One of my favorite Pat Grady lessons is the one he shares about his wife, Sarah Guo. The short of it is that while Pat was just enjoying his weekend down the wine country, Sarah had used that same car ride over to make several phone calls and several messages over the weekend. A time that most VCs take off for themselves, their family, or their hobbies. But Sarah took to get to know the founders, the team, key executives and everyone who was at the company.
For a deal that Sequoia, a16z, and Benchmark were also fighting over, the firm that won the deal was Greylock. And it was because of Sarah. She had spent so much time with said founders that they couldn’t imagine working with any other partner except for her.
Similarly, rumor has it that Mark Zuckerberg was able to buy Instagram also because of a flurry of conversations over Easter weekend in 2012, when no one else was expecting to be working. And while one can argue the ethics behind how the deal went down (i.e. the intensity of communication, threats or that Zuck was driven by paranoia), the fact stands that Facebook acquired that 13-person company with no revenue at a time when Twitter had offered supposedly $500M to acquire the photo-sharing company, and that Sequoia had also offered to mark the company at half a billion. But when literally anyone else could have won the deal, Facebook did.
I wrote about responsiveness being a telltale sign of excellence earlier this month. So this one is more or less an expansion of that.
I’ve always appreciated the ability in others who are able to make things happen. The hustle. Time doesn’t wait for you to wake up. From my buddy Andrew flying across the nation to close a candidate to Blake Robbins who cold emailed Nadeshot three times per week and bought him tickets to the Cavs NBA Finals game to win the chance to fund 100 Thieves. I hear about these stories every so often, from simple things, like flying to meet a founder and not expecting the founder to fly to the Bay, to more wilder stories to a lawyer cold emailing his way to Elon to get an exec position at SpaceX or sending fan mail to a music artist to put a song into outer space. And I can’t help but feel an immense amount of respect (also often inspired to take action myself).
The truth is most people don’t. Not because they physically can’t send an email on the weekend or jump on a phone call at 10PM. But because they won’t.
As an LP, one of the wavelengths I measure emerging GPs on is their ability to win deals. Too often these GPs brag about their networks and operating experiences. More often than not, not differentiated. I kid you not. Like 99% of the time. But in an age, where every GP has a podcast or a newsletter. Or a community. Hell, every GP knows someone who knows an Elon or a Bill Gates or a Jensen Huang (or they know them themselves).
Admittedly, they all start looking the same. But every so often, I meet a GP or a founder who can’t boast a crazy network or crazy set of prior exits. And the only thing they can boast is their hustle. And they are able to show for it. Those are the folks who I think will change the world.
I will admit, hustle is hard as hell to share in a pitch deck. In many ways, I advise GPs and founders to not include it because there is almost no way that a deck is the best platter to share one’s hustle. Then again, the people who are the greatest hustlers don’t need me to tell them that.
They know. And as the Nike slogan goes, they “just do it.”
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.
“A true friend is one who stabs you in the front.”— Oscar Wilde
Many years ago, in what seemed like another lifetime, I made a girl cry. Nothing to boast about. In fact, even today, I’m quite embarrassed that I did so. In a negotiation where I prioritized one small committee in a club’s priorities above the priorities of other committees, I felt that I was right in every way. I conceived a million reasons why rationally I was right — cost, our future members’ preferences, down to the stable marriage algorithm. I fell prey to pride and ego. And she broke down. Instead of apologizing, I walked away, asserting that the data supported my case.
The next day, I found solace among classmates and friends. They told me I didn’t do anything wrong. That they would’ve done the same thing. That the facts proved I was right. Until that evening, a good friend and someone I’d known since middle school, said, “You’re fucking stupid.”
He told me to drop everything and to go apologize in person right that instant. To hell with data and facts. He said that I forgot the very first principle of any negotiation… that there was a human being on the other side. And I didn’t treat her as one. He was the one person who opened my eyes up to the ego I was blinded by. So I did. In my realization, I felt terrible and even worse for needing someone else to tell me that I had to. But that’s the friend I needed. That’s what I needed to hear.
Something you might have realized if you’re a frequent visitor to this small piece of virtual real estate is that I’m not perfect. Nor do I pretend to be. The above example is evidence of that.
I was reminded of that when I was listening to Jonathan Abramson Venture Unlocked earlier this week. Where they brought up the topic of being founder friendly — a term that indubitably carries a lot of baggage. From the VC side, it’s jargon that’s been thrown around so much over the past decade, it’s lost its luster and meaning. From the founder side, many founders frankly just don’t get what it means. Why? Because no one actually defines it.
Over the years, I’ve seen and heard explicit and implicit definitions, including:
Not firing the CEO (even when they don’t do a good job)
Helping the founder grow as the company and CEO job description grows
Having answers to every question the founders ask
Asking (good) questions
Telling the founders what to do
The thing is, all the above are right and wrong at the same time. It’s situationally dependent. Ok, maybe except the last one. That one’s wrong all the time. Something you realize pretty quickly is that the investor is not in the driver’s seat. At best, we sit shotgun.
