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Emerging Manager Products versus Features

mug, comparison

Inspired by John Felix in our recent episode together, as LPs, we often get pitches where GPs claim they’re an N of 1. That they’re the only team in the venture world who has something. Usually it’s the fact that they have brand-name co-investors. Or they run a community. Or they have an operating background, like John says below. And it isn’t that unlike the world of founders pitching VCs.

The truth is most “unfair advantages” are more commonplace than one might think. Even after one hears 50 GP pitches, one can get a pretty good grasp of the overlap.

For the purpose of this blogpost, the goal is to help the emerging LP who has yet to get to 50-100 pitches. And for the GP who hasn’t seen that many other pitches to know what the rest of the market is like. Obviously, the world of venture shifts all the time. What’s unique today is commonplace tomorrow.

For the sake of this post, and to make sure I’m not using some words too liberally, let’s define a few terms I will use quite often in this blogpost:

  • Product: A fully differentiated edge that an emerging manager/firm has. In other words, a must-have, if the firm is to succeed.
  • Feature: A partially differentiated edge, if at all, an edge. In many cases, this may just be table stakes to be an emerging manager today. In other words, a nice-to-have or expected-to-have.

Networks

ProductFeature
Differentiated community
(high/consistent frequency of engagement)		Alumni network (school or company)
Downstream investors that prioritize your signalsIn-person events
Keeper testVirtual events
Co-investors

Networks, in many ways, are synonymous with your ability to source. It’s the difference in a lot of ways from co-investing versus investing before anyone else (versus investing after everyone else). The latter of which is least desirable for an LP looking for pure-play venture and risk capital.

The quickest check is simply an examination of numbers. LinkedIn or Twitter followers. Newsletter subscribers. Podcast subscribers. Community members. While it’s helpful context, it’s also simply not enough.

Here’s a simple case study. Someone who has 5,000 followers on LinkedIn with hundreds of people engaging with their content in a meaningful way is usually more interesting than beat someone who has 20,000 followers on LinkedIn, who only has 10s of engagements. Even better if one generates a substantial amount of deal flow with their content alone.

One thing that is hard to evaluate without doing an incredible amount of diligence is your founder network referring other founders to you. From one angle, it’s table stakes. From another, true referral flywheels are powerful. In the former, purely having it on your pitch deck without additional depth makes that section of the deck easily skippable.

One of my favorite culture tests is Netflix’s Keeper test. That if a team member were to get laid off or fired, would you fight to keep them or be relieved? The best folks, you would fight to keep. And as such, one of my favorite questions during diligence to ask the breakout / top founders in each GPs’ portfolios is: If, gun to head, you had to fire all your investors from your cap table and only keep three, which three would you keep and why?

Do note I differentiate breakout and top founders. They’re not mutually exclusive, but sometimes you can be brilliant and do everything right and things still might not work out. But smart people will keep at it and start a new company. And maybe it was a smaller exit the first time, but the second or third time, their business may really take off. Of course, sometimes I don’t have the same amount of time to diligence each GP as an LP with a team, so I generally ask the question: If all of your portfolio founders were to drop what they’re currently doing regardless of outcome, and start a new business, who are the top 2-3 people you would back again without hesitation?

At the end of the day, for networks, it’s all about attention. It’s not about who you know, but about how well you know them AND who you know that TRUSTS what you know. In an era, where there is more and more noise and information everywhere, a wealth of information leads to a poverty of attention. But if you have a strong foothold on founders’ and/or investors’ attention in one way or another, you have something special.

Experience/expertise

ProductFeature
Early hire at a unicorn company
+
Grew a key metric by many multiples		Operating background
(marketing, sales, operations, talent, community, etc.)
Hired top operators who’ve gone on to change the worldExperience at a larger firm where you didn’t lead rounds / fight for deals
Independent board member

Experience only matters here where there are clear differentiations that you’ve seen and can recognize excellence. In a broader sense, having an operating background is unfortunately table stakes. As John mentioned, any generalities are.

While strong experiences help you source, its main draw is that it impacts the way you pick and win deals. Only those who have experience recognizing excellence (working with or hiring) know the quality in which A-players operate. Others can only imagine what that may look like. That’s why if you’re going to brag that you’re a Xoogler (or insert any other alumni), LPs are going to care which vintage you were at Google. A 2003 Xoogler is more likely to have that discerning eye than a 2023 Xoogler. The same is true for schools. Being a college dropout from a Harvard and Stanford is different from dropping out of college at a two-year program. Not that there’s anything wrong with the latter, but you must find other ways to stand out if so.

Given a large pool of noise when it comes to titles, it’s for that reason I love questions like: “What did you do in your last role that no one else with that title has done?”

Additionally, when it comes to references, positive AND negative references are always better than neutral references. Even better is that you stay top of mind for your founders regularly. A loose proxy, while not perfect, is roughly 2-3 shoutouts per year in your founders’ monthly updates. It takes a willingness to be helpful and for the founders to recognize that you’ve been helpful.

