An old college friend reached out to me not too long ago and asked me if I had any tips to share on getting a mentor. And the first thing I responded with is: “Don’t ask people to be your mentor. In fact, don’t even mention the word mentorship.”
You see, mentorship is a loaded word. It comes with baggage. Centuries of it. Hell, millennia of it. And apparently, dating as far back as 3,000 years ago to Homer’s Odyssey. Mentorship comes with an expectation of commitment. While that amount of commitment differs per person, a mentorship ask from a stranger is an amorphous expectation of time and energy from a busy person who likely has a laundry list of other priorities. Without any precedence or context, it’s hard to make that decision with asymmetric information.
The best pairs of mentorship have always been a two-way street. It takes two to tango. If we were to take the equation of a line:
y = mx + b
… a mentee wants a mentor whose current b, or position and experience level in time, is greater than their own. A mentor wants a mentee whose m (rate of learning, iteration, and hustle) is as great or greater than their own. The bet is that at some point in the future, at least in my experience, mentors would like to learn from their mentees as well, and/or see it paid forward.
Yet, I see so many mentees out there who discount their own value in the relationship. One of my mentors shared with me a few years ago that the older you are, the younger your mentors should be. And I’ve carried that in my heart ever since. More recently, I found that line in the form of a tweet from Samir Kaji.
Was at a VC quarterly meeting today and the topic of aging out in VC/tech came up (which I think is BS)
Their response on how they stay fresh in mental models was around the thinking of "the older you get, the younger your mentors should be".
I can’t claim to have mentored tons of folks, but I also realize both from anecdotal experience and talking with my mentors that the best thing about mentorship is the feedback. That the mentors learn about the result of their advice as an opportunity to finetune their own learnings.
Take for example, my office hours. Of the hundred or so people I’ve met through open office hours, I’ve probably shared the same piece of advice at most five times. It gets even more interesting when you consider that the vast majority of people I’ve met via office hours come for fundraising advice. Somewhere in the ballpark of 80% of people. While there are similar thematic questions I ask people to consider, the best advice is tailored to every unique situation. That said, my advice, like any others’, starts as a product of my own anecdotal experience. A sample size of one. And as we learned in Stats 1 in high school or college, that’s a poor sample size. So, one of the best ways for me to refine my own learnings is either:
Act on it again and again. But there are some things in life I can’t do again. For instance, high school or freshman year of college or my first job. Those are experiences entombed in amber that unless I had a time machine, they’re one and done.
Learn how other people execute on that advice and what resulted of it.
One of the many joys of writing this blog is that every so often a kind reader reaches out to me and shares the results of them implementing the thoughts I’ve shared here. Then they let me know I’m either full of s**t or I drastically helped them grow. And I love both forms of feedback equally as much. After all, it’s the rate of compounded learning that helps me mature — even if it’s outside of my own anecdotal experience. Feedback and learning of others’ results gives me a sample size greater than one. The same is true for other mentors, advisors, and investors out there.
So, what does that mean tactically?
Start with the ask.
There’s a metaphorical saying in the world of venture that investors invest in lines, not dots. They want to see progression rather than stagnation. So in reaching out to anyone you’d want to learn from, don’t lead with “Can I have 30 minutes of your time?” Instead, lead with a question. Why are you reaching out? What question can only they answer?
So, that means, “should I get an MBA?” is not a good question to ask. It’s generic, doesn’t contextualize the question, and you can figure out how to do so on the internet. On the flip side, a better question would be: “I saw that you graduated from Wharton before breaking into VC. So I’m curious, did you always know you wanted to be in VC, or was that something you discovered in B-school? And what experiences did you gain in B-school that set you up for VC?”
Moreover, show you’ve spent time in the idea maze before proposing the question to the person you want to learn from. “I’ve read about X and Y, and have thought about or tried A and B already with these results. But the question still gnaws at me.”
Why does this contextualization matter? One, it gives that person context to better answer your question. Two, the last thing any person giving advice wants is for their advice to dissipate into the cosmos. For their advice to go to naught. And if you show that you’ve spend blood, sweat and tears already pondering the problem, then you’re more likely to take their advice seriously. In effect, their advice will be a lot more meaningful. And, chances are you’re going to be a lot less whimsical than the average person asking for their time. Use someone’s time in a way that won’t feel wasted.
Follow up even if they ghost you.
If they respond the first time, great. And if not, don’t give up until you’ve sent at least three emails. If they don’t respond the first time, they just might not have seen it. If they don’t respond after the ninth email, they’re just not interested.
And with each email follow up, tell them when you plan to follow up since you assume they’re busy. “If you’re too busy, I completely understand and I’ll follow up in two weeks.” On the last email if no response, thank them for their time and wish them well.
Don’t set recurring meetings (initially).
First of all, it’s a heavy ask to anyone — stranger or not. Second of all, there’s no promise that their time (and your time) won’t be wasted. Third, do you even have that much to ask about? Most of the time, you don’t. What you think you want and what you actually need are usually very different. It’s an iterative process.