So, what does “founder friendly” mean?
Jonathan Abrams and the 8-Bit team says, “Do no harm.”
Fred Wilson says, “Saving your company from yourself may well be founder friendly.”
To YC, it’s being honest, transparent, responsive, and acting in the best interests of the company, shareholders, employees, and founders.
The truth is everyone has a different, but similar definition. Like product-market fit, it’s hard to measure and an amorphous term. It’s obvious in hindsight. But mysterious in foresight. Yet, as a founder, there are still many telltale signs on how helpful an investor actually will be.
Leading indicators to helpfulness
One of the reasons I love working with smaller checkwriters — be it angels or emerging fund managers — is that they often punch above their weight class. They’re insanely responsive. And are often more helpful than their check size. They may not be able to single-handedly fill the round, nor can their check get you to profitability, but they’re there when you need them. In other words, they hit high on the check size-to-helpfulness ratio, which I’ve written about before.
The first meeting
Interestingly enough, the first meeting is quite telling of how helpful investors are — regardless of the decision outcome. It could be in the form of investor intros, strategic advice, hard questions to consider, or key hires to make. In fact, they’ll make you feel like you got back days if not weeks, out of a 30-minute meeting. If you, as the founder, get nothing out of the first meeting, then you likely won’t get much when they are on your cap table. The most helpful investors don’t waste time. Not theirs. But more importantly, not yours either. They know that each time you meet with them is time away from building. And they’ll make that time worthwhile.
As an investor, the golden standard should be to be helpful in every meeting. And I don’t mean ending the conversation with “Let me know how I can be helpful.” That’s reactive.
For one of my good friends, that means that if he takes a meeting with you — whether he chooses to invest or not, he will write a 3-5 page bug report on your product. For some of my other friends, it’s that if they take a meeting, they’ll nine out of ten times set up an intro. Instead of asking “How can I be helpful?”, one should ask “What do you need help on?” or “What are the biggest obstacles that prevent you from reaching your 6-12 month goals?” Then, proactively trying to find some way to help.
That said, the afore-mentioned investors’ bar for taking a meeting is rather high.
Response rate
Another proxy for helpfulness is how fast they reply to your emails. Many of the investors who I know are insanely helpful have a system to respond to founders quickly. Moreover, if the decision is a ‘No’, they don’t shy away from sharing that and why they decided to pass. Of course, the latter is not possible for every inbound pitch. But at the very minimum, are table stakes if you’ve already jumped on an initial live conversation with them.
Here, within 24 hours is epic. 48-72 hours is great. And anything longer becomes a dime a dozen.
Inactive founders sing them high praise
It’s always important to do your homework on your investor. One of such ways is talking to other founders they backed, especially the ones who are no longer founders or no longer pursuing the original idea they were backed on. Active portfolio companies are likely to still give lip service to their investors, especially when they are a large portion of their cap table. So, when you ask, “Was this investor helpful?”, you’re likely to get an overly politically correct answer. Rather, the question I recommend asking is:
“If you were to start a new company, who are the three investors — big or small — on your current cap table that you would kill to have back on?”
Conversely, if you talk to former portfolio founders, they’re likely to be a lot more honest as they don’t have a currently active relationship with the investor. Or if they still do, the investor must have done something right.
Lagging indicators to helpfulness
While not the intended purpose of this blogpost, I can’t help but shed some additional context for investors out there. In my recent conversations with GPs and LPs, I noticed a common thread among the GPs who are capable of raising a fund even in a down market. It’s that the founders they back who went on to raise A, B rounds, or greater, come back to invest in their early believers. The people who made a difference in these founders’ lives.
So, whenever I meet an emerging GP asking for fundraising advice, one of the first questions I ask, outside of these five questions which determine if they’re ready to start a fund, is:
Have any of the founders you backed before committed to your fund?
Goodwill and helpfulness builds flywheels. When your founders go on to win, if you’ve been helpful, they’ll want to pay it back.
Tangentially, it’s why the team at Ludlow Ventures says, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.” So, getting deal flow from founders you pass on means, either:
They still want something from you; or
You were really helpful that they want to send all their best founder friends to you.
Hopefully, it’s the latter.
In closing
At the end of the day, no one’s perfect. Not the founders. Not the investors. No one. And it’s okay.
In the current world of chaotic down markets, high interest rates, and more, this is the time to build goodwill. This is the time to be truly founder friendly. If you have less liquidity, you can always help in many ways outside of pure capital. After all, capital for founders is a means to an end, not an end in and of itself. Sometimes it’s just being honest, candid, and transparent with the founder.
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.
Back in mid-2020, I started writing a piece on 99 Pieces of Unsolicited, (Possibly) Ungooglable Startup Advice. There was no ETA on the piece. I had no idea when I would publish it, other than the fact, that I would only do so once I hit the number 99. Yet, just like how I was inspired to write how similar founders and funders are, it finally dawned on me to start writing a similar piece for investors around mid-2021. The funny thing, is though I started this essay half a year later, I finished writing it one and a half months sooner while I was still on advice #95 for the former.
