Category: Venture Capital

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Why It’s Important to Disagree with Your Co-Founders Early

While I don’t always ask this question, when I do, it provides me enormous context to how the founding team works together. What do you and your co-founders fundamentally disagree on? Over the years, I’ve heard many different answers to this question. “We disagreed on which client to bring into our alpha.” “On our last hire.” “Our pricing strategy.” And so on. As long as you contextualize the point of friction, and elaborate on how, why, and what you do to resolve it, then you’re good. There’s no right answer, but there is a wrong answer.

The answer that scares me the most is: “We agree on everything.” Or some variation of that. While people may share a lot of similarities, even potentially the same Myers Briggs personality type (although I do believe people are more nuanced than four letters), no two people are ever completely the same. Take twins, for example. Genetically, they couldn’t be any more similar. Yet, to any of us, who’ve met any pair of twins in our lifetime know they are vastly different people.

Priorities lead to disagreements

One of my favorite counterintuitive lessons from the co-founder and CEO of Twilio, Jeff Lawson, is: “If your exec team isn’t arguing, you’re not prioritizing.” He further elaborates:

“As an executive team, we never actually argued — which is a strange thing to bother a CEO. But in fact, something always felt not quite right to me when we always agreed. Clearly, we must not be making good enough decisions if we all agree all the time.

“What I came to realize was that the reason why we didn’t argue is we weren’t prioritizing. One person says, ‘I like idea A,’ and the other person says, ‘I like idea B,’ and you say, ‘Great, put them both down, we’ll do it all!’ And in fact, when you look back on those documents at the end of the year, we rarely got around to very much of anything in those documents.

“Be vigorous not just about what makes the list, but the specific order in which priorities fall. “We realized it’s not just about all the things we could do, but the order of importance — which is first, which is second. Now you get disagreements and a lot of vigorous, healthy debate.”

Starting the tough conversation

Admittedly, it’s not always easy to have these tough conversations with the people you trust most. In fact, often times, it’s even harder to have these conversations because you’re scared about what it can do to your relationship. Arguably, a fragile one at best. At the end of last year, Yin Wu, founder of Pulley, shared an incredible mindset shift when building an all-star team, which led to my conversation with her.

You’re a team driven to change the world we live in. And to do so, you need a system of priorities.

One of the best ways I’ve learned to address conflicts – explicit and implicit, the latter more detrimental than the former – is taking the most obvious, but the one that most people try to avoid. Address the elephant in the room at the beginning.

I love the way Elizabeth Gilbert approaches that elephant, “The truth has legs. It’s the only thing that will be left standing in the end. So at the end of the day, when all the drama has blown up, and all the trauma has expressed itself, and everyone has acted up and acted out, and there’s been whatever else is happening, when all of that settles, there’s only going to be one thing left standing in the room always, and that’s going to be the truth. […] Since that’s where we’re going to end up, why don’t we just start with it? Why don’t we just start with it?”

When it hasn’t happened yet

If you haven’t disagreed with your team yet, you either haven’t established your priorities or one or the other or both has yet to bring it up. A mentor of mine once told me, “Whatever you least want to do or talk about should be your top priority.” And the goal is to sit down with your team and figure it out. To come into the conversation suspending immediate judgment and trying to see where your other team members are coming from.

As the CEO of a startup or a leader of a team, you don’t have to use every piece of feedback or input you get from your teammates. But you should make sure your teammates feel heard. That you’ve put thought and intention behind considering their ideas and opinions. Whether you choose to deviate from your teammates’ opinions or not, you should clearly convey the rubric that you used to make that decision. And why and how it aligns with the company’s mission.

In closing

And of course, the follow-up to the first question about disagreement would be: How often do these disagreements happen? And how do you move forward after the disagreement comes to light?

I go back to a line Naval Ravikant, co-founder of AngelList, once said, “If you can’t see yourself working with someone for life, don’t work with them for a day.” Indubitably, you’re going to be working with your co-founders for a long time. And if you haven’t dissented with your co-founders – or for that matter, other team members, investors, and customers – yet, you will. And knowing what, how and why you disagree with others can be invaluable for your company’s survival and growth.

This past weekend I heard a new phrasing of disagreement I really liked from a friend of mine. “Creative conflict.” I’m adding that phrase to my dictionary from now on. And well, this is my preface to you all before I do.

Prioritize. Communicate. And embrace creative conflict.

Photo by Ming Jun Tan on Unsplash

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Losing is Winning w/ Jeep Kline, General Partner at Translational Partners and Venture Partner at MrPink VC

“I was a swimmer since I was very young and, you know, I never won. I never won.”