Process

ProductFeature
Response time/speedSome generic outline of an investment process
Evidence of a prepared mindDoing diligence
Asking questions during diligence most others don’t know how to

Yes, response time (or speed in getting back to a founder, or anyone for that matter) is a superpower. It’s remarkably simple, but incredibly hard to execute at scale. By the time, you get to hundreds of emails per week, near impossible, without a robust process. One of my favs to this day happens to be Blake Robbins’ email workflow who’s now at Benchmark.

Now I’m not saying one should rush into a deal, or skip diligence, but making sure people aren’t ghosted in the process matter immensely. As my buddy Ian Park puts it, it’s better for a founder or an LP to know that a GP is working on it than to not feel heard.

You’ve probably heard of the “prepared mind.” The idea that one proactively looks for solutions for a given problem as a function of their lived experiences, research, and analyses over the years.

Its origin probably goes as far back as Louis Pasteur, but I first heard it popularized in venture by the folks at Accel. Anyone can say they have a prepared mind. From an LP’s perspective, we can’t prove that you do or don’t have it outside of you just saying it in a pitch meeting. That’s why a trail of breadcrumbs matter so much. Most people describe it as a function of their track record or past operating experiences. Unfortunately, there may be a large attribution to hindsight bias or revisionist’s history. Being brutally honest with yourself of what was intentional and what was lucky or accidental is a level of intellectual honesty I’ve seen many LPs really appreciate. As an example, I’d really recommend you hearing what Martin Tobias has to say on that topic.

But the best way to illustrate a prepared mind is easier than one thinks. But it also requires starting today. Content. Yes, you can tweet and post on social media or podcast. But I’d probably rank long-form content at the top.

Public long-form writing (or production in general) is arduous. The first draft is rarely perfect. Usually far from it. With the attentive eye and the cautious mind, you go back to the draft again and again until it makes sense. Sometimes, you may even get third parties to comment and revise. Long-form is like beating and refining iron until it’s ready to be made into a blade. And once it’s out, it is encased in amber. A clear record of preparation.

In closing

Pat Grady had a great line on the Invest Like the Best podcast recently. “If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good. A compelling value prop is a comment on high operating margins. You shouldn’t need to spend a lot on sales and marketing. So the metrics to highlight would be good new ARR/S&M, LTV:CAC ratios, payback periods, or percent of organic to paid growth.”

In a similar way, as a venture firm, if your value prop is truly unique, you’re a price setter. You can win greater ownership and set valuation/cap prices. If your value prop is compelling, the quality of your sourcing engine should be second to none, not just from being present online, but from the super-connectors in the industry, be it other investors, top-tier founders, or subject-matter experts.

Of course, all of the above examples are only ones that recently came to mind. The purpose of this blog is for creative construction and destruction. So if you have any other examples yourself, do let me know, and I can retroactively add to this post.

Photo by Mel Poole on Unsplash

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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VC Fund Secondaries Unlocked | Dave McClure | Superclusters | S3E2

dave mcclure

Dave McClure has been a Silicon Valley entrepreneur and investor for over 25 years. He has invested in hundreds of startups around the world, including 10+ IPOs and 40+ unicorns (Credit Karma, Twilio, SendGrid, Lyft, The RealReal, Talkdesk, Grab, Intercom, Canva, Udemy, Lucid, GitLab, Reddit, Stripe, Bukalapak).

Prior to launching PVC in 2019, he was the founding partner of 500 Startups, a global VC firm with $1B AUM that has invested in over 2,500 companies and 5,000 founders across 75 countries. Dave created 20 VC funds under the 500 brand and invested in 20 other VC funds around the world.

Dave began his investing career at Founders Fund where he made seed-stage investments in 40 companies, resulting in 4 unicorns and 3 IPOs. He led the Credit Karma seed round in 2009 (acq INTU, over 400X return). His $3M portfolio returned more than $200M (~65X) in under 10 years.

Before he became an investor, Dave was Director of Marketing at PayPal from 2001-2004. He was also the founder/CEO of Aslan Computing, acquired by Servinet in 1998. Dave graduated from the Johns Hopkins University (BS, Engineering / Applied Mathematics).

You can find Dave on his socials here:
Twitter: https://x.com/davemcclure
LinkedIn: https://www.linkedin.com/in/davemcclure/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[03:37] How did Narnia inspire the start of Dave’s entrepreneurship?
[08:32] On the brink of bankruptcy
[11:42] The lesson Dave took away from his first acquisition
[13:19] What did Dave do that no one else did as a marketing director?
[16:06] What do most people fail to appreciate about secondaries?
[22:31] The 3 bucket method for secondaries
[28:46] How much do fund returners matter for secondaries?
[33:01] When do LPs typically think about selling fund secondaries?
[42:04] What are two questions that Dave asks to see if a portfolio is good for a secondary?
[46:10] Why is it complicated if a GP wants to buy an LP’s stake?
[55:03] When do most funds return 1X? 2-3X?
[57:13] Underwriting VC vs PE secondaries
[1:01:49] How do institutional LPs react to VC secondaries?
[1:07:01] The founding story of Practical VC
[1:15:36] Closing Josh Kopelman in Fund I
[1:18:47] How often does the PayPal Mafia get together?
[1:23:49] What’s the most expensive lessons Dave learned over the years?
[1:27:38] Thank you to Alchemist Accelerator for sponsoring!
[1:28:29] If you enjoyed the episode, would deeply appreciate you sharing with one other friend!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Anything worth doing is worth fucking up the first time. [But] hopefully you don’t keep fucking it up.” – Dave McClure

