Category: Venture Capital

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How Do We Welcome the Founder Narratives Behind the Curtains

Being a founder is one of the toughest jobs in the world. Resilience and grit are two (or one) of the indispensable traits of a 5-star entrepreneur. And most, if not all, investors establish grit as the baseline in founder selection, as opposed to the topline in various other careers. While I don’t mean to discount other career paths, all of which I have incredible admiration for, I can only speak in the world of venture where I spend most of my time in.

Yet that same persistence could very much be the same double-edged sword that makes or breaks you. In October, Ryan Caldbeck wrote about his decision to step down as CEO of CircleUp. It was and is one of the most candid pieces I’ve read about the founder journey to date. In it, one section particularly stood out. “Persistence was my superpower. But now I’ve now come to understand that persistence is a double-edged sword, and my decision not to take a break, to not take more off my plate, hurt me, my family and the company. That was the biggest mistake of my career.”

In the founder journey, there exist many moments a founder’s resilience is stress-tested. To get their first customer. To scale to a team of 10. 30. 100. To get their first investor. To raise their first institutional round. But the last thing a founding team needs is for some of their greatest evangelists – their investors – to create counterproductive friction. While it’s presumptuous of me to say that all friction is counterproductive, some friction and additional perspective is necessary to help founders make better, more informed decisions.

In his same essay, Ryan shares a feedback email he wrote to his former board member, as that member’s participation in the company had become “counterproductive”, “vindictive”, and even “destructive”. Unfortunately, these stories happen more often than I would like. It is why many founders believe investors are the gatekeepers to their startup’s success. But we’re not. We don’t have the right to be. On the same token, that’s exactly why it’s so important for founders to deeply consider founder-investor fit.

Michael Freeman found in 2017 that entrepreneurs are 50% more likely to report a mental health condition. Being a founder is lonely. But it doesn’t have to be.

Anton Ego’s words

A few weekends back, my friend and I re-watched my favorite movie. And as the movie faded into music, Anton Ego’s words echoed in my head. While it’s not the first time this quote has appeared in the venture world, it certainly won’t be the last:

“In many ways, the work of a critic is easy. We risk very little, yet enjoy a position over those who offer up their work and their selves to our judgment. We thrive on negative criticism, which is fun to write and to read. But the bitter truth we critics must face is that, in the grand scheme of things, the average piece of junk is probably more meaningful than our criticism designating it so. But there are times when a critic truly risks something, and that is in the discovery and defense of the new. The world is often unkind to new talent, new creations. The new needs friends.

“Last night, I experienced something new, an extra-ordinary meal from a singularly unexpected source. To say that both the meal and its maker have challenged my preconceptions about fine cooking is a gross understatement. They have rocked me to my core. In the past, I have made no secret of my disdain for Chef Gusteau’s famous motto: ‘Anyone can cook.’ But I realize, only now do I truly understand what he meant. Not everyone can become a great artist, but a great artist can come from anywhere. It is difficult to imagine more humble origins than those of the genius now cooking at Gusteau’s, who is, in this critic’s opinion, nothing less than the finest chef in France. I will be returning to Gusteau’s soon, hungry for more.”

For VCs

One of my favorite investors often says, “stay positive, test negative.” While the greatest strength an entrepreneur can have may be grit, the greatest strength an investor can have is optimism.

Optimism in the world. In markets. In startups. But especially people. That even if one venture doesn’t work out, for the people I’ve had the opportunity to stand behind, I know one of their pursuits eventually will. It’s only a matter of time and luck.

That same optimism is a leading indicator for open-mindedness. As people who build our careers at the top of the funnel, it is our obligation to cast our net outside of what is most familiar to us. There will be a number of ideas and belief systems entrepreneurs have that challenge our own. And in many ways they should, as founders are on the frontlines of innovation, they are aiming to be “right on the non-consensus“, to quote Andy Rachleff. When I first got into VC, that same investor who said “stay positive, test negative”, shared another word of advice, “Some of the best ideas seem crazy at first.“

George Bernard Shaw once said something similar as well, “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.”

Optimism isn’t only isolated to ideas, but also to the people – the “unreasonable” women and men – behind those ideas and the decisions they make. These innovators aren’t perfect, yet somehow many of us expect them to be. And that dichotomy has created this unfair dynamic that stunts innovation more than we think. I have so much respect for the funds that have set aside capital to invest in founders’ wellbeing, like Felicis Ventures, Freestyle, Crosscut, and more. And I hope many more will follow.

The stories we tell

Over the past few months, I’ve had a number of conversations with founders, friends, and readers about “mental fitness” and “emotional hygiene”. If I could borrow two of my friends’ vernacular. And I’ve learned that we humans are such amazing storytellers.

