I met a family office last week and she asked me a really interesting question. Probably the question a lot of us are asking ourselves. Whether you’re a VC or an LP or someone looking to hire team members.
How does one really understand another person?
The short answer is I’m still looking for the answer to that question myself. And probably will continue to do so till the day I die. Kinda like one of those questions… What is the purpose of life? Is there other sentient life in the universe besides us and what are they like? What happens to all the memories we forget? But I digress, though you can probably guess I’m writing this piece in a good mood 🙂
And so I responded.
Doubt I or anyone really has the answer to that. But there’s that Charlie Munger line: “Show me the incentives, and I’ll show you the outcome.”
My first step in every investment conversation is understanding why someone does what they do. Are they trying to prove someone wrong (ie a parent, an ex, their kids, former boss, etc.)? What is their chip on shoulder if they have any? What gives them joy? What gives them pride? How do they identify themselves? Who do they see themselves as? Is there something they’re unwilling to tell me? Why? What’s stopping them?
And some permutation of the questions below is what usually comes up in conversation. While I don’t have a checklist of questions I have to ask, as long as I’m not sure what my sparring partner’s motivation is, I keep trying to figure out. Hopefully, the below questions serve as inspiration for you. Or are just more questions to your arsenal.
What is your selfless motivation—the one that goes in the Forbes interview? What is your selfish motivation—the one you tell yourself when you’re struggling? Your selfless motivation will inspire you on your best days. Your selfish one will keep you going on your worst.
What do you want to have written on your epitaph? Do you have adjectives or words you particularly like?
What is the greatest regret you’ve had? Why?
What’s the greatest thing you’ve ever done that no one around you knows about? Proudest?
What’s the proudest sacrifice you’ve made that no one knows about?
Is there a question no one has ever asked you but you would like to give the answer to?
What is a question you feel uncomfortable asking me?
Is there a set of questions you would feel uncomfortable if I asked you?
Why did your spouse first fall in love with you?
Why do you think each of your former bosses hired you? Would you say they all hired you for the same reason?
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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.
Having been to a number of talks and panels, my biggest frustration with these occasions is when a moderator asks a VC: “So what do you invest in?”
And the VC would respond, “Good people, good markets.” Or “Ambitious founders tackling ambitious problems.” Or some cousin of it. Well, of course. I’m not saying they’re wrong, but no venture capitalist ever says, “I want to invest in bad people building in bad markets.” It’s the kind of advice and “insight” that’s equivalent to a large company saying their company culture is a “family.” Not wrong, but tells me nothing about what you actually want. The same is true for most advice for investors. And well, advice in the investing world is given quite liberally, without liability and responsibility most of the time.
So I made it a mission to collect pieces of advice that were actually tactical or differentiated. Advice that would make you turn your heads and actually pay attention. And under the right circumstances, actually useful. It’s why I wrote this blogpost’s predecessors:
This is the third one in this 99 series for investors. And, if by chance, you’re a founder reading this, to understand the mentality of a differentiated investor, you might also like the 99 series for founders. But I digress.
In no particular order other than the chronological order I found them, below is the third set of 99 pieces of advice for investors:
1/ “Any company that is pure execution risk without any market risk is not a suitable venture investment.” — Chris Paik
2/ “[In the private markets,] I don’t think we’ve seen a 70% write down yet or 70% of these [private companies] worth less than the cash [they’ve spent to date].” Take public market comparables. To see how much public companies are worth as a function of the money they’ve spent to date, look at the “Cumulative Retained Earnings” (which tells you how much money they’ve burnt over their lifetime) compared to the “Enterprise Value” (or market cap minus the cash they have today). If their enterprise value is less than their cumulative retained earnings, that means they’re worth less than the money they’ve spent to date. — David Friedberg (timestamped 4/21/2023, when he said there are 70% of public companies that are worth less than the cash they’ve spent to date, but we haven’t seen a 70% haircut to private market valuations)
3/ The first best use of any consumer product is crime. — Pre-seed VC
4/ When looking for outliers, “Invest in companies that can’t be described in a single sentence.” — Chris Paik
5/ “Venture investing process as a two-stage process – the first where you ensure you avoid false negatives – that is, you ensure that there are no errors of omission, where you unwittingly pass on meeting a potential winner. The second stage is where you avoid a false positive or errors of commission, that is, picking the wrong company.” — Sajith Pai quoting Karthik Reddy
“How are you using AI? Is it a third-party? Let’s see those terms, contracts, etc.