“Anything worth doing is worth doing badly.” – G. K. Chesterton

“There’s a huge discount for illiquidity, and there’s a huge discount for a lack of buyers.” – Dave McClure

“Secondaries is a dish best served cold.” – Dave McClure

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
Follow Superclusters on Twitter: https://twitter.com/SuperclustersLP
Follow Superclusters on TikTok: https://www.tiktok.com/@super.clusters
Follow Superclusters on Instagram: https://instagram.com/super.clusters

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How Long is the VC Asset Class?

bridge, long

Axios’ Dan Primack recently wrote a great update on the shifting tides of institutional LPs allocating to venture. Smaller LPs often need liquidity, given limited capital inflows. And unfortunately, cannot afford to play the long game. Those with access to additional sources of capital, as well as aren’t constrained by mandatory capital outflows, tend to have deeper desires to continue allocating to venture.

Source: Dan Primack, Axios

In conversations with a number of LPs who write $3-10M checks, many have learned first-hand venture’s J-curve. Something these emerging LPs have underestimated in the last few years. As such, a number of foreign LPs are holding back. Moreover, there are looming concerns of currency risk. For instance, US-based LPs who have historically invested in funds domiciled outside of the US, are now accounting for currency depreciation. Ranging from 20-30%. Which means, what normally would have been a 4X net fund based in, say, Japan, is now underwritten as a 3X net. And a 10X would be an 8X.

Early liquidity is nice. But any DPI in the first few years is almost never meaningful and often gets recycled back into the fund to make new investments.

With VC being underwritten to 15-year time horizons, as a GP, you need LPs who can afford that time horizon. Yes, most funds have 10-year fund terms, with the two-year extension. But if the 2008-2012 vintages have taught us anything, it’s that GPs will ask for extensions beyond that. Simply since the best companies stay private longer. Airbnb was private for 12 years. Klaviyo, 11 years. Reddit, 19 years.

Of course, some of these companies are outliers. But the average tech company still stays private for 9-10 years. Assuming venture’s three-year deployment period, the last (hopefully great) investment out of a fund may take till Year 13 to finally achieve a large exit, not including the lock-up period too. That’s not accounting for a growing number of funds pitching four to five-year deployment periods. Excluding emerging market funds, where emerging market companies go public faster.

Moreover, companies need double the revenue they needed back in 2018 to go public. Shoutout to Tomasz Tunguz for the graphic.

Source: Tomasz Tunguz

To make things even more spicy, an interesting trend right now is where we see VC firms moving into PE, and PE moving into VC. At the same time, you have some large institutions who are now investing across multiple asset classes, including public markets. Consequentially, an interesting discussion commences. Should private investors hold public assets?

I was fortunate to be in an LP discussion group recently where we debated that exact question. The general consensus was no. VCs are paid to be private market investors, not public markets. Where their expertise does not lend itself well to watching market movements closely. The only exceptions are crossover funds who build out specific public markets teams. And so when an LP invests, they know exactly what they’re getting themselves into. The expectation is to return the capital back to the LPs right after the lock-up period.

But if the narrative ever changes, prepare for an even longer haul. Good thing, most LPs also agree that evergreen funds don’t make sense for venture either. But that’s a discussion for another day.

Photo by Sven Huls on Unsplash

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Bringing the Endowment Approach to Emerging Managers | John Felix | Superclusters | S3E1

John Felix is the Head of Emerging Managers at Allocate where he leads manager diligence and product innovation within the emerging manager ecosystem. Prior to joining Allocate, John worked at Bowdoin College’s Office of Investments, helping to invest the $2.8 billion endowment across all asset classes, focusing on venture capital. Prior to Bowdoin, John worked at Edgehill Endowment Partners, a $2 billion boutique OCIO. At Edgehill, John was responsible for building out the firm’s venture capital portfolio, sourcing and leading all venture fund commitments. John started his career at Washington University’s Investment Management Company as a member of the small investment team responsible for managing the university’s now $15 billion endowment. John graduated from Washington University in St. Louis with a BSBA in Finance and Entrepreneurship.