You’re probably assuming this is how the opening scene of a movie about a future world-champion swimmer begins. The beginning of the world’s most amazing underdog story. And you’re wrong. Well, not completely wrong. This isn’t a story about the world’s next biggest Olympic swimmer. Although it might be well-timed with the Tokyo Olympics around the corner. This… is a story, in my humble opinion, of one of the world’s next biggest venture capitalists. A story of a young Bangkok girl who became a VC from learning how to lose.

I’ve never been the smartest kid on the block. At least in the IQ department. So I make it my mission to hang out with folks who are smarter and more driven than I am. Jeep is no exception. I met her last month. And as if going from a World Bank economist to Intel leadership to startup advisor and investor to lecturing at UC Berkeley’s Haas School of Business was not enough, in our first conversation, she shared an incredible set of contrarian insights. So earlier this month, I had to jump into another conversation with her.

Something about going long

If you’re a long-time fan of this blog, you know one of my favorite Bezos-isms is, “If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that.”

Jeep is that same kind of superhuman.

“I started as a competitive swimmer since I was seven, and I swam so much and so hard, like three kilometers a day. It’s just a lot of practicing. I never even won a medal. And I kept doing it. And that was hard.

“Because other kids they got medals in different styles. So I learned early on in life what losing actually meant. And I think that’s very important because a lot of smart kids, they never learn how to fail early on in their life. And it’s kind of like a winner’s curse because you know, when they’re the best at everything, since they were young, throughout college , once they come out, and they realize that the world is hard, they are doing things or want to pursue a career that their parents cannot help them, they become risk averse. Meaning they don’t want to try new things.

“So I never won in [any] swimming competitions. Until I got into college. When I got into college, at the time I already quit swimming. I quit in high school. So, I didn’t swim competitively anymore since I didn’t have time to practice. I picked up other activities like piano, which I came to love. In college, one of my friends asked me, ‘Hey Jeep, why don’t you come back to the competition?’ And she knew I never won. We were in the same race at so many events. And I said, ‘I don’t know. Let me try.’ So I tried again.

“So I got back to the practice routine. Adjust my strokes a little bit. And then I won. I got gold and silver medals for a college swimming competition. And I was like, ‘This is a joke. How could I win?’

I never won ever, like for ten some years. And I joke with my friend, ‘You know why, because everybody else quit!’ They quit about the same age in high school.

I just went for it. And that was one of the moments in life that I realized that it’s all about grit. You do what you love and you don’t quit. There will be a moment that you win.”

The analogy extends further

“Failure is the mother of success.” It’s an ancient Chinese proverb that my mom used to tell me again and again growing up. Every time I “failed.” Scored low on a test. Embarrassed myself on stage for a school musical. Placed fourth, right off the podium for multiple competitions. It’s funny thinking about it in retrospect since she turned out to be the exact antithesis of a stereotypical Asian parent. And I love it!

Take tbh, an app where you send your friends anonymous compliments, as an example. It launched back in late 2017. 73 days after its launch, it went from zero to 2.5 million daily active users, which subsequently led to a $100M acquisition by Facebook. To many, tbh looked like an overnight success. But it wasn’t. Nikita Bier, co-founder of tbh, and his team spent seven years with 15 failed products before they arrived at tbh. And with each iteration, they learned and compounded their lessons from their previous failure.

Clubhouse’s Paul Davison and Rohan Seth is another example of a seemingly overnight success. From Talkshow to Highlight (acq. Pinterest), the pair went through at least nine failed apps before they arrive at Clubhouse – last reported to have passed 10 million users. And valued at $4 billion. Their lead investor, Andrew Chen at a16z, spent eight years getting to know Paul.

One of my junior swim teammates told me years ago when I was at my prime, “David, I don’t think I can beat you as you are now. But I promise you I will beat you one day, even if that means after you retire.” At the time, I dismissed it as just another snarky comment, which athletes are prone to make from time to time. But now that I’m a bit wiser than I was in high school, I find that same comment incredibly prescient. It just so happened that a few years ago, we raced each other again. Both of us had long exited the competitive arena, and he won.

In closing

Near the end of our conversation, Jeep cited something Soichiro Honda, the namesake for the Honda Motor Company, once said. “Success can be achieved only through repeated failure and introspection. In fact, success represents 1% of your work which results only from the 99% that is called failure. Many people dream of success. To me success can be achieved only through repeated failure and introspection. In fact, success represents 1% of your work which results only from the 99% that is called failure.”