How are you using customer data? Prior agreements? Prior policies in place? Subsequent policies in place? You could lose the data, the models, and the algorithms. If found in violation by the FTC. States privacy laws like Texas, California, and Virginia also should be looked at.”
7/ “When it’s cooler to be in a startup than in a band, we’re at the top of the market.” — A fund of funds General Partner
8/ “Buy when there is blood in the streets, and sell when there are trumpets in the air.” — A Warren Buffett attribution
9/ Does this founder have 20 years of experience of 20 one-year experiences? Depth vs breadth. Which does the industry/problem they’re building for require?
10/ While there is no one “right” way to run a partnership meeting, beware of conviction-led deals (as opposed to consensus-driven), since partners are incentivized to go into sales mode to convince the rest of the partnership and may make it harder for them to see the flaws in the deal.
11/ In early stage venture, debates on price is a lagging indicator of conviction, or more so, lack thereof.
Price also matters a lot more for big funds than small funds.
Price also matters more for Series B+ funds.
Will caveat that there’s an ocean of difference between $10M and $25M valuation. But it’s semantics between $10M and $12M valuation. How big your slice of the pie is doesn’t matter if the pie doesn’t grow.
Not saying that it’s correlated, but it does remind me of a Kissinger quote: “The reason that university politics is so vicious is because stakes are so small.”
12/ “Judge me on how good my good ideas are, not how bad my bad ideas are.” — Ben Affleck when writing Good Will Hunting. A lot of being a VC is like that.
13/ We like to cite the power law a lot. Where 20% of our investments account for 80% of our returns. But if we were to apply that line of thinking two more times. Aka 4% (20 x 20%) of our investments account for 64% of our returns. Then 0.8% account for 51.2% of our returns. If you really think about it, if you invest in 100 companies, we see in a lot of great portfolios where a single investment return more than 50% of the historical returns.
14/ “Early-stage investing is NOT about mitigating the possibility of failure It’s about discounting the probability of an outsized outcome – what is the size and likelihood of a HUGE win Investing in “safe” companies due to fear of failure is the surest way to a mediocre returns.” — Rick Zullo
15/ “[David Marquardt] said, ‘You know what? You’re a well-trained institutional investor. And your decision was precisely right and exactly wrong.’ And sometimes that happens. In this business, sometimes good decisions have bad outcomes and bad decisions have good outcomes.” — Chris Douvos
16/ When calling a reference and asking about someone’s weakness, “If you were to hire someone under that person, what would be the top traits you’d look for?”
17/ Give founders a blank P&L statement. Tell them that is not their P&L statement; it is their customer’s. And ask them where do they/their product sit on their customer’s P&L statement. Those who are aware of who they are and who they need to sell to do better than those who don’t.
18/ No one has a crystal ball. Well, the pessimists do. They’re right 90% of the time.
19/ “I want the guy who understands his limitations instead of the guy who doesn’t. On the other hand, I’ve learned something terribly important in life. I learned that from Howard Owens. And you know what he used to say? Never underestimate the man who overestimates himself.” — Charlie Munger
20/ “Instead of saying, ‘This risk exists,’ we reframe the risk and ask, ‘What do I have to believe for this to work?’ Doing this transforms risk from a source of fear and unknown into a set of clear assumptions to be systematically tested and de-risked.” For example, “We have to believe we can scale the hardware to XYZ performance metric by ABC date. What are the key engineering constraints bottlenecking that?” — Mike Annunziata
21/ Questions to ask investee (on-list and off-list) references by Graham Duncan:
How would you describe Jane to someone who doesn’t know her?
