably isn’t one to scale a business. A pitch deck is designed to be short. I get it. There’s a lot you can’t fit on to it. But I’m not alone when I say this, we want to see the why and the how behind the what. A bit of Simon Sinek‘s two cents – start with why.

  • Why are you hiring more people? To do what?
  • Why did you choose Google over Facebook ads? Over Reddit, Instagram, Tiktok, you-name-it ads? Over traditional billboards?
  • What is the end goal?
  • What is the core metric you’re optimizing for? In the near term? In the long term? Before your next fundraise?

Just to be clear, just because a founder approaches market analysis from a top-down approach doesn’t instantly disqualify him/her. But it is a red flag. That’s why I’m a huge proponent of bottoms-up market-sizing.

Bottoms-up… and Cheers!

How many customers do you plan to have by the end of this year? By the end of next year? The year after?

How much do you plan to sell your product/service for? How will customer acquisition cost (CAC) get cheaper over the next few years? What will you need to do for CAC to get cheaper?

Eventually, you build out this road map of what the next few quarters and years will look like. You, effectively, plot out, here are the next few milestones we need to hit as a team. And those milestones are quantifiable and actionable – a clear sense of direction for your team and for your investors. Of course, as any road map goes, all subject to change depending on the situation.

In closing

Just like a great joke, you, the founder, need to be capable of delivering the punchline in your pitch deck. The build-up is the problem in the market and the world-class team you’ve assembled, as well as why it means so much to you. The punchline is the solution you’re building. Always, make sure your punchline delivers.

  1. It’s relevant to the rest of the (comedic) routine.
  2. When it hits , it’s at the minimum, satisfying, as a climax. At the maximum, like a world-class punch, it knocks the wind out of your audience.

In the words of Robert McKee, a Fullbright Scholar who’s coached over 60 Academy Award winners, 170 Emmy recipients, among numerous others,

“At story climax, you must deliver a scene beyond which the audience can imagine no other.”

Your punchline, your product, by the time you deliver your pitch’s climax, must deliver a utopia beyond which your investors can imagine no other.

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Not the White Knight in Shining Armor

startup fundraising

I hear so many founders in their pitch decks say: As soon as they raise funding, [blank] will happen. [blank] could be: hiring that CTO or lead developer or an operations lead, getting to X0,000 users, or going “all in” on growth (often heard as Facebook and/or Google ads). That line by itself really doesn’t mean much. So I always follow up, with: “How do you plan to achieve [blank] milestone after you extend your runway/receive venture backing?”

Then this is when I start thinking, “Oh no!”, especially as soon as I hear, after I partner with X investor, they will help me do Y, or worse, they will do Y for me.

And I’m not alone. So, what signals does that response give investors?

  1. Alright, Investor A, I’m planning for you to do the legwork for growing my business.
  2. I don’t know what I’m doing, but please invest in my naivety.
  3. I haven’t thought about that problem/milestone at all, and I’ll worry about it when I get there. So, take a big risk in me.

Why I love athletes, chefs and veterans

There is no white knight in shining armor when you’re raising a round.

This is the reason I love athletes. And for that matter, veterans and chefs, too. Each of them chose a career where they are forced to deal with adversity. Personally and collectively. To a level, most of us might call inhuman. While I’m sure I’ve missed many other industries that also sponsor such arduous growth, and yes, I know I’m generalizing here, these 3 industries seem to have a higher batting average of producing individuals who can find the internal grit to overcome almost any obstacle.

In the words of Y Combinator‘s Michael Seibel in a recent talk he gave with Saastr Annual @ Home,

“They’ve trained themselves to be better at doing things that are hard.”

While he wasn’t necessarily talking about professional athletes, chefs, or veterans, the same is true. The people who are better than you at doing something don’t have it any easier than you do. Rather, they’ve developed a system, or mental model, that helps them conquer extremely difficult obstacles. And because it’s become muscle memory for them, it seems easier for them to accomplish these goals. At the same time, we should never discount their blood, sweat, and tears, or what some of my colleagues call scar tissue, just because we cannot see them. It’s why we in venture call startups “10-year overnight successes“.