Instead, start with a single question. Ask it. If they’re free for a meeting, set 20 minutes (here‘s why I like 20, instead of 30). If not, get their thoughts asynchronously. Get advice. Act on the advice (or not, but be intentional if not). The most important part is to share your results with the origin of that advice.
So, when you close out that initial meeting, ask if you can reach out to them 24 or 48 hours later after you’ve had time to mull on it or act on it. Timeframe will vary. And if you do follow up shortly after without results, limit any additional ask to 1-2 questions, max. Ideally it should take them 2-3 minutes to respond to. For any advice that takes a longer feedback loop, set a time in the future (two weeks, a month, 2 months, etc.) later to reach back out to share your learnings. And sometimes, that means you didn’t implement their advice. Why not? What did you learn from doing the counterfactual?
When you reach back out to share your learnings, see if you can jump on another 20 minute call, or shorter. And get their thoughts on the facts. Possibly get more advice. And do that again and again. Until at some point — my litmus test is usually 3-4 of these discrete exchanges, in no particular frequency —, I ask if we can get something recurring on the calendar. Nothing long. Stick to 20 minutes. And set an end date for the recurring nature. I usually do 4-5 times as the first run through.
At the end of those recurring meetings, be honest and mutually evaluate: Was it a good use of everyone’s time? If not, end it, but reach back out periodically to share your thanks, especially around the holiday season. If it does work, set another set of recurring meetings and reevaluate again in X time. And voila, you have yourself a mentor (in the traditional sense).
One more note on this… if that person is extremely busy and you know they are, sometimes a more personal touch to the email is recording a Loom and asking your question in front of a camera to that person in particular. For any Loom video, I wouldn’t go over a minute of recording time. Keep it concise, and use text to describe everything else.
Build a platform where they can share their advice with others.
Either start a podcast or a blog. Or help them find an audience that is outside of yourself —a fireside chat, a club, a non-profit, posting a Twitter thread or LinkedIn post, and so on. Their time is limited, and if they’re likely to give that same piece of advice to many others, help them find the tribe of people who are willing to listen to their advice. So instead of their advice being one-to-one, it’s one-to-many. In sum, a larger impact radius.
Of course, the caveat here is if the advice you seek is personal experience that isn’t suited for a stage, then don’t do it.
In closing
Some of the mentors I have today are folks I’ve known for years, but neither of us remember the discrete date in which it all started. Simply put, “it just happened.” There are others where we’ve never explicitly said we were mentor and mentee. Yet, I learn just as much if not more than if I had explicitly asked for mentorship. The same is true for some of the “mentees” I have.
At the same time, I wouldn’t discount the fact that you can truly find mentors everywhere in your life. Too many people focus on only finding strategic mentors, but fail to see the value in tactical and peer mentors, which I wrote more about three years back.
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!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
I want to preface; I don’t have all the cards laid out in front of me. In many ways, I am still trying to figure this out for myself. But I count myself lucky to be able to learn from some of the best in building communities. That said, the below are my views alone and are not representative of anyone or any organization.
A good friend recently asked me, “I’m about to start a community. Do you have any tips for how to start one with a bang?”
She’s not alone. Communities have been a hot topic for the past few years. A product of the crypto and NFT craze, and the isolation people felt when the world was forced to go virtual in 2020. At the same time, starting a community and maintaining/managing a community are different. Just like starting a company and growing a company are two different job descriptions. As such, this essay was written with the intention of addressing the former, rather than the latter.
Common traits of great communities
A great community has value and values.
Value is the excuse to bring people together. Value answers the question: why should I join? And within the first week, they should also have the answer to: why should I stay? Two fundamentally different questions. Many communities frontload the value – provide great value at the beginning – facilitating intros, onboarding workshops and socials. Subsequently, answers the first question, but take the second for granted. A community is the gift that keeps on giving. Over time, as you want to be able to scale your time and as the community grows, you need others to help you provide the reason for Why should I stay. Invariably, it comes down to people. You have to pick uncompromisingly great people from the start. And they have to derive so much value from being a part of the community, that demands converts to supply.
They refer others.
They give back to the community – in the form of advice, hosting events, and more.
Value should also be niche – just like the beachhead market for any startup. You want people to self-select themselves out of it, and the only people who stick around are the ones who derive the most benefits from being in it. Take, for example, a community of founders isn’t niche. And there a dime a dozen of the above. A community of pre-seed female founders focused on getting to product-market fit, is.
Values, on the other hand, are the rules of engagement. Codify them early. Take no implicit agreement for granted. Better yet, make them explicit. Back in January 2020, I wrote about rules in the context of building startup culture. I find the same to be true when building communities. “Weak follow-through is another fallacy in creating the culture you want. What you let slide will define the new culture, with or without your approval.”
I don’t mean for you to be a hard-ass on everything. But figure out early on how much slack you’re willing to give, and how much you aren’t. I’ve written about this before. Every person will suck. Every organization will suck. And unsurprisingly, every community will suck. What differentiates a great community from a good community is that the great ones get to choose what they’re willing to suck at.