You can find John on his socials here:
LinkedIn: https://www.linkedin.com/in/johnfelix12/
Twitter: https://x.com/johnfelix123

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[02:35] The band that started it all
[08:43] How did a band of 3 become a band of 5?
[10:39] What bands served as inspiration for John?
[13:37] Lessons on building teams and trust
[19:48] The mischance that led John into the endowment world
[22:34] What John learned under 3 different CIOs
[26:20] What does concentration mean for Washington University’s endowment?
[33:53] Portfolio construction perspectives at an endowment
[36:26] The flaws of GP commits
[41:25] How has John’s approach to emerging managers changed over the years?
[44:17] What is key person risk?
[47:06] One of the biggest challenges emerging managers face
[50:45] Balancing over- and under-diligencing an emerging manager
[56:28] What are traits that GPs think are unique but actually aren’t?
[1:03:36] What makes a great cold email?
[1:08:40] As a sports fan, do the highs or lows hit harder?
[1:11:53] Thank you to Alchemist Accelerator for sponsoring!
[1:12:54] Let me know if you enjoyed this episode with a like, comment or share!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Being too dogmatic about things or having too black or white views will prohibit a lot of LPs from making really, really good investments.” – John Felix

“The biggest leverage on time you can get is identifying which questions are the need-to-haves versus nice-to-haves and knowing when enough work is enough.” – John Felix

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
Follow Superclusters on Twitter: https://twitter.com/SuperclustersLP
Follow Superclusters on TikTok: https://www.tiktok.com/@super.clusters
Follow Superclusters on Instagram: https://instagram.com/super.clusters

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#unfiltered #89 The Palate Setter

cheese

Around the time I wrote a blogpost on culinary tips I had amassed from various chefs, I ended up getting one more piece of advice from a James Beard award winner. The culinary equivalent of a Pulitzer. In fact, one piece of advice that came in right after I clicked publish on that blogpost. Which I subsequently failed to include.

I had asked, “How do you know the palate you come into the kitchen with today is the same as the one that you came in with yesterday? And similarly, what about the one tomorrow?”

To which he responded, “I don’t know.” For a brief second, there was silence. Both of us knowing that the void will be filled, but left there for dramatic effect. “Swiss cheese.”

“Huh?”

“Swiss cheese. Not the fancy stuff, the one you find in the refrigerated section in the supermarket. Every day, when I go into the kitchen, I take a bite of swiss cheese. To me, it has the perfect balance of umami, salt, nuttiness. And the supermarket brand one is always produced with a consistency in their quality. If my bite that day is not as salty, then my palate is muted, and I should salt my dishes that day a little more. And so on.”

And I found that fascinating. Recently, I was reminded of that advice when I was chatting with my friends on preparation rituals. When we start something, to get us in the right mindset, what is the set of practices in which we use to orient ourselves?

Back when I was still swimming competitively, we used to always say the hardest part about swimming is getting in the water. Effectively, starting. The below were some other rituals that came up in that conversation. Part in hopes that it may inspire you to start your own, partly to make sure that I immortalize these practices for myself.

Music

The tuner in many ways is the swiss cheese in music. Something so consistent that it becomes the benchmark for what sound should be. Is your instrument too sharp or too flat?

But from a ritualistic perspective, I’ve seen many play the scales to loosen their fingers, but one of my favorites from my buddy who plays the flute in the orchestra is beatboxing, while playing the happy birthday song. The song choice itself matters less than using one’s entire mouth to enunciate certain beats. And so, by the end of the song, the windpipes and larynx are fully massaged and ready to go.

Podcasts / Streaming

For me, it’s doing 20 burpees while listening to a collection of my favorite podcast clips that I’ve saved from other podcasters, then sitting down and skimming through this list of catchphrases that I’ve since called “The Rookie Guide for Veteran Podcasters.”

For another friend, who’s far more accomplished than I am on this front, it’s doing a series of vocal exercises and facial massages. The former of which expand in both pitch and volume (from a whisper to singing in a voice suited best for operas).

From a third friend, it was religiously taking a 1-hour nap about an hour before the recording session.

Giving live talks

This isn’t from any of us in the room at the time. But Tim Ferriss has also gone on record sharing what he did in preparation for his first SXSW talk when we just launched the Four-Hour Workweek. That he was staying in a friend’s home who had cats. And he kept practicing his talk in front of the cats trying to get their attention. None of which, I assume, knew anything about what he was talking about, yet if he could convey his intent, energy and emotions through to the cat, he’d have a fighting chance getting the audience’s attention at SXSW.

Photo by Camille Brodard 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.

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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#unfiltered #88 Koi No Yokan

love, heart

In a late night conversation with my high school friend last week, I picked up a fascinating Japanese phrase from her. Koi no yokan.

The best translation of it that I found was ‘the premonition of love.’ It serves as the antithesis to the notion of love at first sight. It’s love that takes time to grow on you. Slow, but steady. A seemingly acquired, yet inevitable sense of fate. It’s a feeling that begins when you meet someone you’ll eventually fall in love with.

It’s a remarkable concept with no direct English parallel. It sits in rarified air between words like hiraeth, hyggelig, and yūgen. All of which have inextricable meaning behind a seemingly simplistic string of letters. While I’ll leave the afore-mentioned three to your own rabbit holes, as you might imagine, I’ve been having quite a field trip across the linguistic landscape.

Koi no yokan.

It’s a concept that’s often applied to the enamor between humans. This may just be me being a sacrilegious foreigner, but I find the same linguistic beauty with passions.

In many ways, my love for the emerging GP and LP world was the same. If you told me back in college, that I’d want to spend a few decades of my life obsessed over demystifying the space, I’d have called your bluff. Might have even called you bonkers.