Of course, you can bet your socks I’ve started my next list of unsolicited advice for investors already. Once again, with no ETA. As I learn more, the subsequent insight that leads to an “A-ha!” moment will need to go deeper and more granular. And who knows, the format is likely to change.
I often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve more nuance, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites for investors below cover everything, in no particular order other than categorical resonance, including:
Unfortunately, many of the below advice came from private conversations so I’m unable to share their names. Unless they’ve publicly talked about it. Nevertheless, I promise you won’t be disappointed.
As any Rolodex of advice goes, you will not resonate with every single one, nor should you. Every piece of advice is a product of someone’s anecdotal experience. While each may differ in their gravitas, I hope that each of the below will serve as a tool in your toolkit for and if the time comes when you need it most.
To preface again, 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.
General advice
1/ To be in venture capital, you fundamentally have to be an optimist. You have to believe in a better tomorrow than today.
2/ “Everyone has a plan until they get punched in the mouth.” – Mike Tyson. Told to me by an LP who invests in emerging and diverse managers.
3/ Have good fluidity of startup information. “No founder wants to meet a partner and have to answer the same questions again and again. Best partnerships sync and with every discussion, process the questioning.” – Harry Stebbings
4/ The lesson is to buy low, sell high. Not to buy lowest, sell highest.
5/ “The New York Times test. Don’t do anything you wouldn’t want to see on the front page of the NY Times.” – Peter Hebert
6/ “It takes 20 years to build a reputation and five minutes to ruin it.” – Warren Buffett
7/ When you’re starting off as an investor, bet on one non-obvious founder – a real underdog. Support them along their entire journey. Even if there’s no huge exit, the next one will be bigger. When their VPs go off and start their own businesses, they’ll think of you first as well.
8/ When planning for the next generation of your firm’s successors, hire and mentor a cohort of brilliant investors, instead of focusing on finding the best individual. Investing is often a lonely journey, and it’s much easier to grow into a role if they have people to grow together and commiserate with.
9/ “When exit prices are great, entry prices are lousy. When entry prices are great, exit prices are lousy.” – David Sacks
10/ Illiquidity is a feature, not a bug. – Samir Kaji
11/ Three left turns make a right turn. There is no one way to break into VC. Oftentimes, it’s the ones with the most colorful backgrounds that provide the most perspective forward.
12/ “Whenever you find yourself in the majority, it is time to pause and reflect.” As an early stage investor, I find Mark Twain’s quote to be quite insightful.
13/ “It’s not about figuring out what’s wrong; it’s about figuring out what is so right. The job of an investor is to figure out what is so overwhelmingly great, or so tantalizingly promising that it’s worth dealing with all the stuff that’s broken.” – Pat Grady retelling a story with Roelof Botha
15/ Track your deal flow. Here’s how I track mine. Another incredible syndicate lead with over 5x TVPI (total value to paid in capital) I met keeps it even simpler. A spreadsheet with just 4 columns.
Company
Valuation in
Valuation out
Co-investors – This is where you start sharing deal flow with each other here.
16/ One of your best sources of deal flow might not be from other investors, but those who are adjacent to the venture ecosystem, like startup lawyers and VC attorneys.
17/ A WhatsApp group with your portfolio is a great tool for diligencing investments, not as much for sourcing deals.
18/ “Decide once you have 70% conviction.” – Keith Rabois. Don’t make decisions with 40% conviction since that’s just gambling. Don’t wait till 90% conviction because you’ll miss the deal for being too slow.
19/ Ask questions to founders where they show grit over a repeated period of time. They need to show some form of excellence in their life, but it doesn’t have to be in their current field. From a pre-seed manager with 3 unicorns in a portfolio of 70.
20/ As an emerging manager, one of the best reasons for investing in emerging markets: Do you want to see the deals that the top 0.1% see? Or do you want to see the deals that the 0.1% passed on? From the same pre-seed manager with 3 unicorns in a portfolio of 70.
21/ Every day, open your calendar for just one hour (two 30-minute slots) to founders you wouldn’t have had otherwise. Your network will compound. From a manager who’s invested in multiple unicorns and does the above from 10-11PM every night.
22/ The bigger your check size, the harder you have to fight to get into the round.
23/ The best investors frontload their diligence so they can have smarter first conversations with founders.
24/ Perform immersion-based diligence. Become super consumers and super users of a category, as close as you can get to subject-matter experts. That way you know very quickly after meeting a founder if their product is differentiated or unique. While you’re at it, write 2-3 page bug report stress-testing the product. Founders really do appreciate it.
26/ When a founder can’t take no for an answer and pushes back, “I always have to accept the possibility that I’m making a mistake.” The venture business keeps me humble, but these are the benchmarks that the team and I all believe in. Inspired by JCal and Molly Wood.
27/ Win deals by “sucking the oxygen out of the air.” In investing there are two ways to invest: picking or getting picked. Picking is naturally in a non-competitive space. Getting picked is the exact opposite. You have to eat competition for breakfast. And when you’re competing for a deal everyone wants to get into, you have to be top-of-mind. You need to increase the surface area in which founders remember you, not just to take their time, but to be really, really valuable in as much time as you can spend with them. Inspired by Pat Grady on an anecdote about Sarah Guo.