She further elaborated, “For people who grew up in a society, in a culture that does not easily accept failure, I want them to know that it’s actually not a bad thing to try and hear rejection. But along the way, they have to make sure that they learn.

“It’s the same thing when I teach UC-Berkeley students. I told my brilliant graduate MBA students that there is, for me – and it’s true – there is no stupid question. If other people think your question is stupid, but at least you learn. If you learn, there’s no stupid question. Do not ask good questions, if it means you don’t learn anything.”

In a way, I’m reminded of a peculiar quote by Karl Popper, “Good tests kill flawed theories; we remain alive to guess again.” While Popper was known to be quite the contrarian thinker of his day, the same seems to hold for questions. Good questions kill flawed theories. We remain alive to learn again. After all, speaking from personal experience, I often find myself burning the midnight oil to ask the perfect question. But in the pursuit of asking the “perfect question”, I’ve forgone the adventures I would have had to arrive at the answer I thought I sought.

We learn when we fail. We learn, to one day succeed. The greatest are the greatest because they have a higher propensity to fail than the average person. As the great Winston Churchill said, “Success consists of going from failure to failure without loss of enthusiasm.”

And as Jeep said, “Winning is actually losing, but learning along the way.”

Thanks Jeep for helping with earlier draft edits!

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#unfiltered #48 Am I Valuable in this Ecosystem?

In the past month, I’ve doubted myself and my abilities more than I have in the past two years combined. Half from putting myself intentionally in tough conversations, half from pursuing new opportunities to see them turn belly up. The latter is merely a fact in life. But coupled with the former, I can’t say I was always the happiest camper. So, when in one of the former’s conversations, someone asked me: “Are you worth anything in the startup world?”… I hesitated for more than a day, before I had the courage to give myself an answer. While it was a rhetorical question then, it is a question I need a companion answer to now.

  1. Nothing. Without entrepreneurs, I am useless in this ecosystem. On the flip side, if there are entrepreneurs that I can help find product-market fit and grow, I’m a percentage-based function of their growth. Let’s say as an investor, I own 10% of a company. If the company’s worth $0, then I am too. If it’s not zero, then I’m worth whatever 10% of the whole is worth. Is that a representation of my true market value? No. It’s merely an assumption that for, say, $250K for 10%, I am worth, in the long run, at least 10x of $250K to help founders move faster on their journey.
  2. Something. How much? I don’t know. My job is to help pair founders with the knowledge, skills, and relationships that will transcend the outcome of the venture itself. They say entrepreneurship is never a zero sum game. Even if your idea doesn’t find its product-market fit, the time you spend hustling is cross-applicable to any other industry. Can founders find the knowledge, skills, and relationships without me? Most likely. There are so many resources online via YouTube, Medium, Substack, Quora, just to name a few, that it’d be silly of me to think I’m essential. What I can do is expedite the journey towards their goals. Hopefully even alleviate some stress. And even when I do so, I’m only truly useful in one chapter of their journey rather than the whole novel. But if my worth is just to reduce the friction it takes to get us one step closer to live in the world we want to live in tomorrow, then so be it.

I’m reminded of what Ashmeet Sidana of Engineering Capital said recently. “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.”

Photo by Sunrise Photos on Unsplash

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How to Build Your Investor Pipeline Without a Network

One of the most common questions I get from first-time founders, as well as those outside the Bay Area, is: “Who is/How do I find the best investor for our startup?” Often underscored by circumstances of:

  • Raising their first round of funding
  • Finding the best angel investors
  • Doesn’t have a network in the Bay Area or with investors

While I try to be as helpful as I can in providing names and introductions, more often than not, I don’t know. I usually don’t know who’s the best final denominator, but I do know where and how to start. In other words, how to build a network, when you don’t think you have one. I emphasize “think” because the world is so connected these days. And you’re at most a 2nd or 3rd degree connection from anyone you might wanna meet. Plus, so many early-stage investors spend time on brand-building via Medium, Quora, Twitter, Substack, podcasting, blogging, and maybe even YouTube. It’s not hard to do a quick Google search to find them.

“Googling” efficiency

While I do recommend starting your research independently first, if you really are stumped, DM me on my socials or drop me a line via this blog. Of course, this is not a blog post to tell you to just “Google it”. After all, that would be me being insensitive. Here’s how I’d start.