And while I’d been hovering like a satellite around the space for a while, it wasn’t till I started writing The Non-Obvious Emerging LP Playbook that I realized there was an inkling of a yearning there. Answers only led to more questions. Each insight I learned was always paired with another punctuated with a question mark. And it honestly was a really fun exercise. I didn’t write that blogpost for anyone else. Just myself. Like a public diary that encapsulated my intellectual expedition in the LP world. Even before I published it, even before any other feedback I got for it, it felt special. All catalyzed by an opportunity to back a first-time fund manager I’d been honored to see grow as the last check in.

At that point, I still had neither committed to the idea of really being a capital allocator nor to the promise of more of such content.

And when that blogpost finally saw daylight, and a number of readers responded in kind, a tenured investor asked if I was going to write a book. It seemed only fitting that a non-fiction 200-page book be the successor to the 12,500 word blogpost. So pen met paper.

I revisited old and forged new relationships off the momentum of the blogpost. And around 80 pages into the manuscript, I ran out of things to write. I didn’t know how to continue. It felt both lacking and comprehensive at the same time. I could add in more examples. Case studies. Or just superfluous language. The equivalent of turning “my dad” into “my wife’s father-in-law.” The latter of which I swore to myself I wouldn’t do.

So I stopped.

Put it aside. And went on with the rest of my life.

But time and time again, I’d find myself staring at the ceiling at night, journaling, or writing on my whiteboard in the shower about the afore-mentioned topics. It became borderline annoying that my mind kept circling back to it and I was doing nothing about it.

So frick that. As I once learned from Max Nussenbaum, who I got to work with sooner after, the fastest way to test out if there’s a market for your ideas AND if one’s interests are sustained across longer periods of time is to just write about it. And I did. Here, here, here, and more.

At one point, my buddy Erik asked if I was going to start a podcast. At first, I dismissed the idea. Didn’t think I had the skillset or the personality for one. But man, I lost even more sleep in the ensuing weeks after he seeded the idea in my head. And so I started a podcast. (Which holy hell, I can’t wait to show you Season 3 on July 1st)

I realized much later, probably a year after I stopped writing the book, that the reason I couldn’t write anymore, despite asking so many really smart LPs for help, wasn’t that there was nothing more to share, there was still a lot… Hell, even each family office had a strategy so unlike the next. And as the saying goes, if you know one family office, you really only know one family office. So no, it wasn’t because there was nothing else to write. In one world, I could have just written an encyclopedia of strategies. It was that there was so much that had yet to be written, ever, about allocating into emerging managers.

Venture as an asset class was not the Wild West, still an alternative and still risky, but there have been predecessors who’ve productized the practice. But allocating to Fund I’s and II’s without proof of a track record was a horizon most had yet to cross.

Hell, I wrote a LinkedIn post just yesterday on how I think about evaluating Fund I track records without relying on TVPI, DPI, and IRR. And why I think more funds of funds should exist.

An excerpt on my LinkedIn post

Simply put and in summary, there’s a complexity premium on not just venture capital, but specifically on evaluating Fund Is and IIs. And I don’t mean the big firm spinouts who have a portable track record. I mean the real folks who are truly starting to build a firm (not just a fund) for the first time.

I don’t have all the answers. Sure, as hell, I hope to have more in the near future. But I’m ridiculously excited to find answers (and more nuanced questions) — putting science to art — as an emerging LP.

If you couldn’t tell yet… I think I’m in love.

And if you’re interested, I’d love to have you join me on this ride.

Photo by Mayur Gala 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.

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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The Power Law of Questions

question, mark

Recently I’ve been hearing a lot of power law this, power law that. And you guessed right, that’s VC and LP talk. Definitely not founder vocabulary. Simply, that 20% of inputs lead to 80% of outputs. For instance, 20% of investments yield 80% of the returns.

Along a similar vein… what about questions? What 20% of questions lead to 80% of answers you need to make a decision? Or help you get 80% of the way to conviction in a deal?

‘Cause really, every question after those delivers only marginal and diminishing returns. And too much so, then you end up just wasting the founder’s or GP’s time. As the late Don Valentine once said, “[VC] is all about figuring out which questions are the right questions to ask, and since we don’t have a clue what the right answer is, we’re very interested in the process by which the entrepreneur get to the conclusion that he offers.”

While I can’t speak for everyone, here are the questions that help me get to 80% conviction. For emerging GPs.

I’m going to exclude “What is your fund strategy?” Because you should have either asked this at the beginning or found out before the meeting. This question informs if you should even take the meeting in the first place. Is it a fit for what you’re looking for or not? There, as one would expect, you’d be looking into fund size, vertical, portfolio size, and stage largely. Simple, but necessary. At least to not waste anyone’s time from the get go.

Where are you at as a GP by Fund III? What does Fund I and II look like by Fund III?