These powerful narratives has kept the human race alive all these millennia. Before the written word, it was the art of the spoken word, passed down from generation to generation, that held tales of ancestral origins of where to hunt and where to migrate to each season. The same stories have started and ended wars. They have helped us conquer impossible odds. Some narratives today are compelling enough for us to buy a new product or to end a conglomerate.

Yet these exact stories, especially the ones we tell ourselves, can cause stress, anxiety, and depression. The ones that the people we care about and respect tell us can carry even more weight. From role models, parents, managers, friends, mentors, teachers, peers, and more.

In closing

I realized, in conversation, these past few autumn months, more than ever, the power of sharing those stories. To share that we’re not alone and that together, we may learn more than the sum of our individual parts. I understand that it’s no easy task. Even for myself, I debated for the longest time whether to share that I’m not at my best right now. But I’m glad I did. The feedback from the people around me I’ve gotten since brought forth clarity and solace. Similarly, six of my friends, who publicly shared how they get through their toughest times (Pt 1, Pt 2), told me after how grateful they were to have an enormous weight lifted off their shoulders.

Top photo by Nong Vang on Unsplash

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When Investor Goodwill Backfires – What It Means to be Founder-Friendly and Founder-Investor Fit

A few Fridays ago, I had the fortune of reconnecting with a founder, backed by some of the most recognizable names in the Valley and exited his business last year to a juggernaut in the data space. Now working on his second startup. And he brought something extremely curious to my attention. “Investors shouldn’t be too founder-friendly.”

I’ve talked to hundreds of founders and seen thousands of pitch decks in my short 4 years in venture capital. Yet, that Friday was the first time I’d ever heard that. And it was too bizarre for me not to double-click on. The fact that the sentence also came out of a founder’s mouth and not an investor’s bewildered me even more.

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Fantastic Unicorns and Where to Find Them

As a venture scout and as someone who loves helping pre-seed/seed startups before they get to the A, I get asked this one question more often than I expect. “David, do you think this is a good idea?” Most of the time, admittedly, I don’t know. Why? I’m not the core user. I wouldn’t count myself as an early adopter who could become a power user, outside of pure curiosity. I’m not their customer. To quote Michael Seibel of Y Combinator,

… “customers are the gatekeepers of the startups world.” Then comes the question, if customers are the gatekeepers to the venture world, how do you know if you’re on to something if you’re any one of the below:

  • Pre-product,
  • Pre-traction,
  • And/or pre-revenue?

This blog post isn’t designed to be the crystal ball to all your problems. I have to disappoint. I’m a Muggle without the power of Divination. But instead, let me share 3 mental models that might help a budding founder find idea-market fit. Let’s call it a tracker’s kit that may increase your chances at finding a unicorn.

  1. Frustration
  2. The highly fragmented industry with low NPS
  3. Right on non-consensus
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The Double-Edged Sword of Transparency, when Fundraising

In the venture world, startups have another alias. 10-year overnight successes.

For the majority of the world, we hear about startups through a Thursday morning TechCrunch article or by way of the Friday Happy Hour gossip stream. Well, okay, I’m not being time sensitive. We’re not going out for Friday night happy hours these days. But we might spy something in our social feeds after a startup hits 5 million users or they just raised $50 million from a top-tier venture firm.

And these TC or Forbes or NY Times articles paint these founding CEOs to almost be perfect individuals. Good news. They’re not. They’re human – just like you and me. Over the years, the more I’ve gotten to know these leaders, the more I realized how similar we are. How similar they were when they were where I am today. And even now, how they still feel the unease in the uncertainty in the world. My study last week on how people are living through the pandemic – what inspires them or what frustrates them – further illustrated our similarities. An animator who’s fought against doubt. An executive who lost his grandpa, broke up, and felt lost in the corporate politics. A founder who was forced to make the tough decision of leaving his team. And much more.

What’s that one analogy people use again – to show that everyone is living a life we know nothing about?

A duck, above the surface, perfectly calm and composed. Underwater, furiously paddling to stay afloat.

The double-edged sword

The good news is that most VCs know that founders aren’t perfect human beings. The bad news is the irony. On one hand, they know that founders aren’t perfect and should be willing to be vulnerable. On the other hand, too much vulnerability means that VC’s say, “I’m out.”

In many cases, investors may seem hypocritical. And arguably, there’s a handful of them who don’t even know what they’re looking for themselves. Yet, in most scenarios, the bargaining chip is on the investors’ end. Not with the founders. It’s frustrating. I know. I’ve talked to founders and will continue to talk with founders who feel that way. So, what is that fine line between the showing “perfection” and embracing imperfection?