You should be exclusive
Moreover, my hot take is that you have to be exclusive. Or let me clarify… in the wealth of Slack groups and Discord servers, yet in the world where everyone still has a job (or two), friends, family, and other communities they’re already a part of that all already slice up their 24-hour day pie in so many different ways, you are competing for their attention. If you’re a community, you’re competing against Instagram, Twitter, TikTok, Friday happy hours, Saturday nights out with the girls, date night with their partner, eight hours of sleep, their workout routine, and so much more. And so, you have to be inclusive of those who have been excluded. As such, you have to exclude those who have historically been included.
I’m not saying that you should start a community for the underestimated just ’cause. It’s like starting a business because you want the title of CEO. Don’t do it. It’s not worth your time. It’s not worth your energy. But you have to be honest with yourself, are you adding more value in the world? Is there anyone else who would sacrifice their other commitments to belong in your community? And do you have the discipline and the drive to maintain this community in the long term? The worst thing you can do is create a new home for someone then take it away.
Building and rebuilding habits
When starting a community, you are asking individuals to build a new habit. One of your greatest competitors is the incumbent solution of existing habits and routine. Some research cites that it takes 21 days to break a habit. And about two months to build a new one. All in all, 90 days all things considered.
Elliot Berkman, Director of University of Oregon’s Social and Affective Neuroscience Laboratory, surmises that there are three factors to breaking a habit.
The availability of an alternative habit
Strength of motivation to change
Mental and physical ability to break the habit
To break down the above:
The availability of an alternative habit
How available is the replacement behavior? Are there other communities out there that do the exact same thing? How well known are they? What are their barriers to entry?
If there is a readily available alternative community, the first question you need to answer is: why bother making another? Realistically, any one person only has enough time and attention to be in 2-3 communities – total. The second question you need to answer is: how do people normally learn of that community? And subsequently, is there a market or audience who doesn’t have access to this distribution channel? If so, what channels occupy most of their attention? Target those.
Strength of motivation to change
There’s a saying in the world of marketing that goes something along the lines of: People don’t buy products. They buy better versions of themselves. Therefore, as a community, you need to nail the value you provide. Is it aspirational? Does it get people to jump out of their seats and scream yes?
A simple litmus test is if you were to share the reason you created the community, do they respond with “How do I sign up for this now?” or “Let me think about it.”? If the latter, you haven’t nailed your value proposition. In other words, what you’re selling isn’t aspirational. Or if it is, you’re either talking to the wrong demographic or the value proposition is a 10% improvement in people’s lives, not a 10x. Sarah Tavel‘s “10x better and cheaper” framework (albeit for startups) is a great mental model for nailing your value prop. Your community must be:
So much better than the incumbent solution or habit they regress to, and
Easy to jump on (i.e. switching costs must be low enough for it be a no-brainer) – Sometimes this means you need to manually onboard every individual into your community. And sometimes all one needs is an accountability partner. Everyone wants be THE number that matters, not just A number. Make people feel special.
Mental and physical ability to break the habit
This is admittedly the factor that is most outside of your immediate control. Here, I regress to the below nerdy formula I made up in the process of writing this blogpost:
(how much work you need to put into each member) ∝ 1/(# of members)
The amount of work you need to put into inspiring each member to join is indirectly proportional to the number of members you can accommodate in your community. In other words, the less you need to convince people to join your community, the more members you can accommodate. The more time you need to inspire enough activation energy for a person to build a new habit, the smaller the initial cohort of members you can tailor to.
This is why I love the concept of the idea maze so much. Has your target community members put in blood, sweat, and tears trying to find the value that you are providing? Why does this matter?
They’ve designed their life already around finding answers around your value prop. They’re going to be more engaged than the average individual. They’re intrinsically motivated to be curious.
Shared empathy. They know how tough finding an answer is, such that they’re more willing to help others going through similar problems.
The shared struggles that people collectively and synchronously go through together build camaraderie and trust. No matter how small or big. The bonds of a sports team are built upon the sweats and tears of brutal training regimens, losses and wins. The trust of a Navy Seals class is built through Hell Week, pain, exhaustion, adversity, and (the likelihood of) death. And, the friendships between college freshmen are built through the unfamiliar environment of a new and daunting chapter of their life.
In closing
Starting a community is hard. 99% of communities (don’t quote me on this number, but I know I’m close to the mark) disappear into obsolescence after their founders lose their motivation. Oftentimes even prior. Not only are you cultivating a new habit yourself, but you are doing so for everyone else you want in your community. I hope the above was able to illuminate your thinking as much as it did for me. I continue to learn and iterate, and as such, will likely publish more content on this topic in the future. For now, this essay will be my thoughts encased in amber.
A big thank you to everyone who’s influenced and will continue to influence my thoughts on community, including but not limited to Sam, Andrew, Mishti, Jerel, Shuo, and most recently, Enzo.
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!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”
“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”
“I don’t think we’ll make it, David. How do we break it to our team?”
It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.
Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.
Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.
I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:
Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.
Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!
To preface, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
On fundraising…
1/ Some useful benchmarks and goals for stages of funding:
<$1M: pre-seed
Find what PMF looks like and how to measure it
$1-5M: seed
$2-4M – you found PMF already and you’re gearing up to scale
$5M – you’re ready for the A
$5-20: Series A *timestamped mid-2021, your mileage may vary in different fundraising climates
2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly. *timestamped mid-2021, your mileage may vary in different fundraising climates
3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.