One of the greatest tools I picked up from my high school debate days was learning to use Google search operators. Like:

  • “[word]” – Quotes around a word or words enforces that keyword, meaning it has to exist in the search items
  • site: – Limits your search query to results with this domain
  • intitle: – Webpages with that keyword in its title
  • inurl: – URLs containing that keyword

Say you’re looking for investors. I would start with a search query of:

site: docs.google.com/spreadsheets intitle: investors

Or:

site: airtable.com inurl: investors

Feel free to refine the above searches to “angel investors” or “pre-seed funds”.

Landing and expanding your investor/advisor network

I was chatting with a friend, first-time founder, recently who’s gearing up for her fundraising frenzy leading up to Demo Day. She asked me, “Who should I be talking to?” While I could only name a few names since I wasn’t super familiar with the fashion industry, I thought my “subject-matter expert network expansion” system would be more useful. SMENE. Yes, I made that name up on the spot. If you have a better nomination, please do let me know. But I digress.

First, while you might not think you have the network you want, leverage who you know to get a beachhead into the SMEN (SME network) you want. Yes I also made up that acronym just now. But don’t just ask anyone, ask your friends who are founders, relative experts/enthusiasts, and investors. Ideally with experience/knowledge in the same/similar vertical or business model.

Second, if you feel like you don’t have those, just reach out to people who are founders, relative experts/enthusiasts, and investors. Via Twitter, Quora, LinkedIn, Clubhouse. Or maybe something more esoteric. I know Li Jin and Justin Kan are on TikTok and Garry Tan and Allie Miller are on Instagram. You’d be surprised at how far a cold email/message go. If it helps, here’s my template for doing so.

Then you ask them three questions:

  1. Who is/would your dream investor be? And two names at most.
    • Or similarly, who is the first (or top 2) people they think of when I say [insert your industry/business model]?
  2. Who, of their existing investors, if they were to build a new business tomorrow in a similar sector, is the one person who would be a “no brainer” to bring back on their cap table?
  3. Who did they pitch to that turned them down for investment, but still was very helpful?

For each of the above questions, why two names at most? Two names because any more means people are scraping their minds for “leftovers”. And there’s a huge discrepancy between the A-players in their mind and the B-players. Then you reach out/get intro’ed to those people they suggested. Ask them the exact same question at the end of the conversation (whether they invest or not). And you do it over and over again, until you find the investor with the right fit.

Photo by Andrew Ly on Unsplash

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#unfiltered #46 Soon May the Investor Fund

Not long ago, there was this massive TikTok craze on sea shanties. And while I don’t have a TikTok account, the ripple effects have reached me as well. What started as a shower thought after a founder recommended I gamify my advice to founders fundraising, well… turned into this. To the tune of Soon May the Wellerman Come:

There once was a team that put to sea
The name of that team was Friends ‘N Me
The winds blew hard, but growth tipped up
O’, burn that midnight oil (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

She had not been two years from start
When push became the pull we sought
The founder called all hands and wrought
The product to scale now (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

The servers’ now a right real mess
We had to call the AWS
They had us pay for more bandwidth
But that’s okay with us (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

We’ve tripled our growth last year, oh yus
With dollar retention as one cause
When we were asked what it was
We said ’twas one twenty (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

We’ve ten cust’mers that five of which
Are referenceable you’ll find on pitch
That one of which is kinda rich
They’re paying hundy K (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

Photo by Katherine McCormack on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

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The Goosebump Test

Ever since I started my career in VC, I’ve been trying to understand the concept of “intuition”. Yet, it wasn’t after I’d seen over 500 pitch decks and met over 100 founders before I began to have an inkling of what intuition meant. In fact, embarrassingly so, when I first started at SkyDeck, Berkeley’s startup accelerator, I thought every other startup I met was gonna be a winner. After all, it was rather rare that a founder wouldn’t be excited about their idea at the first meeting. I was told again and again by investors, one of the key drivers for a startup is the founder’s passion. I thought, well, the numbers might not be there yet. But with this founder’s excitement, they’ll get there eventually. And quickly, I mistook “hopefully” as “eventually”. Two words with very different meanings.