Making the blade that works for you

When founders ask, this is what I tell them.

  1. Be upfront with your investors if you’re incompetent on an aspect or aspects of the business.
  2. Show them you’re competent… in finding a way to be competent.

Be upfront with your investors if you’re incompetent on an aspect or aspects of the business.

Address the elephant in the room. If you don’t bring it up, they’re bound to ask. Or worse yet, if they don’t ask, it’s going to be gnawing at them in their minds. And may end up being the main contributing factor to a “No”.

Show them you’re competent… in finding a way to be competent.

Early-stage VCs usually take between 2-4 months before they go from “Hi, my name is Buttercup” to “Take my money”. And here are the steps:

  • Coffee chat, aka “Hi, my name is Buttercup” (If you’re wondering why “Buttercup”, there’s a story behind there, but another day. Or if anyone’s dying to know, DM me or ask me in the comments below.)
  • 2nd meeting with same individual partner (maybe a +1)
  • Full partnership meeting
  • Diligence
  • Term sheet, aka “Take my money”

Lesson 1: Don’t skip steps (for the most part). What do I mean? When you’re having a coffee chat, your goal should not be to get a term sheet there. Your goal is should be to get to meeting 2. Think of it like a sales funnel.

Lesson 2: Learn and grow during the time you get to know an investor. Doers > thinkers. Hustle. Be scrappy, resourceful. At each step, the VC(s) are evaluating if you have the acumen, competency, and what Sequoia Capital calls it – a bias towards action.

Let’s analogize with the equation of a line: y = mx +b. We measure a founder’s competency not just at “b”, but a greater emphasis on “m”. And over the course of the time we get to know each other, if a founder can prove that to us. For me, after the first meeting, I usually give a couple pieces of advice. “Oh, you should really talk with Sarah. She’s really good at sales.” Or. “Have you thought about this UX improvement in the user journey?”

What I’m looking for, by the time we have our second meeting, is what have they done in the mean time. And for a great founder, there are 2 possibilities:

  1. They acted on the advice, and they come back with the results.
  2. They heavily considered the piece of advice. Did something else. Explained to me why they did something else. And also share the results of that decision.

In both scenarios, they have new results by the time we meet. They don’t have to be “right”, as if I’m even a person who can evaluate what’s right versus wrong. But they do have to learn fast. Hustlers make mistakes. And through the mistakes, they learn. Fast. It’s a preamble to what working with a VC looks like.

If you’re curious, Chris Moody at Foundry Group has a brilliant 3-part series of why you shouldn’t take money from a VC. In his first reason to not, if you want to build a lifestyle business. Otherwise, you’ve got to learn fast and be scrappy.

Here’s an example of scrappiness

When I was an operator, we were strapped for cash and looking for cash, so we didn’t have much of a budget for marketing and advertising. Admittedly, we also didn’t really know how to market the business. Minus a few theoretical classes, we knew nothing.

We used free student printing (for us up to 10,000 pages) to print out flyers we made by ourselves. Given that our audience included both SMBs and millennial/Gen Z’s looking for jobs, as much as we wanted to flyer to college students at the plaza or in front of local businesses, we knew it wouldn’t be smart. ’Cause everyone else was doing so.

So then it came down to the question: where do people have plenty of attention to spend but have not yet been saturated with information. For us, it was the bathroom. Specifically, in the stalls. When you’re locked inside the bathroom, doing your business, you either look at the door in front of you and/or at your cellphone. And the doors were often blank canvases. So we decided to stick our flyers on the backsides of these stall doors – both in the dorms and in public restrooms, which inevitably got our websites 10s of 1000s of views early on.

That said, the janitorial staff tore down our flyers every night at 11pm. So we had to be back on the streets and sticking in flyers in public and dorm bathrooms every morning at 5am. And it so happens, I once talked to one of the university’s janitorial staff members and he actually said thanks. Since he found his new job via a flyer he kept having to rip off.

As the economist Herbert A. Simon says, “a wealth of information creates a poverty of attention.” As an entrepreneur, you’re looking for the margins, where there is a poverty of information and a wealth of attention.

In closing

I can only speak from my perspective and what I seek in founders. But having talked and learned from a number of investors who have a track record for returning >5x MOIC (multiple on invested capital), I know I’m not alone.

It’s okay to be vulnerable of the potholes ahead – to not know how to do certain things. We’re human. It’s okay. But show that you have at least have a hypothesis on how to learn those things.

Photo by Ricardo Cruz on Unsplash

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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.

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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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