4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.
5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.
6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys *Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.
7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?
Pitch deck + appendix slides
Current round investment docs
Use of funds
Current and proforma cap table
Pilot usage data, if any
References + links to everyone’s LinkedIn:
Key members of management
1-2 customers, if any
1-2 investors, if any
Financials: annual + YTD P&L + projections
Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
List of all FAQ investor questions throughout the fundraising process
Press, if any
Legal stuff: Patents, trademarks, IP assignments, articles of incorporation
8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.
9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.
10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.
11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.
12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“
13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.
Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.
It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.
14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.
15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitorslides.
16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.
17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.
18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”
19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.
20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.
21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.
22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.
23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.
24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.
25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.
26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky
27/ If you want money, ask for advice. If you want advice, ask for money.
28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.
29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.
30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.
31/ A good distribution of your company’s early angel investors include:
32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.
33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao
On managing team/culture…
34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)
35/ Please pay yourself as a founder. Some useful founder salary benchmarks:
Seed stage – lowest paid employee
Series A or when you find product-market fit (PMF) – lowest paid engineer
When you hit scale – mid-level engineer
When you’ve reached market dominance – market rate pay for CEOs
If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again
36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.
One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eaterinterview, time-stamped at the start of the pandemic.
37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.
38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libinbefore, when he said, “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.
39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.
40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.
41/ James Currier has a great list of ways to compensate your team and/or community.
Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
Cash (e.g. USD, EUR)
Equity shares (traditional)
Discounted fees
Premier placement and traffic/attention
Status symbols
Early access
Some voting and/or decision making, ability to edit/change
Premier software features
Membership to a valuable clique of other nodes
Real world perks like dinner/tickets to the ball game
Belief in the mission (right-brain, intrinsic)
Commitment to a set of human relationships (right-brain, intrinsic)
Tokens (fungible)
Non-Fungible Tokens
42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.
43/ “Outliers create bad mental models for founders.” – Founder Collective
44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.
45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.
46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.
47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.
48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.
49/ “The founder’s job is to make the receptionist rich.” – Doug Leone
50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.
52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.
53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.
54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.
55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.
56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.
57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.
58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.
59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.
On governance…
60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.
61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.
62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.
63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.
64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:
(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation) *based on what you believe their salary would be **typically 1-2 years
65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.
66/ Monthly/quarterly investor updates should include, and probably in the below order:
Your ask
Brief summary of what you do
Key metrics, cash flow, revenue
Key hires
New product features/offerings (if applicable)
67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.
69/ “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.
70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman
71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.
72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.
73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”
74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham
On building communities…
75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.
76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”
77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.
On pricing…
78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?
Customers will try to negotiate for earlier renewal, longer contract periods.
When you waive the price increases, customers feel like they’re winning.
You can upsell them more easily to more features.
79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.
80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.
On product/strategy…
81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:
Product discipline, through priorities, where company leaders have to think months in advance for, and
Expectations and motivates team members to help showcase a new product.
82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.
83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.
84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.
85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
86/ Good founders are great product builders. Great founders are great company builders.
87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.
88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani
89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.
90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.
91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”
92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.
93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.
For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.
94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.
On market insight and competitive analysis…
95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.
96/ Have a contrarian point of view. Traits of a top-tier contrarian view:
People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
It’s iterative. Be willing to change your mind when the facts change.
97/ Falling in love with the problem is more powerful than falling in love with the solution.
98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.
99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
With the crazy market we’re in today, VCs are frontloading their diligence. They’re having smarter conversations earlier. Before 2021, most investors would have intro conversations with founders before taking a deeper dive into the market to see if the opportunity is big enough. Nowadays, investors do most, if not all, their homework before they start conversations with founders. And when they’ve gotten a good understanding of the market and a more robust thesis, then:
They go out finding and talking to the founders who are solving the problems and gaps in the market they know exist.
They incubate their own companies that solve these same issues.
Subsequently, they are more exploratory than ever before. In frontloading their diligence, VCs have become more informed, if not better, predictors of not only where the market is today, but where the market is going to be tomorrow. They have a better grasp on the non-obvious. Or at the very minimum, have a much better understanding on the obvious, so that the boundaries of the non-obvious are pushed further. In turn, they can truly invest in the outliers. Outliers that are more than three standard deviations from the mean.
Startup ideas are often pushing the boundaries of our understanding of the world we live in. The team at Floodgate use an incredible breakdown to frame the amount of data that needs to be present to qualify the validity of a team and idea. “[W]e like to say some secrets are plausible, some are possible, and some are preposterous, all different types of insights. It matters what type it is because the type of team you need, the type of people you need to hire, the fundraising strategy, the risk profile, the amount of inflections that have to come together. All of those things vary, depending on the type of secret about future that you’re pursuing,” said Mike Maples Jr. recently on the Invest Like the Best podcast.
Science fiction is, by definition, preposterous. But so are the true outliers. And as any great investor knows, that’s where the greatest alphas are generated.