To founders

Bringing it back full circle, a great founder (as opposed to a good or okay founder) never completely relies on an external source for the growth of their company. By the same token, a great founder also never blames the failure of their startup because of an external source. A great founder – regardless of the business’s success or failure – learns quickly to not only repeat the same mistake again, but also develop insights and skills to push their business forward. While you as the founder isn’t required to be the best in the world of a particular skill, you will need to practice and accel at it until you can find the best in the world. But to hire the best in the world, you also have to be reasonably literate in the field to differentiate the best from the second best.

The solution

Here’s what investors are looking for instead:

  1. We’ve thought about the problem. We’ve A/B tested with these 3 strategies (and why we chose each strategy). Numbers-wise, Strategy B proves to: (a) have the most traction, and (b) is most closely aligned with our core metric – revenue.
  2. Here are the 2-3 core milestones we plan to hit once we get this injection of capital. And we will do what it takes to get there. In order to get there, we’ve thought about hiring an expert in operational efficiency and purchasing these 5 tools to help us hit these milestones. For the former, here’s who we’ve talked to, why we think they’re a perfect fit, and what each of their responses are so far. For the latter, each tool in this short list can help us save X amount of time and Y amount of burn. Do you think we’re approaching these goals in an optimal way?
    • Note: The signal you’re giving here is that you and your team are results-/goals-oriented, while the process of getting to those goals are fluid and stress-tested.

In both cases, you’re showing your potential investors that you’ve done your homework already (versus a Hail Mary). But at the end of the day, you are open and willing to entertain their suggestions, which, ideally, come with years of experience in operating and/or advising other founders who have gone through a similar journey.

So, stay curious out there! Always question the seemingly unquestionable!

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How Prospect Theory Relates to Venture Capital

economics, prospect theory, coins, venture capital

The other day, I saw a post on r/venturecapital (and now you know what my Reddit handle is) asking how prospect theory relates to venture capital. Admittedly, quite thought-provoking! Ever since college, I’ve been a huge behavioral economics buff – how human psychology dictates market motions. And, prospect theory happens to fall in that category.

First developed by Daniel Kahneman and Amos Tversky, prospect theory is a behavioral model that says humans are naturally loss-averse. Oh, you might know the former Nobel Prize bugger from authoring Thinking, Fast and Slow, a book I highly recommend if you’re curious about the intricacies of how our brain understands the data around us. Simply put, we react stronger to losing something than when we gain something.

*As you can see, this graph is safe for family-friendly programming

For example, I’m more likely to feel the loss after losing my $1500 cellphone than the ephemeral gain of winning a grand and a half in the lottery. On one end, you’re probably thinking that makes sense. On the other end, you’re probably calling me a loser for spending so much on a cellphone. Well, joke’s on you. I got my phone for $250 on Black Friday. But I digress. In another instance, if you look at kids, they’re more likely to throw a tantrum if you take away a marshmallow on their plate than give you a hug for giving them an extra marshmallow.

Similarly…

As you might expect, prospect theory informs many of my investing/sourcing decisions, including:

So, VCs and prospect theory

So, you’re probably now thinking: “Gimme the deets.”

While prospect theory suggests people typically weigh the impact of their losses more than they so their wins, VCs are humans at the end of the day. Just like your amateur naive stock trader will hold on to losses, and sell their wins, many VCs tend to do the same, as a reactionary measure.

It’s counterintuitive. But the name of the game in early-stage investing is not about how many losses you’ve sustained (especially when 7 out of every 10 go out of business, 2-3 break even, and hopefully 1 makes it), but about the magnitude of the wins an investor makes.