What’s your sample size of people in the role in which you knew Jane?
Who was the best person at this role that you’ve ever seen?
If we call that person a “100”, the gold standard, where’s Jane right now on a 1-100?
Does she remind you of anyone else you know?
If Jane’s number comes up on your caller ID, what does your brain anticipate she’s going to be calling about? What’s the feeling?
Three attributes I like to keep in mind are someone’s hunger, their humility, and how smart they are about people. If you were to force rank those for Jane from what she exhibits the most to least, how would you rank them?
What motivates Jane at this stage of her life?
If you were coaching Jane, how would you help her take her game up?
If you were going to hire someone to complement Jane doing the same activity (NOT a different role), what would they be good at to offset Jane’s strengths and weaknesses?
How strong is your endorsement of Jane on a 1-10? (If they answer 7, say actually sorry 7s are not allowed, 6 or 8? If the answer is an 8, “What is in that two points?”)
22/ “Neutral references are worse than negative references.” — Kelli Fontaine
23/ “If someone brags about their success or happiness, assume it’s half what they claim. If someone downplays their success or happiness, assume it’s double what they claim.” — George Mack
24/ “Historians now recognize the Roman Empire fell in 476 – but it wasn’t acknowledged by Roman society until many generations later. If you wait for the media to inform you, you’ll either be wrong or too late.” — George Mack
25/ “Joe Rogan and Warren Buffett are both entrepreneurs. But if you switched them, both businesses would fail. Rule of thumb: If a word is so broad that you can’t switch 2 things it describes, it needs unbundling.” — George Mack
26/ Are the founders at the same stage on the Maslow’s Hierarchy of Needs? If not, how have they come to terms with different motivations outside of the scope of the venture itself?
27/ $100K contracts take about 70 days to close. So a founder becomes interesting if they figure out how to close faster. — Gong State of Revenue Growth 2025 report
28/ Beware of “annual curiosity revenue.” “AI companies with quick early ARR growth can lead to false positives as many are seeing massive churn rates.” — Samir Kaji
29/ Data suggests that “never following on” beats “always following on” 63% of the time. “Outperformance for the typical portfolio is 12% better when you don’t follow on (3.52X vs 3.14X).” — Abe Othman
30/ “A successful reserve strategy depends both the chance of picking winners and the step up value at the next round. The stock price multiple * the probably of receiving funding = 1.” If the product of your variables is more than one, you should focus primarily on increasing your check size and ownership at entry. And as such, fewer to no reserves. If you’re below one, you’re better off with more reserves. — Clint Korver
31/ Be aware of “seed-strapping” among AI startups. Your SAFEs may never convert. “Watch for any revisions to *YC’s* SAFE or *YC’s* side letter (note: YC has a secret SAFE and side letter documentation not available on on their website, so careful with conclusions).” — Chris Harvey
32/ In underwriting AI companies in 2025, ARR and run rate are no longer signal. Instead, look at sales efficiency (how long it takes you to implement your product; if you charge more or double the price, will customers still buy your product?), the cost to acquire that revenue, and net dollar retention (gross churn, land and expand). — Nina Achadjian
33/ “The ‘raise very little’ strategy only works if you’re in a market that most people believe (incorrectly) is tiny or unimportant. If other people are paying attention, you have to beat the next guy.” — Parker Conrad
34/ Instead of asking founders/references what are their weaknesses, ask for 2-3 positive words that describe them and 2-3 positive words that DO NOT describe them.