Discipline. In the first 4 years of a fund, you’re evaluated on nothing else except for the discipline and the prepared mind that you have going in. All the small and early DPI and TVPI mean close to nothing. And it’s far too early for a GP to fall into their respective quartile. In other words, Fund I is selling that promise. The prepared mind. Fund II is selling Fund I’s strategy and discipline. Fund III, you’re selling the returns on Fund I.

Vision. Is this GP thinking about institutionalizing a firm versus just a fund? How are they thinking about creating processes and repeatability into their model? How do they think about succession and talent? And sometimes I go a few steps further. What does Fund V look like? And what does the steady state of your fund strategy look like?

What value do you bring to your portfolio companies?

This is going to help with reference calls and for you to fact check if an investor actually brings that kind of value to their portfolio companies. So, in effect, the question to portfolio companies would be: How has X investor helped you in your journey?

On the flip side, even during those reference calls, I like asking: Would you take their check if they doubled their ownership? And for me to figure out how high can they take their ownership in a company before the check is no longer worth it. There are some investors who are phenomenal $250K pre-seed/seed checks for 2.5-5% ownership (other times less), but not worth their value for $2-3M checks for the same stages. To me, that’s indicative of where the market thinks GP-market fit is at.

I also love the line of questioning that Eric Bahn once taught me. “How would you rate this GP on a scale of 1 to 10?” Oftentimes, founders will give them a rating of 6, 7, 8, or if you’re lucky 9. And the follow up question then becomes, “What would get this investor to a 10?” And that’s where meaty parts are.

Of course, it’s important to do this exercise a few times, especially with the top performers in their portfolio to truly have a decent benchmark. And the ones that didn’t do so well. After all, our brand is made by our winners. And our reputation is made by those that didn’t.

In the trifecta of sourcing, picking, and winning, this is how GPs win deals.

How do you resolve conflict or disagreement in the partnership?

This is really prescient in a partnership. Same as a co-foundership. If someone says, we never disagree, I’m running fast in the other direction. Everyone disagrees and has conflicts. Even twins and best friends do. If you don’t, you either have been sweeping things under the rug or one (or both or all) of you doesn’t care enough to give a shit. Because if you give a damn, you’re gonna have opinions. And not all humans have the same opinions. If everyone does, realistically, we only need one of you.

Hell, Jaclyn Freeman Hester even goes a step further and asks, How would you fire your partner?

Jaclyn on firing partners and team risk

Personally I think that last question yields interesting results and thought exercises, but lower on my totem pole (or higher if you want to be culturally accurate) of questions I need answers to in the initial meetings.

How are you finding companies? How are you building your pipeline?

This is always a question I get to, but especially valuable, when I ask it to spinouts. Building a repeatable and scalable sourcing pipeline is one of the cruxes of being a great fund manager. But in the age when a lot of LPs are shifting their focus to spinouts from top-tier funds, it’s an important reminder that (a) not all spinouts are created equal, and (b) most often, I find spinouts who rely largely on their existing “brand” and “network” without being able to quantify the pillars of it and how it’s repeatable.

For (a), a GP spinning out is evaluated differently than a partner or a junior investment member. A GP is one who manages the LP relationships, and knows intimately the value of what goes in an LPA, on top of her/his investing prowess. And the further you go down the food chain, the less visibility one gets of the end to end process. In many ways, the associates and analysts spinning out need the most help, but are also most willing to hustle.

Which brings me to (b). Most spinouts rely on the infrastructure and brand of their previous firm, and once they’ve left, they lose that brand within a year’s time. Meaning if they don’t find a way or have an existing way to continue to build deal flow, oftentimes, they’ll be left with the leftovers on the venture table. This question, for me, gives me a sense of whether an investor is a lean-in investor or a lean-back investor. The devil’s in the details.

What are the top 3 reasons I shouldn’t invest?

This is a test to see how much self-awareness a founder/GP has. The most dangerous answer is saying “There are no reasons not to invest.” There are always reasons not to. The question is, are you aware of them? And can you prioritize which risks to de-risk first?

In many ways, I think pitching a Fund I as illustrating the minimum viable assumption you need to get to the minimum viable product. And Fund II is getting to the minimum lovable strategy (by founders and other investors in the ecosystem). And with anything that is minimally viable, there are a bunch of holes in it.

Another way to say the above is also, “If halfway through the fund we realize the fund isn’t working, what is the most likely reason why?”

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Angels who are Useless to Founders

angel. statue, broken

This may very much be the hill I end up dying on as an angel. I also realize that the title of the blogpost itself is ionically charged. But it’s something I feel strongly about.

Two caveats.

One, this is going to be one of my more strongly worded blogposts. I don’t write many of these. It doesn’t give me joy to “call” people out. If you’re a reader to this blog for the more mild-mannered Cup of Zhou, I’ll see you next week. 🙂

Let’s just say I’m writing this out of frustration after chatting with a founder who hit all the below red flags. But more importantly, frustration at myself for not recognizing the below a mile away when I took the meeting. And the opening 2 questions for that meeting was can you share what you do? and what do you invest in? Both of which are quite evident on my LinkedIn. Moreover the cold outreach came via LinkedIn.