You don’t have to be a full-time investor to know that I was quite off the mark. I soon and quickly learned that passion can be faked, especially in the first meeting. And on that journey, I realized how important having a large and deep sample size was. Large, in the sense of number of founding teams I was meeting. Deep, in the sense of spending longer hours with these teams. Of course, realistically, I couldn’t spend more time with everyone I met, but that also meant I shouldn’t just spend half an hour with them and call it a day. My general rule of thumb became I was going to meet every founder at least twice, and at least a week apart. This gave me:

  1. Time to cool my head from the excitement of the meeting
    • Am I more, less, or just as excited to meet them in meeting two as I was in meeting one?
    • If I were [insert my mentor’s name], would I do the deal? Why or why not?
      • Sometimes, it was really helpful to put myself in the shoes of someone’s who’s way more experienced than I am.
  2. Time to approach the opportunity more analytically
    • Does it align with the macro trends I’ve seen?
    • Do they have some early semblance of product-market fit? Why can that be an early proxy for it?
    • Would I be a power user?
    • Is their origin story enough to compel them towards this idea for the next 7-10 years? Are they meant/”destined” to do this?
    • Would they be able to succeed without me? Without funding?
    • Is venture funding a path they need to take towards growth? What about equity crowdfunding? Bootstrapping? Reaching profitability via a tweak in their business model?

Of course, there were, are, and will be exceptions.

Alfred Chuang of Race Capital recently shared his “co-founder test”: “People asked me so well, how do you determine this is a company you want to invest in. In early stage, I say if this company I want to co-founded with, that I will, in any moment jump on my own two feet in the building, the company would have found this, I don’t do it. Wow. Right. That’s where the conviction come from. Right? This is the ultimate gut test, you don’t pass that gut test, you don’t do it. So I urge the founders on either side to say, Well, think of me as your co-founder. If you don’t think of me as a co-founder, don’t do the deal with me.”

I recently tuned into one of Basecamp‘s Jason Fried‘s latest interviews, in which he describes how he chooses to pursue projects based on feel. Particularly when he gets the goosebumps. Similar to him, and I’m sure many others, I regret far more of what I say yes to than what I say no to. It’s not that I jump in knowing I will regret my decision. In fact, I’m usually pretty sure I won’t. Nevertheless, in only a rare few circumstances, is it a full-body yes, as Tim Ferriss would call it. VCs, as with any investor or buyer, aren’t immune to buyer’s remorse.

When imagining what could go right – the greatest, most impactful possible upside, does it send happy chills down my spine? Am I riffing off their energy and actively throwing ideas out? Am I unconsciously trying to hit my limit on words per minute? If so…

Some investors call it intuition. Others call it conviction. I’m gonna need my own pretentious phrase. Let’s call it the goosebump test.

My goosebumps will undoubtedly evolve over time. It will react to new stimuli, based on my accumulated knowledge and experience. It will also learn from the scar tissue that will form in the future. While I will try to follow my goosebumps as much as I can, they will undoubtedly also fail me at times. Just like how I wouldn’t be as excited now by some of the startups that got me excited back at SkyDeck, I imagine there will be a healthy handful that I do now that my body will learn from in the future. And I will continue to do my best to codify my learnings and share my scar tissue for myself and on this blog over time.

Photo by Stephen Leonardi on Unsplash

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Think like an LP to Get a Job in VC

I want to preface this piece by first saying, though I have LP (limited partner) friends, I’ve never been an LP. So take everything with a grain of salt. For that matter, even I have been an LP, still take this with a grain of salt. After all it’s just my one perspective on the world. Nevertheless, I hope this perspective helps to provide some context around the venture space. As it did for me.

For years, I’ve recommended my friends who were looking at startup job opportunities to think like a VC. And having chatted a number of firms over the years about scout, associate/analyst, venture partner roles, I’ve come to a new revelation. Or rather one that I’ve practiced for a while, but haven’t connected the dots until recently.

When you’re looking for VC job opportunities, think like an LP. I’ve written about the LP calculus a few times before, like:

Here are some questions I usually consider:

  • How have you thought about your own differentiation that gets you access to some of the uniquely fund-defining opportunities you have?
  • What are the startups in your anti-portfolio? And what have you learned since from them?
  • [if their funds are wildly different in fund size (i.e. Fund I – $20M, Fund II – $100M)] How do you think about fund strategy now versus Fund [t_now-1]?
    • For context, usually each subsequent fund doubles in size. i.e. Fund I $20M, Fund II $40-50M, Fund III $80-100M
  • [If they have fund advisors, EIRs, and/or scouts] How do you pick advisors? What is your mental model for picking scouts?
    • Or one of my favorite phrasings: How do you differentiate the good from the great [advisors/scouts]?

Over the weekend, my friend sent me a great podcast for me to unwind. In it, I found an unlikely hero soundbite. “Your library holds a lot of value that you may not know until the story arrives. […] No one’s selling characters ’cause they’re one story away from this character becoming a hit.” While its context is related to why Marvel won’t sell any of its superheroes, Alex Segura‘s, co-president of Archie Comic Publications, anecdote proves just as insightful to the world of venture.