Pitching to LPs
28/ Surprises suck. On Samir Kaji’s podcast, Guy Perelmuter of GRIDS Capital once said: “There’s only one thing that LPs hate more than losing money. It’s surprises.” More here.
29/ Fund I: You’re selling a promise. Fund II: You’re selling a strategy. And, Fund III: You’re selling the returns on Fund I.
30/ Steven Spielberg didn’t know what E.T. should look like, so he had everyone write down people they respected. And so E.T. looked a bit like everyone on that list, including Carl Sandburg, Albert Einstein and Ernest Hemingway. In a very similar way, come up with a list of your ideal LPs. And create a fund based on what they like to see and what you can bring to the table. Oftentimes, it’s easier to ask them for personal checks than checks out of their fund.
31/ Ask the founders you back for intros to their other investors as potential LPs in your fund.
32/ The return hurdles for LPs are different per fund type: *subject to market motions. Timestamped in Sept 2021 by Samir Kaji
Nano-fund (<$20M): 5-7x+
Seed fund: 3-5x+
Series A: 3x+
Growth: 2-2.5x+
Crossover/late growth (driven by IRR, not multiples): 10-12%+
33/ “If you know one family office, you know one family office.” Said by one of the largest LPs in venture funds. Each family office situation is uniquely different.
34/ Family offices are surprisingly closed off to cold emails, but often share a lot of deal flow with each other. Have co-investors or founders introduce you to them.
35/ It takes on average 2 months for an institutional LP to do diligence and reference checks. Plan accordingly.
36/ LPs look for:
Track record (could be as an individual angel as well)
Value add
Operational excellence
37/ Data shows that first-time/emerging managers are more likely to deliver outperformance than their counterparts, but as one, you still need to show you have experience investing.
38/ People, including LPs, tend to remember stories, more than they do data. Teach your LPs something interesting.
39/ LPs have started looking more into two trends: private investments and impact/ESG initiatives. By nature of you reading this blogpost, you’re most likely the former already. The latter is worth considering as part of your thesis.
40/ Every coffee is worthwhile in some form.
41/ LP diligence into VCs break down into two types: investment and operational DD.
Investment DD includes team, incentive alignment, strategy, performance, current market, and terms/fees.
Team: What does leadership look like? How diverse are you?
Alignment: Do you have performance-based compensation?
Strategy: What sectors are you investing into? What does your underwriting discipline look like?
Performance: What do your exits look like? Are you exits repeatable?
Market: What are the current industry valuations? Economies of scale?
Terms/fees: Are they LP friendly? Are the fees based on alphas or betas? Are they aligned with your value add?
Operational DD includes business model, operational controls, tech platforms, service providers, compliance and risk.
42/ If you’re pitching to other venture funds to be LPs, say for $250K checks, larger funds (i.e. $1B fund) typically have fund allocations because check size is negligible. And a value add as deal flow for them at the A. Whereas, smaller funds don’t because it is a meaningful size of their fund. So, GPs write personal checks.
43/ If you’re planning to raise a fund, think of it like raising 10 Series A rounds. For most Series A rounds, a founder talks to about 50 investors. So for a Fund I, you’re likely to talk to 500 LPs to close one.
44/ Send potential LPs quarterly LP updates, especially institutions. Institutions will most likely not invest in your Fund I or II, but keep them up to date on the latest deals you’re getting into, so you’re primed for Fund III.
45/ Family offices want to get in top funds but most can’t because top funds have huge waitlists. Yet they still want access to the same deals as top funds get access to. They’re in learning mode. Your best sell to family offices is, therefore, to have:
Tier 1 investors as your fund’s LPs
Tier 1 investors as co-investors
Deals that they wanted to get into anyway
46/ Your Fund I LPs are going to be mostly individual angels. They believe in you and your promise, and are less worried about financial returns.
47/ Institutional LPs are looking for returns and consistency. If you say you’ll do 70% core checks and 30% discovery checks, they’re checking to see if you stick to it. Institutions aren’t in learning mode, instead you as a fund manager fit into a very specific category in their portfolio. Subsequently, you’re competing with other funds with similar foci/theses as you do.
48/ Be transparent with your IRRs. If you know you have inflated IRRs due to massive markups that are annualized, let your (potential) LPs know. For early stage, that’s probably 25-30%+. Especially when you’re in today’s frothy market (timestamped Jan 2022). Or as Jason Calacanis says it for his first scout fund that had crazy IRRs, “It’s only down from here.”
49/ Don’t waste a disproportionate amount of time convincing potential LPs about the viability of your thesis. Shoot for folks who can already see your vision. If you manage to convince an LP that didn’t previously agree, they may or may not end up micromanaging you if your thesis doesn’t work out as “expected.” Inspired by Elizabeth Yin.