For instance, if you’ve invested in 100 companies, and 99 go out of business, and 1 makes 200x, you just doubled your fund. Of course, a successful fund typically makes 3-5x cash on cash multiple. Just our fancy way of saying your fund returns $3-5 for every dollar invested by a limited partner (LP). Although there are some nuances, many VC investors use cash on cash and multiple on invested capital (MOIC) quite interchangeably.

Guess for you to be counted as a successful investor, that one investment’s gotta go to 300x, at the minimum. In reality, you’re probably not going to have just one investment perform. Especially if you’re in the top quartile of VCs out there. You’re looking at a ~2.5% unicorn rate. So 2-3 investments of your 100 investments should be valued at over a billion dollars. Unless you’re Chris Sacca, who I hear returned 250x cash on cash for his first $8.4M seed fund, which included the likes of Uber, Twitter, and Instagram.

Of course, larger funds are harder to return. It’s easier to return a $10M fund than a $1B, much less a $100B. While I’m not supporting the only $100B vehicle known to date, the losses that fund sustained made the front page news a while back. And though by monetary value, they lost more than most other funds out there. Percentage-wise, they’re not alone. But in the public and media’s eyes, their losses are weighted more heavily than smaller funds.

In closing/Disclaimer

But hey, I’m no registered investment advisor. If you’re looking for which specific startups to invest in, please do consult with a professional. While I may share what startups have attracted my attention here and there, my thoughts are just my own thoughts. And, this post is merely me sharing the correlation between venture capital and prospect theory, plus a few digressions.

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#unfiltered #24 How long do you take to prepare for a talk? – A Study about Time Allocation

notes, prepare for a talk, public speaking

Last week, my mentor/friend asked me if I knew anyone who’s stellar at storytelling and would be willing to hold a 1-hour workshop about it with his mentorship group. I connected with my buddy who earned his chops podcasting and being a brilliant customer-oriented founder, specifically on the user journey.

And it got me thinking. Hmmmm, I wonder how long people take to prep for a workshop or talk designed to inform and educate. Which eventually led me to the question… How much time allocation might many event hosts underestimate when asking a speaker to speak at their event?

Well, outside of travel, set up, rehearsal time, and of course, the length of the talk/workshop itself.

So, over the last few days, I reached out to 68 friends, mentors, and colleagues who have been on the stage before, including:

  • VCs – who invest out of vehicles that range from $5M to $1B (sample-specific)
  • Angels – investing individuals, who have over $1M in net worth
  • Founders – both venture-backed and bootstrapped
  • Executives – Fortune 500 and startup
  • Journalists
  • Influencers – YouTubers and podcasters
  • Consultants/Advisors
  • Professors
  • And, those who’ve been on public stages with 1000+ in live viewership.

… and asked them 2 questions:

  1. How long, in hours, do you take to prepare for a 1-hour talk?
    • For the purpose of slightly limiting the scope to this question, let’s say it’s on a topic you’re extremely passionate and well-versed in, and the audience is as, if not more, passionate than you are.
  2. And if I said this was for a high-stakes event, that may change your career trajectory, would your answer change? If so, how long would you spend prepping?

50 responded, with numerical answers, by the time I’m writing this post, with a few results I found to be quite surprising. *pushing my nerd glasses*

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VCs = Gatekeepers?

vc gatekeepers, gate

Not too long ago, I had the fortune of chatting with a fascinating product mind. During our delightful conversation, she asked me:

Are VCs the gatekeepers of ideas?

…referencing Michael Seibel‘s recent string of tweets:

And I’m in complete accordance. I want to specifically underscore 2 of Michael’s sentences.

… and…

The only ‘exception’ to this ‘rule’ would be if investors themselves were the target market for the product. At the same time, I can see how the venture industry has led her and many others to believe otherwise. So I thought I’d elaborate more through this post.

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A Reminder of “Why I Love You” – Managing Downtime and Dynamics Between Fundraising Meetings

love, founder vc love, vc fundraising meetings

I recently read Mark Suster‘s 2018 blog post about startups on “Remind me why I love you again?”. As an extremely active VC, he specifically detailed why, unfortunately, by meeting 2, 3, and so on with a founder, he may forget the context of reconnecting and why the founder/startup is so amazing. And, simply, he calls it “love decay”.