Preposterous ideas are backed by logic and insight
To quote PG from an essay he wrote earlier this year, “Most implausible-sounding ideas are in fact bad and could be safely dismissed. But not when they’re proposed by reasonable domain experts. If the person proposing the idea is reasonable, then they know how implausible it sounds. And yet they’re proposing it anyway. That suggests they know something you don’t. And if they have deep domain expertise, that’s probably the source of it.
“Such ideas are not merely unsafe to dismiss, but disproportionately likely to be interesting.”
But no matter how implausible your startup idea sounds, there still has to fundamentally be an audience. And while it may not be obvious today, the goal is that it will be obvious one day. Frankly, if it’s forever non-obvious and forever in the non-consensus, you just can’t make any money there. If Airbnb stuck only with the convention industry or Uber only with the black cab, or Shopify only with snowboards, they would never have the ability to be as big as they are today.
Shopify’s Alex Danco has this great line in his essay World Building. “If you can create a world that’s more clear and compelling than the complex, ambiguous real world, then people will be attracted to that story.”
As investors, we have to start from first principle thinking. Investors, in frontloading their diligence, find the answers to “why now” and “why this”. All they’re looking for after is the “why you.” The further down the line towards preposterous science fiction you are, the more you need to sell investors on “why you”.
Idea Plausibility
Key Question
Context
Plausible
Why this?
Most people can see why this idea should exist. Because of the consensus, you’re competing in a saturated market of similar, if not the same ideas. Therefore, to stand out, you must show traction.
Possible
Why now?
It makes sense that this idea should exist, but it’s unclear whether there’s a market for this. To stand out, you have to convince investors on the market, and subsequently the market timing.
Preposterous
Why you?
Hands down, this is just crazy. You’re clearly in the non-consensus. Now the only way you can redeem yourself is if you have incredible insight and foresight. What’s the future you see and why does that make sense given the information we have today? If an investor doesn’t walk out of that meeting having been mind-blown on your lesson from the future, you’ve got no chance.
And when answering the “why you”, it’s not just on your background and years of experience, but your expertise. As Sequoia’s Roelof Bothaputs it, “So what was the insight? What is the problem that you’re addressing? And why is your solution compelling and unique in addressing that problem? Even if it’s compelling, if it’s not unique there’re going to be lots of competitors. And then you’re probably going to struggle to build a distinctive business. So it’s that unique and compelling value proposition that I look for.” So before anything else, the best investors, like Roelof, “think of value creation before value capture.”
In order to find that earned secret – that compelling and unique secret sauce – in the first place, you have to love what you’re working. And not just passionate, but obsessive. The problem you’re trying to solve keeps you up at night. You have to be more of a “missionary” than a “mercenary” as Roelof would put it. If you’re truly a missionary, even the most preposterous idea will sound plausible if you can break down why it truly matters.
The Regulatory Dilemma
The most important and arguably the hardest part about writing science fiction – and this is equally true for funders as it is for founders – is that we have to self-regulate. Regulation will always be a lagging indicator of technological development. Regulators won’t move until there’s enough momentum.
But, as we learned in high school physics, with every action, you need an equal and opposite reaction. The hard about momentum, and I imagine this’ll only be more true in a decentralized world, is that it’s second order derivative is positive. In other words, it’ll only get faster and faster. On the other hand, regulation follows the afterimage of innovation. It sees where the puck was or, at best, is at, but not, until much later, where the puck is going. And truth be told, innovation will eventually plateau, as it follows a rather step-wise function, as I’ve written before. And when it does, regulation will catch up.
So, in the high school physics example of Newtonian physics, the reaction, in this case, regulation, needs to be equal and opposite force comparative to where the puck will be. But as you’ve guessed, that will stop innovation. And I don’t think the vast majority of the world would want that. Progress fuels the human race.
In fantastical worlds, we are often used to how awesome things can be. Making the impossible possible. But as Brandon explains, “the truth is that it’s virtually impossible to come up with a magical effect that nobody else has thought of. Originality, I’ve seen, doesn’t come so often with the power itself as with the limitation.”
As the infamous line goes, “with great power comes great responsibility.” If you end up having access to every single person on this planet’s data, what makes you a company worth betting on isn’t your power, but how you use that power. How you self-regulate in using that power. Take, Open AI’s GPT-3. Instead of sharing the entire AI with the world, they limited that power to prevent malicious actors through an API.
What does self-regulation mean? Simply, aligning incentives so that all stakeholders win. When you have two people, you have a 2×2 matrix to account for four possible outcomes. There’s a situation where both people win, two situations where one wins, one loses, and another where both lose. Needless to say, we want to be maximizing for win-win situations.
As Balaji Srinivasansaid on the Tim Ferriss Show recently, “When you have three people, it’s a 2x2x2, because there’s eight outcomes, win/lose times win/lose times win/lose. It’s a Cartesian product.. […] When you have N people, it’s two by two by two to the Nth power. It’s like this hypercube it as it gets very complicated.” Subsequently, the greater the organization, the more stakeholders there, and the harder it is to account for the “win” to the Nth power outcome. Nevertheless, it’s important for founder and funders at the frontier of technological and economic development to consider such outcomes. And at what point is there a divergence of incentives.