50/ “The irony for us was LPs asking about portfolio construction was a sign that the meeting was going poorly.” – Jarrid Tingle.
51/ Institutional LPs prefer you to have a concentrated startup portfolio – less than 30 companies. They already have diversification across funds, so they’re maximizing the chance that their portfolio has fund returners. That said, you’re probably not raising institutional capital until Fund III. Inspired by Jarrid Tingle.
52/ If you’re an emerging manager with a fund is less than 4 years old, boasting high IRR (i.e. 50%+) is meaningless to sophisticated and institutional LPs. Focus on real comparative advantages instead. – Samir Kaji.
53/ When raising early checks from LPs, ask for double the minimum check size. Some LPs will negotiate down, and when they only have to commit half of what they thought they had to, they leave feeling like they won.
54/ When potential LPs aren’t responding to your follow ups/LP updates, send one more follow up saying: “I am assuming you are not interested in investing into our fund. If I am wrong, please let me know or else this will be your last update.” Told to me by a Fund III manager who used this as her conversion strategy.
55/ It’s easier to have larger checkwriters ($500K+) commit than smaller checkwriters (<$100K). $500K is a much smaller proportion of larger checkwriters’ net worth than checkwriters who write $100K checks. And as such, smaller checkwriters write less checks, have less “disposable income”, and push back/negotiate a lot more with fund managers before committing. Told to me by a Fund III manager.
Fund strategy/management
56/ As an investor, if you want to maintain your ownership, you have to continue requesting pro-rata rights at each round.
58/ “Opportunity funds are pre-established blind pool vehicles that eliminate the timing issues that come with deal-by-deal SPVs. Opportunity funds sometimes have reduced economics from traditional 2/20 structures, including management fees that are sometimes charged on deployed, not committed capital. Unlike individual SPVs, losses from one portfolio company in an opportunity fund offset gains from another when factoring in carried interest.” – Samir Kaji. See the full breakdown of pros and cons of opportunity funds here.
59/ There are two ways to generate alphas.
Get in early.
Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.
60/ Sometimes being right is more important than being in the non-consensus. Inspired by Kanyi Maqubela.
Market risk as a function of ownership – What is the financial upside if exit happens? Is it meaningful enough to the fund size?
Judgment risk – Are you picking the right companies?
Win rate risk – How can you help your portfolio companies win? What is your value add?
62/ By Fund III, you should start having institutional capital in your investor base.
63/ The closer you get to investing in growth or startups post-product-market fit, the closer your capital is to optimization capital. Founders will likely succeed with or without you, but your name on the cap table will hopefully get them there faster and more efficiently.
64/ If you’re a traditional venture fund, you have to invest in venture-qualifying opportunities, like direct startup investments. But you can invest up to 20% of your fund’s capital in non-venture-qualifying opportunities, like tokens/SAFTs (simple agreement for future tokens), real estate, secondaries, and so on.
65/ If increased multiples coming out of various vintage funds, feel free to deviate from the normal 2-20. Many funds have 25 or 30% carry now, or accelerators where 20% scales with multiples (and often with a catch-up back to 1.0x at higher carry). – Samir Kaji
66/ Normally, fund managers take 2% management fees, usually over 10 years, totaling 20% over the lifetime of the fund. These days, I’m seeing a number of emerging managers take larger management fees over less years. For example, 10% as a one-off. Or 5% over 2-3 years.
67/ “The razor I apply to investing and startups is that every decision that increases your probability of wild outlier success should also increase your probability of total failure. If you want to be a shot at being a 10x returning fund? You’ll have to take on the higher likelihood of being a 1x. If you think you’re going to build the next Stripe? You’re going to have to run the risk of going nowhere.” – Finn Murphy
69/ The longer you delay/deprioritize having diverse partners, the harder it’ll be to hire your first one.
Advising founders/executives
70/ A founder’s greatest weakness is his/her/their distraction. Don’t contribute to the noise.
71/ It’s far more powerful to ask good questions to founders than give “good answers”. The founders have a larger dataset about the business than you do. Let them connect the dots, but help them reframe problems through questions.
72/ You are not in the driver’s seat. The founder is.
73/ A great reason for not taking a board seat is that if you disagree with the founders, disagree privately. Heard from a prolific late-stage VC.
74/ Advice is cheap. Differentiate between being a mentor and an ally. Mentors give free advice when founders ask. Allies go out of their way to help you. Be an ally.
75/ The best way to be recognized for your value-add is to be consistent. What is one thing you can help with? And stick to it.
76/ Productize your answers. Every time a founder asks you a question, it’s likely others have the same one. Build an FAQ. Ideally publicly.
77/ If you have the choice, always opt to be kind rather than to be nice. You will help founders so much more by telling them the truth (i.e. why you’re not excited about their business) than defaulting on an excuse outside of their control (i.e. I need to talk with my partners or I’ve already deployed all the capital in this fund). While the latter may be true, if you’re truly excited about a founder and their product, you’ll make it happen.
78/ Help founders with their firsts. It doesn’t have to be their first check, but could also be their first hire, engineer, office space, sale, co-founder, team dispute, and so on.