Mark Suster’s graph on ‘Love Decay’

The longer it has been since a VC/founder’s last meeting, the harder it is to recall the context of the current meeting. Though I may not be as over-saturated with deal flow as Mark is, it is an unfortunate circumstance I come across in meeting 5-10 founders and replying to 100+ emails a week.

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#unfiltered #21 The Recipe for Personal Growth – Thomas Keller’s Equation for Execution, The VC/Startup Parallel, Helping Others, La Recette Pour La Citron Pressé

lantern, personal growth, light

Over the weekend, I was brewing up some mad lemonade. ‘Cause well, that’s the summer thing to do. Since I’m limited in my expeditions outdoors, it’s just watching the sun skim over the horizon, blossoming its rose petals across the evening sky, in my backyard, sipping on homemade lemonade. If you’re curious about my recipe, I’ll include it at the bottom of this post.

When I’m cooking or performing acts of flavor mad science, I enjoy listening to food-related podcasts, like Kappy’s Beyond the Plate, Kappy’s CookTracks or Bon Appétit’s Foodcast. Unfortunately, all are on a temporary hiatus. So, I opted for the next best – YouTube videos. And recently, a curious video popped up in my Recommended feed. A 2010 TED Talk with Thomas Keller.

Thomas Keller. An individual probably best known, among many others, for his achievements with The French Laundry. Needless to say, I was enamored by his talk. But the fireworks in my head didn’t start going off until the 12:46 mark.

Continue reading “#unfiltered #21 The Recipe for Personal Growth – Thomas Keller’s Equation for Execution, The VC/Startup Parallel, Helping Others, La Recette Pour La Citron Pressé”
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Why Aren’t Investment Theses Hyper-Specific?

pedestrian, vc investment thesis

As a result of my commitment to provide feedback for every founder who wants a second (or third) pair of eyes on their pitch deck, I’ve been jumping on 30-minute to 1-hour calls with folks. Although I’ve had this internal commitment ever since I started in venture, I didn’t vocalize it until earlier this year. And you know, realistically, this is not gonna scale well… at all. But hey, I’ll worry about that bridge when I cross it.

Something I noticed fairly recently, which admittedly may partly be confirmation bias ever since I became cognizant of it, is that there have been a significant number of founders currently fundraising who complain to me about:

  1. Many VCs don’t have their investment thesis online/public.
  2. Of those that are, VCs have “too broad” of a thesis.

So, it got me thinking and asking some colleagues. And I will be the first to admit this is all anecdotal, limited by the scope of my network. But it makes sense. That said, if you think I missed, overlooked, over- or underestimated anything, let me know.

The Exclusionary Biases

By virtue of specificity, you are, by definition, excluding some population out there. For example, in focusing only on potential investments in the Bay, you are excluding everyone else outside or can’t reach the Bay in one way or another. Here’s another. Let’s say you look for founders that are graduates from X, Y, or Z university. You are, in effect, excluding graduates from other schools, but also, those who haven’t graduated or did not have the opportunity to graduate at all.

The seed market example

Here’s one last one. This is more of an implicit specificity around the market. The (pre-) seed market is designed for largely two populations of founders:

  1. Serial entrepreneurs, who’ve had at least one exit;
  2. And, single-digit (or low double) employees of wildly successful ventures.

Why? You, as a founder, are at a stage where you have yet to prove product-market fit. Sometimes, not even traction to back it up. And when you’re unable to play the numbers game (like during the stages at the A and up), VCs are betting on the you and your team. So, to start off, we (and I say that because I’ve been guilty of overemphasizing this before) look into your background.

  • What did your professional career look like before this?
  • Do you have the entrepreneurial bone in your body?
  • How long have you spent in the idea maze?