There’s usually a strict alignment in the value creation days. But as the business grows and evolves to worry more about value capture, there needs to be a recalibration of growth and an ownership of responsibility as the architects who willed a seemingly preposterous idea into existence.
In closing
We live in a day in age that is crazier than ever before. To use Tim Urban’s analogy, if you brought someone from 1750 to today and had them just observe the world we live in, that person will not only be mind-blown, but literally, die of shock. To get the same effect of having someone die of shock in 1750, you can’t just bring someone from 1500, but you’d have to go further back till 12,000 BC. The world is changing exponentially. And new technologies further that. Who knows? In 50 years, we in 2021, might die of shock from what the world will have become.
And rightly because of such velocity, innovators – founders and investors – will have to lead the charge not only technically and economically, but also morally.
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I was doomscrolling through Twitter when I stumbled on Samir Kaji‘s recent tweet:
A reason that emerging managers have done so well in early funds is not due to smaller funds sizes but because when gp/thesis is often strongest. Return atrophy usually happens when thesis drift happens at a magnitude that is more significant and faster than firm evolution.
I’ve written before that the difference between an emerged fund manager and an emerging manager is one’s raised a Fund III and the other hasn’t.
In Fund I, you’re selling a promise – a dream – to your LPs. That promise is often for angels, founders, and other GPs who write smaller checks. You’re split testing among various investments, trying to see what works and what doesn’t. More likely than not, you’re taking low to no management fees, and only carry. No reserve ratio either. And any follow-on checks you do via an SPV, with preference to your existing LPs. You’re focused on refining your thesis.
In Fund II, you’re pitching a strategy – the beginnings of pattern recognition of what works and what doesn’t. You’re thesis-driven.
Fund III, as Braughm Ricke says, “you’re selling the returns on Fund I.” On Fund III and up, many fund managers start deviating from their initial thesis – minimally at first. Each subsequent fundraise, which often scales in zeros, is a lagging indicator of your thesis and strategy. And across funds, the thesis becomes more of a guiding principle than the end all, be all of a fund. There are only a few firms out there that continue to exercise extreme fundraising discipline in. Which, to their credit, is often hard to do. ‘Cause if it’s working, your LPs want to put more money into you. And as your fund size scales, so does your strategy.
Subsequently, it becomes a race between the scalability of a fund’s strategy and fund size.
Softbank’s mistake
In 2017, Softbank’s Vision Fund I (SVF I) of $100B was by far the largest in the venture market. In fact, 50 times larger than the largest venture funds at the time. Yet, every time they made a bad bet, the media swarmed on them, calling them out. The reality is that, proportionally speaking, Softbank made as many successful versus unsuccessful bets as the average venture fund out there. To date, SVF I’s portfolio is valued at $146.5 billion, which doesn’t put it in the top quartile, but still performs better than half of the venture funds out there. But bigger numbers warrant more attention. Softbank has since course-corrected, opting to raise a smaller $40B Fund II (which is still massive by venture standards), with smaller checks.
While there are many interpretations of Softbank’s apparent failure with SVF I (while it could be still too early to tell), my take is it was too early for its time. Just like investors ask founders the “why now” question to determine the timing of the market, Softbank missed its “why now” moment.
Bigger funds make sense
I wrote a little over a month ago that we’re in a hype market right now. Startups are getting funded at greater valuations than ever before. Investors seem to have lost pricing discipline. $5 million rounds pre-product honestly scare me. But as Dell Technologies Capital‘s Frank told me, “VCs have been mispricing companies. We anchor ourselves on historical valuations. But these anchors could be wrong.” Most are vastly overvalued, yet future successes are grossly undervalued.
Allocating $152 billion into VC funds, LPs are excited about the market activity and that the timeline on returns are shorter. Namely:
Exits via SPAC,
Accelerated timelines because of the pandemic (i.e. healthcare, fintech, delivery, cloud computing, etc.)
And secondary markets providing liquidity.
We’ve also seen institutional LPs, like pension funds, foundations, and endowments, invest directly into startups.
Moreover, we’re seeing growth and private equity funds investing directly into early-stage startups. To be specific over 50 of them invested in over $1B into private companies in 2021 so far.
As a result of the market motions, the Q2 2021 hit a quarterly record in the number of unicorns minted. According to CB Insights, 136 unicorns just in Q2. And a 491% YoY increase. As Techcrunch’s Alex Wilhelm and Anna Heimputs it, “Global startups raised either as much, or very nearly as much, in the first two quarters of 2021 as they did in all of 2020.”
Hence, we see top-tier venture funds matching the market’s stride, (a) providing opportunity for their LPs to access their deal flow and (b) meeting the startup market’s needs for greater financing rounds. Andreessen recently raised their $400M seed fund. Greylock with their $500M. And most recently, NFX with their $450M pre-seed and seed Fund III.