79/ There are four big ways you can help founders: fundraising, hiring, sales pipeline, and strategy. Figure out what you’re good at and double down on that.
80/ Focus on your check-size to helpfulness ratio (CS:H). What is your unique value add to founders that’ll help them get to their destination faster? Optimize for 5x as a VC. 10x as an angel.
81/ “The job of a board is to hire and fire the CEO. If you think I’m doing a bad job, you should fire me. Otherwise, I’m gonna have to ask you to stay out of my way.” – Frank Slootman to Doug Leone after he was hired as CEO of ServiceNow.
SPVs and syndicates
82/ The top syndicates out there all have 3 traits:
Great team
Great traction
Tier 1 VC
If your deal has all of the above, and if you raise on AngelList, your deal is shared with the Private Capital Network (PCN), which AngelList’s own community of LPs and investors, a lot of which are family offices, who allocate at lest $500K of capital per year.
83/ If you’re raising an AngelList syndicate, you need to raise a minimum of $80K or else the economics don’t really make sense. AL charges an $8K fee.
84/ If you want to include Canadian investors in your syndicate, for regulation purposes, you need to invest 2% of the allocation size or $10K.
85/ Investing a sizeable check as a syndicate lead (e.g. $10K+) is good signal for conviction in the deal, and often gets more attention.
86/ 99% of LPs in syndicates want to be passive capital because they’re investing in 50 other syndicates. You can build relationships individually with them over time, but don’t count on their strategic value.
87/ Historically, smaller checkwriters take up 99% of your time. Conversely, your biggest checkwriters will often take up almost no time. Even more true for syndicates.
88/ LPs don’t care for deals where syndicate leads have time commitment without cash commitment.
89/ Don’t give LPs time to take founders’ time. Most of the time LPs don’t ask good questions, so it’s not worth the effort to set up time for each to meet with founders individually. On the other hand, a good LP update would be to host a webinar or live Q&A session. One to many is better than one to one.
90/ There’s a lot of cannibalism in the syndicate market. The same LPs are in different syndicates.
91/ Choose whether you will or will not send LP updates. Set clear expectations on LP updates. And if you do, stick to that cadence. The people who write you the $1-5K checks are often the loudest and demand monthly updates. If you choose not to, one of my favorite syndicate leads says this to their LPs, “We won’t give any LP updates. I’ve done my diligence, and I won’t give information rights. I have a portfolio of hundreds of deals, and I can’t be expected to give deal-by-deal updates every month or every quarter. So if you are investing, just know you’re along for the ride.” Some LPs won’t like that and won’t invest, but mentioning that upfront will save you from a whole lot of headaches down the road.
92/ If you’re setting up an SPV to solely invest in a fund (or where more than 40% of the SPV is going into the fund), all your SPVs can’t against the 249 LPs cap on a fund <$10M and a 99 cap on a fund >$10. But you can invest in funds if you’re setting up an SPV to invest in more than one fund. Context from Samir Kaji and Mac Conwell.
Evergreen/Rolling funds
93/ Just like vintage years/funds are important for traditional funds, vintage quarters matter to your LPs. If they didn’t give you capital during, say Q2 of 2021, when you invested in the hottest startup on the market, your Q1 and your Q3 LPs don’t have access to those returns.
94/ Whereas GPs typically make capital calls to their LPs every 6 months, AngelList’s Rolling Funds just institutionalized the process by forcing GPs to make capital calls every 3 months.
Angel investing
95/ “The best way to get deal access isn’t to be great with founders—it’s to have other investors think you’re great with founders. Build a high NPS with investors, since they have meaningfully more reach than an operator. But of course, fight hard to be great with founders too or else this will all crash down.” – Aaron Schwartz
96/ Make most of your personal mistakes on your own money as an angel (before you raise a fund).
97/ When you’re starting off, be really good at one thing. Could be GTM, growth, product, sales hires, etc. Make sure the world knows the one thing you’re good at. From there, founders and investors will think of you when they think of that one thing. Unless you’re Sequoia or a16z, it’s far better to be a specialist than a generalist if you want to be top of mind for other investors sharing deal flow.
98/ “As an angel investor, it’s more important to be swimming in a pool of good potential investments than to be an exceptionally good picker. Obviously if you’re able to be both, it’s better 🙂 but if you had to choose between being in a position to see great deals and then picking randomly, or coming across average deals and picking expertly, choose the former.” – Jack Altman
99/ “Just like the only way to get good at wine is to drink a lot of wine. The only way to get good at investing is to see a lot of deals.” – Lo Toney.
Disclaimer: None of this is 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.
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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.
Charles Hudson at Precursor told Monique Woodward of Cake Ventures, when she was first raising, “You’re not just raising for Fund I; you’re raising for the first three funds. And act accordingly.” In other words, build long-term relationships. As someone who lives and breathes in the entrepreneurial ecosystem, it’s about giving first. There are many things I have yet to do, but are on my life’s roadmap. And given my humble, but curious beginnings, two of the greatest gifts I can give right now at this point in my career, are:
Time
Valuable connections
… which led me to be a scout years ago. Or as the folks at Techstars say, give first. On a similar wavelength, one of my mentor figures told me when I first jumped into venture, “Think three careers in advance.” You’re laying the groundwork for your future success. Or, as I have sometimes heard it described, the tailwind of your 10-year overnight success.