Discovering first-time early-stage founders is hard. The same is true for finding the next killer GP or venture firm. AngelList’s Rolling Funds are democratizing access to capital, lowering the barrier to entry for emerging fund managers. And really the success of a fund is determined by its MOIC – multiple on invested capital. 5x and up would be ideal. And that, like I mentioned in my last blogpost, boils down to the fund’s top one or two winners. Loosely analogized to a fund’s unicorn rate (percent of portfolio that are unicorns). In other words, the “one [investment] away from this [fund] becoming a hit.”

To see if a fund can consistently find those stories boils down to its systems. Often times, you’re joining a fund that has yet to have a runaway success. Or a fund that has a fund returner. So, instead, you’re looking at their thesis and if their thesis allows them to be:

  1. The best dollar on the cap table of a startup in their scope
  2. Forward-thinking enough to see where the market is heading, rather than where it’s been
    • And by definition of being forward-thinking, taking bets/risks that few other VCs would, yet calculated enough to make logical sense given the trajectory of the market. In other words, is the thesis grounded on first principles, yet able to capture their second-order effects?
    • That, in turn, requires you as a VC applicant to have decent literacy in the market the firm is betting in.

As James Clear, author of Atomic Habits, wrote, “You do not rise to the level of your goals. You fall to the level of your systems.” What are their mental models? Fund strategy? How do they think about portfolio construction? About capital allocation? And more importantly, time allocation?

If you’re looking to learn more about GP-LP dynamics, I highly recommend Samir Kaji’s Venture Unlocked podcast and Notation Capital’s Origins podcast.

Photo by Micheile Henderson on Unsplash

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Why Should the Investor NPS Score Exist?

I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?

As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?

Let’s look for a second from the investor side of the table…

Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.

On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.

Erik Torenberg of Village Global further elaborated in a tweet:

And, Jason M. Lemkin of SaaStr tweeted:

Why does a VC’s fund strategy matter to you as the founder?

A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.

I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.

If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.

While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:

  1. The uncommon – Differentiators
  2. The common – What everybody else is doing

The uncommon

Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:

  • Ability to build communities having built large followings
  • Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
  • Getting in’s to top executives at Fortune 500 companies
  • Closing government contracts
  • Access/domain expertise on international markets
  • In-house production teams
  • They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
  • Ability to get you on the front page of NY Times, WSJ, or TechCrunch
  • Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
  • Influencer network
  • Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
  • Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
  • Surprisingly, not as common as I thought, VCs that pick up your call “after hours”

The common

Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:

  • Money, maybe follow-on investments
  • Access to the VC’s network (i.e. potential customers, advisors, etc.)
  • Access to the partner(s) experience
  • Intros to downstream investors

That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.

Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.

Finding investor NPS

You can find CS:H, or investor NPS, out in a couple of ways:

  • The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
  • You find out by asking portfolio founders during your diligence.
  • Your founder friends are highly recommending said investor to you.

Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quoted Brett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”

In closing

“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:

If you were to start a new company tomorrow, would you still want this investor on your cap table?

With three options:

  • No
  • Yes
  • It’s a no-brainer.

And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.

Photo by Laurice Manaligod on Unsplash

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A Strategy to Win Versus A Strategy Not to Lose w/ Alex Sok

For a number of friends and founders I’ve chatted this with, I’ve been a big fan of the concept of “winning versus not losing”. Ever since I heard back in 2018. In an interview with Tim Ferriss, Ann Miura-Ko of Floodgate said, “This is probably the hardest piece – knowing the difference between a winning strategy versus a strategy not to lose. […] Not losing often involves a lot of hedging. And when you feel that urge to hedge, you need to focus. You need to be offensive.”

There are a few great examples of what differentiates winning and not losing from both Tim and Ann in that interview. For instance, a lack of focus by going after two different market segments is a strategy not to lose. “The reason why that’s really hedging is you have two completely different ways of selling to those organizations and you’re afraid to pick one because maybe you have some revenue in both.”

My college friend recently connected me with entrepreneur, designer, angel investor, Alex Sok. Both of us found unlikely common ground in using sports analogies to relate to building a company. Me, swimming (e.g. here and here). Alex, football. Specifically, American football. Having been a quarterback for his school’s football team back in the day, he said something quite fascinating, “You can’t win in the first quarter, but you can lose in the first quarter.” And you know me, I had to double click on that.