In his analysis of a16z, writer Dror Poleg shares that “you are guaranteed to lose purchasing power if you keep your money in so-called safe assets, and a handful of extremely successful investments capture most of the available returns. Investors who try to stay safe or even take risks but miss out on the biggest winners end up far behind.” The a16z’s, the Greylocks and the NFXs are betting on that risk.
Fund returners are increasingly harder to come by
As more money is put into the private markets, with startups on higher and higher valuations, unicorns are no longer the sexiest things on the market. A unicorn exit only warrants Greylock with a 2x fund returner. With the best funds all performing at 5x multiples and up, you need a few more unicorn exits. In due course, the 2021 sexiest exits will be decacorns rather than unicorns. Whereas before the standard for a top performing fund was a 2.5%+ unicorn rate, now it’s a 2.5% decacorn rate.
The truth is that in the ever-evolving game of venture capital, there are really only a small handful of companies that really matter. A top-tier investor once told me last year that number was 20. And the goal is an investor is to get in one or some of those 20 companies. ‘Cause those are the fund returners. Take for example, Garry Tan at Initialized Capital, earlier this year. He invested $300K into Coinbase back in 2012. And when they went public, he returned $2B to the fund. That’s 6000x. For a $7M fund, that’s an incredible return! LPs are popping bottles with you. For a half-billion dollar fund, that’s only a 4x. Still good. But as a GP, you’ll need a few more of such wins to make your LPs really happy.
I also know I’m making a lot of assumptions here. Fees and expenses still to be paid back, which lowers overall return. And the fact that for a half-billion dollar seed fund, check sizes are in the millions rather than hundreds of thousands. But I digress.
There is more capital than ever in the markets, but less startups are getting funded. The second quarter of this year has been the biggest for seed stage activity ever, measured by dollars invested. Yet total deal volume went down.
Each of these startups will take a larger percentage of the public attention pie. Yet, most startups will still churn out of the market in the longer run. Some will break even. And some will make back 2-5x of investor’s money. Subsequently, there will still be the same distribution of fund returners for the funds that make it out of the hype market.
In closing
As funds scale as a lagging indicator of today’s market, the discipline to balance strategy and scale becomes ever the more prescient. We will see bigger flops. “Startup raises XX million dollars closes down.” They might get more attention in the near future from media. Similarly, venture capitalists who empirically took supporting cast roles will be “celebretized” in the same way.
The world is moving faster and faster. As Balaji Srinivasan tweeted yesterday:
But as the market itself scales over time, the wider public will get desensitized to dollars raised at the early stages. And possibly to the flops as well. Softbank’s investment in Zume Pizza and Brandless turned heads yesterday, but probably won’t five years from now. It’s still early to tell whether a16z, Greylock, NFX, among a few others’ decisions will generate significant alphas. I imagine these funds will have similar portfolio distributions as their smaller counterparts. The only difference, due to their magnitudes, is that they’re subject to greater scrutiny under the magnifying glass. And will continue to stay that way in the foreseeable future.
Nevertheless, I’m thrilled to see speed and fund size as a forcing function for innovation in the market. There’s been fairly little innovation at the top of the funnel in the venture market since the 1970s. VCs meet with X number of founders per week, go through several meetings, diligence, then invest. But during the pandemic, we’ve seen the digitization of venture dollars, regulations, and new fund structures:
Quoting a good friend of mine, “It’s a good time to be alive.” We live in a world where the lines between risk and the status quo are blurring. Where signal and noise are as well. The only difference is an investor’s ability to maintain discipline at scale. A form of discipline never before required in venture.
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Proportionally speaking, I rarely make referrals and intros. Numerically speaking, I set up more intros than the average person. Frankly, if I made every intro that people have asked of me, I’d be out of social capital. It’s not to say I’m never willing to spend or risk my social capital. And I do so more frequently than most people might find comfortable. In fact, the baseline requirement for my job is to be able to put my neck on the line for the startups I’m recommending. The other side of the coin is that I’ve made more than a few poor calls in my career so far. That is to say, I’m not perfect.
I only set up intros if I can see a win-win scenario. A win for the person who wants to get introduced. And a win for the person they will be introduced to. The clearer I can see it, the easier the intro is to make. The less I can, the more I look for proxies of what could be one.
This largely has been my framework for introducing founders to investors, as well as potential hires, partners, and clients. Over the years, I realized that I’ve also been using the same for people who would like an intro to someone above their weight class.
Below I’ll share the 4 traits – not mutually exclusive – of what I look for in world-class founders.
As a result of my commitment to provide feedback for every founder who wants a second (or third) pair of eyes on their pitch deck, I’ve been jumping on 30-minute to 1-hour calls with folks. Although I’ve had this internal commitment ever since I started in venture, I didn’t vocalize it until earlier this year. And you know, realistically, this is not gonna scale well… at all. But hey, I’ll worry about that bridge when I cross it.
Something I noticed fairly recently, which admittedly may partly be confirmation bias ever since I became cognizant of it, is that there have been a significant number of founders currently fundraising who complain to me about:
Many VCs don’t have their investment thesis online/public.
Of those that are, VCs have “too broad” of a thesis.