The delta between a good investor and a great investor

Let’s say an investor were to be approached by two founders with the exact same product, almost identical team, same amount of traction, same years of experience, and let’s, for argument’s sake, have spent the same number of years contemplating the problem, but the only difference is where they came from. One is a first-time founder from [insert corporate America]. The other is the 5th employee of X amazing startup. Many VCs I’ve talked with would and have defaulted on the latter. And the answer is reinforced if the latter is a founder with an exit.

The question wasn’t made to be fair. And, it’s not fair. To the VCs’ credit, their job is to de-risk each of their investments. Or else, it’d be gambling. One way to do so is to check the founder’s professional track record. But the delta here that differentiates the good from the great investor is that great investors pause after given this information and right before they make a conclusion. That pause that gives them time to ask and weigh in on:

What is this founder(s)’ narrative beyond the LinkedIn resume?

Shifting the scope

It’s not about the quantitative, but about the qualitative. It’s not about the batting average, but about the number and distance of the home runs. So instead of the earlier question:

  • How long have you spent in the idea maze?

And instead…

  • What have you learned in your time in the idea maze?

Similarly, from what I’ve gathered from my friends in deep/frontier tech, instead of:

  • How many publications have you published?

And instead…

  • Where are you listed in the authorship of that research? The first? The second? The 20th?
    • For context of those outside of the industry, where one is listed defines how much that person has contributed towards the research.
    • As a slight nuance, there are some publications, where the “most important” individual is listed last. Usually a professor who mentored the researchers, but not always.
  • And, how many times has your research been cited?

Some more context onto specificity

Some other touch points on why (public) investment theses are broad:

  • FOMO. Investors are scared of the ‘whats if’s’. The market opportunity in aggregate is always smaller than the opportunity in the non-aggregate.
  • Hyper-specific theses self-selects founders out who think they’re not a ‘perfect fit’. Very similar to job posts and their respective ‘requirements’.
  • Some keep their thesis broad in the beginning before refining it over time. This is more of a trend with generalist funds.
  • Theses are broad by firm, but more specific by partner. The latter of which isn’t always public, but can generally be tracked by tracking their previous investments, Twitter (or other social media) posts, and what makes them say no. Or simply, by asking them.

The pros of specificity

Up to this point, it may seem like specificity isn’t necessarily a good thing for an investor. At least to put out publicly.

But in many cases, it is. It helps with funneling out noise, which makes it easier to find the signals. It may mean less deal flow, which means less ‘busy’ work. But you get to focus more time on the ones you really care about. And hopefully lead to better capital and resource allocation. The important part is to check your biases when honing the thesis. Also, happens to be the reason why LPs (limited partners – investors who invest in VCs) love multi-GP funds (ideally of different backgrounds). Since there are others who will check your blind side.

Specificity also works in targeting specific populations that may historically be underrepresented or underestimated. Like a fund dedicated to female founders or BIPOC founders or drop-outs or immigrant founders. Broad theses, in this case, often inversely impact the diversity of investments for a fund. When you’re not focusing on anyone, you’re focusing on no one. Then, the default goes back to your track record of investments. And your track record is often self-perpetuating. If you’ve previously backed Stanford grads, you’re most likely going to continue to attract Stanford grads. If you’ve previously backed white male founders, that’ll most likely continue to be the case. In effect, you’re alienating those who don’t fit the founder archetype you’ve previously invested in.

In closing

We are, naturally, seekers of homogeneity. We naturally form cliques in our social and professional circles. And the more we seek it – consciously and subconsciously, the more it perpetuates in our lives. Focus on heterogeneity. I’m always working to consider biases – implicit and explicit – in my life and seeing how I’m self-selecting myself out of many social circles.

Whether you, my friend, are an investor or not. Our inputs define our outputs. Much like the food we put in our body. So, if there’s anything I hope you can take away from this post, I want you to:

  1. Take a step back,
  2. And examine what personal time, effort, social, and capital biases are we using to set the parameters of our investment theses.

Photo by Andrew Teoh on Unsplash

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