35/ “You want to be pre-narrative. You want to position your capital in an area where the supply of capital increases over time and where those assets will be traded at a premium.” — Albert Azout
36/ “For Hard Tech companies, the only metric that matters before Series B is the ‘Speed of Hiring Impressive People’, aka the ‘SHIP’ rate.” — Mike Annunziata
37/ Beware of co-CEOs and founders who used to be VCs where their past firm isn’t investing. — Sriram Krishnan
38/ “If you don’t pay great people internally, then you’re a price taker.” — Ashby Monk
39/ “Buying junk at a discount is still junk.” — Abe Finkelstein
40/ “What do you do when you don’t know anything, you haven’t met anybody, you have no context, the human brain starts inventing rationale.” — Narayan Chowdhury
41/ “The bigger you get, the more established you get, the more underwriting emphasis goes into how this team operates as a structure rather than is there a star?” — Matt Curtolo
42/ “Price reflects the inefficiencies of the market.” — Albert Azout
43/ “You want to be pre-narrative. You want to position your capital in an area where the supply of capital increases over time and where those assets will be traded at a premium.” — Albert Azout
44/ “We don’t want a slow no. A slow no is bad for everybody.” — Sean Warrington
45/ “Today’s world is unpredictable, and this is as stable as it will ever be again.” — Seth Godin
46/ “Alfred is the worst e-commerce investor at Sequoia as he knows too much & I am the best biotech investor at Sequoia as I know nothing about biology.” — Roelof Botha, quoted by Finn Murphy
47/ “Since the job is not about simple pattern-matching but about finding true outliers, seniority and experience don’t guarantee success.” — Ian Park
48/ As your fund size grows, do be wary of investing in competing portfolio companies. While it’s always been a tradition in venture to not to, times may be changing. Be sure to be transparent and know how to separate church and state. “This is an issue where the business model for funds is at odds with what most founders want.” Ways you can do so. By Charles Hudson.
“Use a seed fund or scout strategy to meet as many promising, early-stage companies as you can.
“Focus on investing in Series A and Series B (instead of seed) rounds and pay up to get into the winners when it’s clear which companies are working.
“Buy secondary positions in the companies that matter but that you missed.
“Invest in competitors but have different investors take board seats and create firewalls to limit information spillover.”
49/ “I deeply subscribe to, ‘There’s always another train leaving the station.’” — Wendy Li
50/ “Alpha’s three things: information asymmetry, access, and, actually, taxes.” — Vijen Patel
51/ The worst mistake you can make as an early-stage investor is to believe you’re the smartest person in the room.
Fundraising from LPs
52/ “If you’re at 75-80% committed and then you say there’s a single close, that will drive urgency. If you’re at 10 to 30 to 40% committed, and you say there’s a single close, you have no catalyzing power. There’s just so much dirt to hoe. When I went out, when people would ask, ‘When are you closing?’ I would say, ‘We will close on this particular date and ideally it will be a single close. And here is where I am. I’ve closed X% of the pipeline and the total value of the pipe of interested investors was this amount of money.’ The goal was to show with a relatively small conversion rate, I could get to a single close.” — Tomasz Tunguz
53/ What to prepare for the due diligence questionnaire (DDQ) with institutional LPs. — Chris Harvey
54/ What Minal Hasan includes in the fund diligence room (specifically for Fund IIs)
Primary materials
Due Diligence Questionnaire
Pitch Deck
Appendix to Pitch Deck
Detailed Investment Thesis & Strategy
Term Sheet
LPA
Subscription Agreement
Legal
Incorporation Documents for LP, GP, and MC
Entity Org Chart
Team
Team Bios
Prior Partner Investment Performance
Hiring Plan
List of Advisors
List of References
List of Co-investors
List of Service Providers
Portfolio
One-pager on each company
Deal Pipeline
Governance
Board/Board Observer Seats
Policies
Sample Investment Memos
Sample Quarterly Report
Sample Capital Account Statement
Sample Capital Call Notice
Sample Distribution Notice
Financial Docs
Budget
IRR Spreadsheet
IRR Benchmarking
IRR Letter certified by accountant
Marketing
Press mentions
Authored thought leadership
55/ When fundraising, don’t share which other LPs you’re talking to. Even if LPs ask who you’re talking to. Unless money is in the bank, nothing counts. Tell the other LPs that you have non-disclosures with all your other LPs, but that you have a lot of interest. If you share the marquee names, the other LPs’ will base their decision on the closing of those LPs. If they commit, great. If not, it will materially impact how the new LPs view your fund.