I was previously under the assumption that you only needed a strategy to win, but not to lose. But as all generalizations that start with the word “only”, I was wrong. And Alex contextualized it for me – that sometimes you do need to think about how not to “lose”.

Winning versus not losing

“You can’t win in the first quarter, but you can lose in the first quarter.”

Throwing the ball deep for your running back to make the touchdown is a strategy to win. On the flip side, if you don’t convert on the third down, you’re going to lose. You may not win, but if you don’t, you could very much lose. Not all mistakes carry the same gravitas. Some mistakes can be detrimental; most mistakes aren’t. Just because you’re making sure that you convert on the third down does not mean you can’t still swing for the fences.

For founders, losing in the first quarter is akin to:

  • Burning through your seed funding in six months;
  • Hiring four professional executives before you get to product-market fit;
  • Not talking to your customers;
  • There is no one in the room who can tackle the biggest risk of the business (i.e. no engineer when you’re building an AI solution, or no one who can do sales when you’re an enterprise tech company)

You’re still aiming high, but that doesn’t mean you should burden yourself with an astronomical burn rate.

“Game plans will have to vary depending on your market or product. Key fundamental traits that increase the probability of failure will always be present. It’s important to identify which ones matter most in relation to the game plan,” says Alex. “A tough defense or go-to-market means being more focused on identifying which channels to pursue and then doubling down if it works out.”

On the flip side, “an aggressive defense or burgeoning industry might mean taking more chances but setting up plays wisely to take advantage of their aggressive, risk-taking nature. This will force the defense to settle down and play you more honestly. In startup terms, that might mean steady progress and growth with a few deep shots to achieve escape velocity from your competitors.”

Not to get forget about winning

You’ve probably heard of the saying, “If you want your company to truly scale, you have to do things that don’t scale.” Especially in the zero to one phase. From idea to product-market fit. Many of us in venture break down the early life cycle of a company by zero-to-one and one-to-infinity. The first “half” is doing things that don’t scale. Figuring out what frustrations your customers are going through. Getting that pedometer up on the street yourself. Daniel Kahneman wrote in his book Thinking, Fast and Slow, “Acquisition of skills requires a regular environment, an adequate opportunity to practice, and rapid and unequivocal feedback about the correctness of thoughts and actions.”

Here are a few examples:

In the early days of Airbnb, Brian, Joe, and Nathan used to visit early Airbnb hosts with a rented DSLR to photograph their houses.

For Stripe, the founders manually onboarded every merchant to deliver “instant” merchant accounts. Of course, the Collison brothers took it a step further to mint the term “Collison installation”. Usually when founders ask early leads “Will you try our beta?”, if people say yes, then they say, “Great, we’ll send you a link.” Rather, Patrick and John said, “Right then, give me your laptop” and set it up for them right then and there.

At Doordash, they found restaurant menu PDFs online, created landing pages, put their personal number out there for people to call, and personally executed deliveries within the day.

To get his first 2000 users, Ryan at Product Hunt wrote handcrafted emails to early users and reporters to grow what started off as an email list.

Similarly, in football, teams often spend the first half of the game feeling out their opponents. Their strengths, their weaknesses. And the back half, doubling down on where your opponents fall short on. While not your opponents, founders should be spending the first half feeling out their market. Be scrappy. Nothing that’ll make you lose in the first quarter, but make mistakes. Give your team and yourself a 10-20% error rate. One of your greatest superpowers as a small team is your ability to move fast. Use it to your advantage.

Paul Graham once wrote, “Tim Cook doesn’t send you a hand-written note after you buy a laptop. He can’t. But you can. That’s one advantage of being small: you can provide a level of service no big company can.”

In closing

Alex said, “In order to be a dominant offense, you have to force the defense to cover every inch of the field.” If you only throw long, then your opponents will only need to cover long. If you only throw to the left, they only have to cover left. But if you have a diversified strategy, your opponents will have to cover every inch of the field. And to win, all you need is for your opponents to hesitate for half a second. And with a laser-focused strategy, that’s all you need to break through against your incumbents. Your incumbents often have bigger teams, can attract more talent, have deeper pockets, and the list goes on.

As a small team, you’re on offense. You can’t cover every inch of the field, and neither do you need to. You just need to be a single running back who makes it past a wall of linebackers. To do that, you need focus. As Tim Ferriss recently said on the Starting Greatness podcast, “the biggest risk to your startup is your distraction.” And it’s not just you and your team, but also the investors you bring on. Sammy Abdullah of Blossom Street Ventures wrote that the question you need to be asking yourself about your investors is: “Are you going to distract me from running the business and will you be candid with me when I have a problem?”