I try to be helpful to everyone who takes time out of their day to talk to me – be it outbound or inbound. Of course, over time, it’s been much harder for me to meaningfully add value to every person who comes my way. Though my blog is one way to scale and share my knowledge capital, I’m always looking for new ways. So if anyone has any recommendations, I’m all ears. After all, I’m still in my first inning.
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Fast, Simple, Awesome
In the theme of scaling myself, I recently shared with the fellows in our VC fellowship about my workflow as a scout. And, I thought it’d be just as valuable to you my readers as well.
I find myself living in my inbox for at least 3-4 hours a day, with hundreds of email chains by the end of the week. What I needed most was operational efficiency. And, at the end of the day, efficiency is results divided by your efforts.
E = Result/Effort
First things first, tune your email settings, which I first picked up from Blake Robbins‘ blog:
If you have more than one inbox, enable multiple inboxes.
Enable compact view versus default view.
Enable keyboard shortcuts.
The only ones you really need are: E to archive, V to move an email
Enable auto-advance. So that you move on to the next email automatically after performing an action on the previous.
Then, the best thing is you only need three folders: Action Needed, Read Later, and Pending Response.
For any email that takes longer than a minute or two to reply, it goes in the Action Needed folder, like long-form advice/feedback or being stalled by waiting on a reply for a double-opt in. When my day frees up a bit more, usually later in the day, I revisit this folder to address all the other action items.
Read Later includes the mountain of blogs, newsletters, news outlets I’ve subscribed to, but didn’t have time to start reading until later in the day. Occasionally, it includes a founder’s monthly investor update. For the latter, I usually just scroll straight to the asks and see if I can help or not. If not, I read and move on.
For the emails I send out but expect a response in return, Pending Response is the perfect folder for that. This next part is completely optional. But, under the Nudges category, enable Suggest emails to follow up on. Because of Google’s algorithm, it can occasionally end up adding to the clutter when it surfaces up an email that doesn’t need to be followed up on. But if that’s the case, it goes straight into the archive folder.
And yes, for everything else, that don’t go in the above three folders, goes into Archives.
I used to have a million and one folders for startups, jobs, VCs, events, saved articles/newsletters, and more. Which looks great when you’re organizing material and when the inbox search algorithm wasn’t as great as it is now, but it doesn’t speed up the workflow. In fact, it often slowed me down – as I tried to put items in the appropriate folder before responding to my next email. And sometimes, they fit in multiple folders.
For mobile, the only thing you need to change are the Mail swipe actions. Swipe right to archive. And swipe left to Move to [folder].
You can either do the above, or use Superhuman, which has all the above functions. The faster I can get back to people who need my help, the better. Whether it’s me, or someone smarter than me, I try to point founders in the right direction.
Tracking the data
Separately, on an excel sheet, though I don’t track every startup I talk to, I track deals I refer/intro, with the following columns:
Startup
Founder(s)
Date
Stage
Industry
Deck [link]
Referral Source
Who’d I refer to
Secret Sauce – Differentiator/Reason for referral
Result of referral (Pending, Talking, Rejected, Invested, Will revisit)
Date of action [result of referral]
Check size (if applicable)
Round size (if applicable)
I also color-code so that’s it’s easier on the eyes. With the above, I can track:
Most intros/investments/rejections, by:
Industry
Partner
Stage
Referral source
Response Rate
Average Time:
Between intro and investment, per VC
Between intro and conversation
Average check size (per fiscal year)
Average round rise (per fiscal year)
% breakdown by types of compensation
% referral sources from founders who successfully fundraised (via me)
Founders who didn’t successfully fundraise (via me)
In closing
As one of my favorite VC quotes go: “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.” I’ve had the fortune of working with some amazing founders over the years – a number of them who I was never able to help with the limitations of my own knowledge, but through the people I sent them to. Luckily, I largely attribute to my ability to help founders quickly through the above workflow. Hopefully, it can be as useful to you as it has been for me.
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I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?
As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?
Let’s look for a second from the investor side of the table…
Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.
On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.
Up to a $20m fund, there are are many ways to do 3x+
Up to a $60m fund, there are several ways
After $150m fund, there is probably 1 way
— Jason ✨Be Kind✨ Lemkin 🇮🇱 (@jasonlk) April 5, 2017
Why does a VC’s fund strategy matter to you as the founder?
A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.
I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.
If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.
While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:
The uncommon – Differentiators
The common – What everybody else is doing
The uncommon
Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:
Ability to build communities having built large followings
Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
Getting in’s to top executives at Fortune 500 companies
Closing government contracts
Access/domain expertise on international markets
In-house production teams
They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
Ability to get you on the front page of NY Times, WSJ, or TechCrunch
Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
Influencer network
Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
Surprisingly, not as common as I thought, VCs that pick up your call “after hours”
The common
Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:
Money, maybe follow-on investments
Access to the VC’s network (i.e. potential customers, advisors, etc.)