So, it got me thinking and asking some colleagues. And I will be the first to admit this is all anecdotal, limited by the scope of my network. But it makes sense. That said, if you think I missed, overlooked, over- or underestimated anything, let me know.
The Exclusionary Biases
By virtue of specificity, you are, by definition, excluding some population out there. For example, in focusing only on potential investments in the Bay, you are excluding everyone else outside or can’t reach the Bay in one way or another. Here’s another. Let’s say you look for founders that are graduates from X, Y, or Z university. You are, in effect, excluding graduates from other schools, but also, those who haven’t graduated or did not have the opportunity to graduate at all.
The seed market example
Here’s one last one. This is more of an implicit specificity around the market. The (pre-) seed market is designed for largely two populations of founders:
Serial entrepreneurs, who’ve had at least one exit;
And, single-digit (or low double) employees of wildly successful ventures.
Why? You, as a founder, are at a stage where you have yet to prove product-market fit. Sometimes, not even traction to back it up. And when you’re unable to play the numbers game (like during the stages at the A and up), VCs are betting on the you and your team. So, to start off, we (and I say that because I’ve been guilty of overemphasizing this before) look into your background.
What did your professional career look like before this?
Do you have the entrepreneurial bone in your body?
Here’s some context of what the idea maze might look like in another post I wrote.
The delta between a good investor and a great investor
Let’s say an investor were to be approached by two founders with the exact same product, almost identical team, same amount of traction, same years of experience, and let’s, for argument’s sake, have spent the same number of years contemplating the problem, but the only difference is where they came from. One is a first-time founder from [insert corporate America]. The other is the 5th employee of X amazing startup. Many VCs I’ve talked with would and have defaulted on the latter. And the answer is reinforced if the latter is a founder with an exit.
The question wasn’t made to be fair. And, it’s not fair. To the VCs’ credit, their job is to de-risk each of their investments. Or else, it’d be gambling. One way to do so is to check the founder’s professional track record. But the delta here that differentiates the good from the great investor is that great investors pause after given this information and right before they make a conclusion. That pause that gives them time to ask and weigh in on:
What is this founder(s)’ narrative beyond the LinkedIn resume?
Shifting the scope
It’s not about the quantitative, but about the qualitative. It’s not about the batting average, but about the number and distance of the home runs. So instead of the earlier question:
How long have you spent in the idea maze?
And instead…
What have you learned in your time in the idea maze?
Similarly, from what I’ve gathered from my friends in deep/frontier tech, instead of:
How many publications have you published?
And instead…
Where are you listed in the authorship of that research? The first? The second? The 20th?
For context of those outside of the industry, where one is listed defines how much that person has contributed towards the research.
As a slight nuance, there are some publications, where the “most important” individual is listed last. Usually a professor who mentored the researchers, but not always.
And, how many times has your research been cited?
Some more context onto specificity
Some other touch points on why (public) investment theses are broad:
FOMO. Investors are scared of the ‘whats if’s’. The market opportunity in aggregate is always smaller than the opportunity in the non-aggregate.
Hyper-specific theses self-selects founders out who think they’re not a ‘perfect fit’. Very similar to job posts and their respective ‘requirements’.
Some keep their thesis broad in the beginning before refining it over time. This is more of a trend with generalist funds.
Theses are broad by firm, but more specific by partner. The latter of which isn’t always public, but can generally be tracked by tracking their previous investments, Twitter (or other social media) posts, and what makes them say no. Or simply, by asking them.
The pros of specificity
Up to this point, it may seem like specificity isn’t necessarily a good thing for an investor. At least to put out publicly.
But in many cases, it is. It helps with funneling out noise, which makes it easier to find the signals. It may mean less deal flow, which means less ‘busy’ work. But you get to focus more time on the ones you really care about. And hopefully lead to better capital and resource allocation. The important part is to check your biases when honing the thesis. Also, happens to be the reason why LPs (limited partners – investors who invest in VCs) love multi-GP funds (ideally of different backgrounds). Since there are others who will check your blind side.
Specificity also works in targeting specific populations that may historically be underrepresented or underestimated. Like a fund dedicated to female founders or BIPOC founders or drop-outs or immigrant founders. Broad theses, in this case, often inversely impact the diversity of investments for a fund. When you’re not focusing on anyone, you’re focusing on no one. Then, the default goes back to your track record of investments. And your track record is often self-perpetuating. If you’ve previously backed Stanford grads, you’re most likely going to continue to attract Stanford grads. If you’ve previously backed white male founders, that’ll most likely continue to be the case. In effect, you’re alienating those who don’t fit the founder archetype you’ve previously invested in.
In closing
We are, naturally, seekers of homogeneity. We naturally form cliques in our social and professional circles. And the more we seek it – consciously and subconsciously, the more it perpetuates in our lives. Focus on heterogeneity. I’m always working to consider biases – implicit and explicit – in my life and seeing how I’m self-selecting myself out of many social circles.
Whether you, my friend, are an investor or not. Our inputs define our outputs. Much like the food we put in our body. So, if there’s anything I hope you can take away from this post, I want you to:
Take a step back,
And examine what personal time, effort, social, and capital biases are we using to set the parameters of our investment theses.
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