Focus. If you’re focusing on everything, you’re focusing on nothing. You have no room to hesitate, but it’s exactly what you want your competitors to do. That half a second on the field is about two years in the venture world. Or until you can find your product-market fit. Until you reach scale. Until you reach the “one” in zero-to-one. ‘Cause once you’re there, you just need to put your head down and run. And it’s the beginning of something defensible. Of something you can win with.

If you’re curious about taking a deeper dive on product-market fit, I recommend checking out some of my other essays:

Photo by Joe Calomeni from Pexels

Thank you Alex for helping me with early drafts of this essay!

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#unfiltered #42 The Miracle that Catalyzes the Hero’s Journey

In the venture world, the word timing is thrown around in a very canonical way. Many investors and founders mythologize the concept of timing around a business. While there is some science and data that might be able to point in the general direction, success is a lagging indicator of timing. And arguably, the only way anyone can really determine if the timing is right or not is in hindsight. Investors that said they knew the exact timing of the market may just be attributing their success to survivorship bias.

To analogize it, it’s the same as knowing when to invest in the market or in a particular stock. Everyone wants to buy at the lowest, sell at the highest. Your ROI is positively correlated with the sell price, and negatively correlated with the buy price. But when is the lowest? No one really knows for certain. We can guesstimate a timeframe with reasonable confidence, but that’s the best we can do. The same is true for measuring timing in the market. Yet there is one thing that I’ve come to learn in my years in the venture world that’s as close as you can get to the “true” timing of the market. A miracle.

Let me explain.

One miracle

Every startup needs one miracle to succeed. One. No more. No less. Elad Gil said in an interview with James Currier at nfx, “Every startup needs to have a single miracle… If your startup needs zero miracles to work, it probably isn’t a defensible startup. If your startup needs multiple miracles, it probably isn’t going to work.” He further elaborates, “If you have more than one, you have compounding small odds and that means you’re very, very likely to fail.”

Before that miracle, if you’re truly creating a revolutionary business, by definition, you’re in the non-consensus. You have more non-believers than you do believers. If it were an obvious business, then everyone would do it. If everyone does it, economically-speaking, the ROI is low. In a situation, where every kid sells lemonade with the exact same recipe by the street corner, everyone is fighting for the exact same customers. Eventually, it’ll lead to a race to the bottom.

That single miracle is going to be that trial by fire. The true test of grit and founder obsession. That trial, whenever it is, predictable or not, determines if your product will stay a niche idea (and possible fizzle into obscurity) or a business that will change the world. For you and your business, that miracle could have been catalyzed by the pandemic, the GME short squeeze, ’08 recession (if you’re an older business), the inauguration, or something yet to come. The question is: How do you respond in the face of adversity?

Why is that miracle important?

Tim Ferriss once said, “Your superpower is very often right next to your wound, like your biggest wound. […] They’re often two sides of the same coin.” If you can survive and conquer that trial, the miracle – your superpower – becomes one of your strongest moats. The lessons you learned, the trust you (re)built, and the legacy you begin to construct. Those lessons – those earned secrets – while not impervious, will ideally be incredibly hard to obtain for others without walking through fire. A metamorphic journey from a vulnerable caterpillar to a beautiful monarch. What Joseph Campbell calls the “hero’s journey“.

And in the longer time horizon, that you are no longer just the protagonist of that miracle, but that you are also a producer of miracles for others. You are then capable of minting miracles systematically. Be it your customers, your team members, and your investors.

Why #unfiltered?

You might be wondering why I tagged this essay as #unfiltered. Frankly, it’s a new unrefined hypothesis that I’ve been playing around with. While it’s been inspired by others, I believe there’s more nuance I still need to uncover as well. That I’ll need to test a bit more to see if it can be a more robust thesis.

Going forward, I will continue to ask founders questions like:

  • What is the origin story of this idea?
  • If you were to fail in 18 months, what would be the most likely reason why?
  • Conversely, if you were to wildly succeed in that same time frame, what would be the biggest contributor?
  • Why are you a different person today than when you started this business? Who/what catalyzed this/these change(s)?
    • Examples of who: customers, team, partners, investors
    • Examples of what: black swan events, market trends, socio-economic habits, new technologies, an inflection point in your life when you faced impossible odds, failures, etc.

But I’ll be particularly looking for the earned secret among a miracle of adversity. Simply put, I’m looking to hear this song play in the background. The beginning of a mythical legend in the making.

Cover photo by Jon Ander on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

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