Access to the partner(s) experience
Intros to downstream investors
That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.
Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.
Finding investor NPS
You can find CS:H, or investor NPS, out in a couple of ways:
The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
You find out by asking portfolio founders during your diligence.
Your founder friends are highly recommending said investor to you.
Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quotedBrett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
In closing
“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:
If you were to start a new company tomorrow, would you still want this investor on your cap table?
With three options:
No
Yes
It’s a no-brainer.
And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.
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I wrote an essay exactly a week ago about welcoming tough founder narratives. In it, the prerequisite to play in VC is to be open-minded – to “stay positive” and to “test negative”. I’m reminded of something Tim Ferriss shared in his recent interview with Jim Collins, “It is not that beauty is hard to find, it’s that it is easy to overlook.”
In a world where it is my job to evaluate people who stretch the margins – to stretch “common sense”, it’s easy to be cynical. On the same token, it’s also easy to be incredibly optimistic. As Blake Robbins of Ludlow Venturesputs it, “the best venture capitalists [are] able to perfectly toe the line of optimist vs. pessimist.”
Since then, partly due to the semi-recent influx of investment talks I’ve seen and been a part of – the holiday mad dash, if you will, I’ve had some time to myself to re-center my purpose in the venture world.
The role of an investor
As someone on the investing side of the table, it is our job to check founders’ blind sides. To consider things they may not be aware to even consider. Drawing parallels between seemingly orthogonal parts of the business that we know because we’ve seen hundreds, if not thousands of businesses. For example, if you’re creating a plug-and-play solution – a product whose main selling point is its ease of use, the more you have to spend on your customer success team, the less effective your product is.
Of course, we merely provide insight and context to a situation, but it is the founders who have the final say.
The brand of an investor
Craig Thomas, an LP, wrote on his Substack last month: “Brand is arguably the only thing that resembles a moat in traditional venture capital.” To summarize Nikhil Basu Trivedi words briefly, brand here is constructed by how strong the synergy between the various forms of acquisition channels (i.e. content, performance marketing/ads, virality/word-of-mouth) and the players in the ecosystem (i.e. founders, investors, LPs, operators, talent, etc.) are. In simpler terms, brand is about who knows and how well they know what you stand for.
Increasingly, in the world of venture, while “picking” the right investments via conviction and a thesis still matters, it’s becoming a world of VCs “getting picked“, as Fred Destin of Stride.VC tweets. This is especially true for the deals that investors expected outsized returns on – effectively, uncapped upside.
Craig provides a great graphic for why brand matters. The blue-dotted line, which he calls the Mendoza Line for VC firms, represents y = x + b. And the best VC firms have b’s where b > 1.
He points out that the fallacy here is when firms prematurely scale. Increasing their AUM (assets under management) before establishing and growing their brand. And it’s something I’m not keen on falling for.
Seen in another light, Correlation Ventures did a study that found almost 65% of venture-backed deals fail to return on investment. And only 4% make outsized “magical returns”. Proving that b > 1 is truly easier said than done.
There’s a saying in venture: Luck only gets better with success. It’s largely described in the context that it only takes one epic investment to get you on the radar. And I believe building a successful brand is a leading indicator of success. Of course, having a strong brand and having outsized returns are not mutually exclusive either. In a 2015 Medium post, Blake quotes Brett deMarrais of Ludlow Ventures, which I think acutely sums up what it means to be a great investor. “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
As you might have guessed, I’m on the brand-building phase. Craig wrote: “Brand is reputation and access.” A great brand leads to better deal flow, which leads strong signals for downstream investors. Which leads to a stronger brand. Analogized, it’s what Reid Hoffman has said all these years: “a good product with great distribution will almost always beat a great product with poor distribution.” As an investor, a VC is their own product.
In closing
To quote Ruben Harris’ first boss in Ruben’s recent interview with Garry Tan, “To become a billionaire, help a billion people.” Through a mutual friend, I first met Ruben, Artur, and Timur back in ’18 around the inception of Career Karma and when they were hosting office hours at their apartment for folks who wanted to break into tech. At the inflection point in my career, I went to one of these to meet the individuals I had only been communicating over emails with. And within 5 minutes, Ruben said: “Here’s who you’ve got to talk to…”. And gave me 2 names I hadn’t even considered reaching out to beforehand. Both ended up being great influences on my growth.
True to their mission, even prior to the founding of Career Karma, they’ve been playing the connective tissue between talent, education and occupation. From their podcast to their company, the triple threat have created an impressive brand and community of givers and hustlers. And I highly recommend checking out their podcast to hear some of their community’s stories. Here’s one of my favorites. Congratulations on your A led by Initialized, Ruben, Artur, and Timur!
Similarly, that’s the investor I’m working to be. While I still have miles more to go in building a brand, I believe I’m taking steps in the right direction.
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