Two, I’m a small check angel. And this may not apply if you write north of a $100K angel check or a $250K LP check. You’re likely also excluded from this hill I’ll die on if you don’t have the network that would alert you on deals on a regular basis.

That said, if you’re a small check investor like me AND you have a decent network, any founder who doesn’t know exactly why they want you on the cap table outside of money is probably not a founder worth your time.

Why?

  1. To them, you’re just another check, and not THE check. Whatever wrapper they put on things, you’re dumb money to them. Now, it’s not about feeling self-important. In fact, don’t delude yourself on your importance. It’s about being valuable, outside of the money. The early stages of company-building are so crucial that you really need all hands rowing in the same direction. Any hands that are idle, or worse, rowing in the opposite direction, is a waste of time, attention and resources.
  2. They don’t know what they want. They don’t know the critical needs of the business. Is it talent? Is it getting to $1M ARR and developing a sales strategy? Is it scaling past product-market fit? Is it finding product-market fit? And because they don’t, they don’t know what they need help in. And any non-surgical answer, including terms relative to broad strokes, is a dud.
  3. And in many ways, because of the above reasons, you’re wasting your dollar. The best founders are surgical and intentional to a fault. They’re also some of the best salespeople in the world. And they will make you feel like you’re the most important person in the world (whether actually true or not, but sometimes, even that doesn’t really matter). Because if they can win you over, they have a great batting average of winning key customers over.

FYI, also probably not worth your time if they:

  1. Say you specialize in XX industry is not enough. Anyone can guess that at a glance at your LinkedIn. Even more so, if you’ve made it explicit.
  2. Spend more time pitching to you than asking you questions to understand your values and what you’re interested in. They’re more interested in what comes out of their mouth than by how much reaches your ears.
  3. Say you’re valuable for intros you can make. LinkedIn doesn’t tell people the strength of your first degree connections. For better or worse, I’m connected with a lot of people. Product of me being a bit too liberal with inbound connections early on. But it doesn’t mean I know them all equally as well. In fact, intros for a founder as an investor are table stakes. You must either be best friends with key decision makers/customers or downstream investors, or it’s really not as useful. And that only comes out if the founder spends time getting to know you, as listed in the second point above.

Ever since I added “Angel investor” to my LinkedIn profile, I’ve received a lot of noise. Quantity of deal flow went up by maybe 10-20 per week (and some weeks where I post something or get tagged in something that gets 5K+ impressions, that inbound deal flow from LinkedIn doubles if not more). But I’d say 95% of that are deals I would never invest in. Either since it’s out of scope, stage, check size, or just type of founder. Which at some point, when I remember to and I’m not typing this on my little 6×3 inch screen, I’ll have to redact that title, “Angel investor.”

Deal flow has become easy. But easy doesn’t mean good. The truth is, I’d rather mean a lot to a few than a little to a lot people.

And by the way, the same is true, if you’re a small check LP.

At the end of the day, as a founder (or emerging GP), it’s about finding your early believers. Those who choose to stand by you not just because everything’s going up and to the right. But those who will stand by you when shit hits the fan.

I was watching the latest episode of Hot Ones (yes, this is my guilty pleasure), where Sean is interviewing Will Smith, and Will shares that there are three kinds of friends in your life that you call at 3AM.

  1. One kind of friend looks at the phone and pretends to be asleep.
  2. A second kind of friend that picks up the phone that makes you feel bad for being in trouble.
  3. And the third kind is putting their pants on while they’re answering the phone.

You want the third kind.

It also harkens back to the same conversation Aakar, Ho, Vignesh, and I had two weeks ago. Believing comes from faith. And faith comes not just from where you are today, but where you will go. And that is established on Day 1.

To get early believers, you have to show you care. You have to give (even if it means your time, attention, and/or enthusiasm/interest), before you get. That is as true for investors as it is for customers.

Photo by Jon Tyson on Unsplash

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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How to Break into VC in 2024

run, start, running, track and field

Last week, I was chatting with Maya from Spice Capital. And in part of our conversation, she said that the advice she gives to folks looking to break into VC is that they should study late-stage founders, so that they know what excellence and quality looks like.

And I wholeheartedly agree. To get a bit more surgical, for anyone looking to break into VC, study founders who’ve gotten to at least a Series C round. And not only that, if you can, reach out to founders who’ve hit at least Series C, with 8- to 9-figure ARR from EACH set of vintage years. From the bull run of 2020-2021 to the growth periods of 2012-2019 to the GFC to the dot com boom and crash.

If you were to only take one vintage, you have a skewed view of what “great” looks like. But to sample across the eras allows you to pattern match with a greater and less-biased sample size. And instead of focusing on what changed in each era, focus on what hasn’t changed.

To the average person who’s looking to break into VC without a network, aka 99.9% of the world, myself and Maya included when we first did, cold emails and coffee chat asks will only get you so far. In fact, more often than not, you’ll either be ghosted or rejected. So, get creative.

If it helps, here are some ideas that may kindle the fire:

  • Start a podcast. I don’t care if you only have an audience of one. Start it. At some point it’ll grow. But giving people a platform to share their advice is better than having one isolated conversation. After all, that’s how Harry Stebbings started.
  • Or a newsletter or a blog. Vis a vis, Lenny Rachitsky or Packy McCormick. Hell, even a book, like Paige Doherty did. Although the last of which is a lot more work, but tends to be have more evergreen content.
  • Get into investment banking or tech/management consulting. This isn’t new. But if you get the chance to work with pre-IPO companies and take them public, there is immense value in seeing excellence in play.
  • Host events. While I personally like intimate dinners, there is also value from hosting large networking events, fireside chats, and panels. Like Maya, or Jonathan Chang, or David Ongchoco.

I reread PG’s blogpost on the cities and ambition recently thanks to a good friend of mine down in San Diego. And in it, there’s a specific phrase that caught my eye, “the quality of eavesdropping.” A phrase that has since worked its way into my own rotation. If I were to tie the above examples thematically together, it’s that the quality of eavesdropping is really high. At events, and in consulting, you’re around the buzz of talent. And the jazz of inspiration. When tuning into a podcast, one is often multitasking. Driving, exercising, walking, cooking, you name it. And one might say it is one of the best forms of passive learning out there.

Meriam Webster defines eavesdropping as the act of secretly listening to something private. George Loewenstein says one of the triggers to curiosity is access to information known to others. Private information, in other words, information with an element of exclusivity, fits just that. And as such, while doing the above is useful and helpful to you, it is just as helpful to everyone else. To a busy individual, that just might make her attendance worth it.

All that said, know that if you forever look to lagging indicators of success, you will always be one step behind. If not more. As long as you are tracking successful founders, their companies and their key talent (early employees or key executives), there will be others who will out-execute you. Their networks are larger. And stronger. Especially in that regard.

As someone young, or someone new to an industry, your best bet is to take market risk, not execution risk. Another perspective that both Maya and I share. Betting on new markets mean you are starting off at the same start line as everyone else is. If you can’t get home field advantage, play in a field no one’s played in before.

So after doing the above, and learning from the best, draw your conclusions. And graduate to a new market. But also, beware of the potholes pattern recognition creates.

If it may help, at least for me, it’s useful to remember that excellence is everywhere. And someone who is both ambitious and has a track record for fulfilling promises, is bound to go far. For the latter, it’s especially important to fulfill promises to oneself. The more impossible it is to that individual at that point in time, the better. Whether it was to be an Olympian, or asking their high school crush to prom. Or as Aram Verdiyan calls it “distance travelled.“

Photo by Braden Collum on Unsplash

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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DGQ 21: What’s going to get you excited to be at this business in 5 years?

watch, time

This one was inspired by Harry Stebbings’ episode with Dan Siroker that I tuned into earlier this week. In it, Dan describes his most memorable VC meeting, which happened to be with Peter Fenton at Benchmark. Where Peter asks Dan, “Dan, what’s gonna get you excited to be at this business in five years?”

In sum, what are your future motivations going to look like? Nine out of ten times, it’s likely not going to be exactly the same as the one today. And given that it will look differently, can you still stay true to the North Star of this business as you do today? What’s gonna change? What’s gonna stay the same?

For the most part, the people and the problem space are likely to stay the same. The product may look quite different though. And it’s highly likely that in five years, you would have found product-market fit. So, that’s Act I. Is it the advent of the next chapter of what your company could look like that gets you excited? Hell it might be. You can then tackle a bigger problem. A larger market. An adjacent market. Or what Bangaly Kaba calls the adjacent users. For some founders, it’s the market they always wanted to tackle, but couldn’t when they realized their beachhead market must be something else.

While I can’t speak for everyone, here are some of the answers I’ve personally come to like over the years. From either founders or fund managers:

  • There is no other industry that offers the same velocity of learning that this one provides.
  • I want my company’s legacy to outlive my own. And I want to empower the next generation of builders with the resources and the power to solve the greatest needs of our generation.
  • I want to go home and tell my my wife/husband/kids that I lived my fullest life today. And this is what gives me endless joy.
  • Act I was solving a problem I faced. Act II is solving a problem others face in our space.
  • Getting on the phone with a customer and hearing how much our product changed their lives makes me really happy.
  • If I’m not regularly putting the firm’s reputation on the line, we’re not trying hard enough. And I live for that challenge.
  • I want to build a world where people don’t settle for “It is what it is.”
  • No one else is solving the problem I want to solve in the way that I believe it should be solved.
  • I want to continue to be a superhero, a role model, for my daughter/son.

In many ways, it’s quite similar to the question I ask first-time GPs or aspiring GPs about their motivation.

Things in venture exist on long time horizons. For founders, it’s at least 7-9 years before an exit. For fund managers, it’s 10-15 years per fund. And that’s just a single fund. Anything more is longer. So in order to compete against the very best, you need to have long time horizons. You must have the resolve to stay the course. As Kevin Kelly says, “The main thing is to keep the main thing the main thing.”

Along the same vein, there’s also a Jeff Bezos quote I really like: “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… Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

Photo by Luke Chesser on Unsplash

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

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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