56/ When working with overseas LPs, you should ask for their citizenship, where their capital is domiciled at, and who is the ultimate beneficial owner if not the person you are pitching? This would help you navigate CFIUS rules and knowing who you’re actually bringing on board.
57/ You should ask prospective overseas LPs what their citizenship is and who the ultimate beneficial owner (UBO) is, if not the person you are talking to, as you are doing diligence on your prospective LPs.
58/ “Going to see accounts before budgets are set helps get your brand and your story in the mind of the budget setter. In the case of the US, budgets are set in January and July, depending on the fiscal year. In the case of Japan, budgets are set at the end of March, early April. To get into the budget for Tokyo, you gotta be working with the client in the fall to get them ready to do it for the next fiscal year. [For] Korea, the budgets are set in January, but they don’t really get executed on till the first of April. So there’s time in there where you can work on those things. The same thing is true with Europe. A lot of budgets are mid-year. So you develop some understanding of patterns. You need to give yourself, for better or worse if you’re raising money, two to three years of relationship-building with clients.” — David York
59/ “Getting an LP is like pulling a weight with a string of thread. If you pull too hard, the string snaps. If you don’t pull hard enough, you don’t pull the weight at all. It’s this very careful balancing act of moving people along in a process.” — Dan Stolar
60/ “Things that break the rules have a bigger threshold to overcome to grab the reader’s attention, but once they do, they tend to have a stronger, and more dedicated following. Blandness tends to get fewer dedicated followers.” — Brandon Sanderson on creative writing, but applies just as well to pitches
61/ In all great stories, the protagonist (in the case of a pitch, you) is proactive, capable, and relatable. Your pitch needs to show all three, but at the minimum two out of the three. — Brandon Sanderson
62/ “Data rooms are where fund-raising processes go to die.” Prioritize in-person and live conversations. When your investor asks you for documents, ask for 15 minutes on their calendar so you can “best prepare” the information they want. If they aren’t willing to give you that 15 minutes, you’ve lost the deal already. — Mark Suster
63/ “Funds can start with a private offering, then move to 506(c) after the prior offering is completed without a waiting period—new Rule 152(b) allows for a quick switch, you just can’t do them at the same time or start with Rule 506(c) then move to 506(b).” — Chris Harvey
64/ “Set your own agenda or someone else will.” — Melinda Gates
65/ To address key person risk if the GP, or one of the GPs, has a debilitating health condition within the fund term, include the below in the LPA, by Shahrukh Khan: Each Key Person shall, as a condition to their designation, represent and covenant to the Partners [inclusive of the GP and LPs] that, to the best of their knowledge, they are not currently experiencing any medical condition reasonably expected to materially impair their ability to perform their duties over the Term [usually 10-12 years] of the Fund. If, during the Investment Period [when the fund is actively making investments], a Key Person is diagnosed with or undergoes treatment for a condition that materially impacts their ability to fulfill their responsibilities, the General Partner shall promptly disclose to the Limited Partners that a Health-Related Key Person Event [we could define this broadly] has occurred. The specifics of the health condition need not be disclosed [maybe except to the LPAC if there is one?]. Upon such notification, the Investment Period will be suspended and cannot continue without the express approval of the Limited Partners. [I feel like this could mean that no new investments can be made until LPs review and vote on whether to proceed with the fund’s activities in light of the health-related situation.]
66/ When asking LPs what they invest in, sometimes what they don’t invest in is more helpful than what they say they invest in. Most LPs are trained to be generalists — by sector, by stage, by asset class — so asking what they do invest in often nets an answer like “We invest in everything” or “We only invest in the best,” which are often less helpful tells when you’re trying to figure out if you’re a good fit for them or not.
67/ If you have a 3(c)(1) fund, “if an investor owns >10% of your fund, the SEC’s look-through rule requires you to count ALL underlying beneficial owners toward your 100-investor limit.” The workaround is you create a side letter for large LPs that includes this statement: “The Investor’s Capital Commitment shall equal the lesser of [check size] or 10% of total fund commitments.” — Chris Harvey
68/ At your AGM, talk about categories of VCs you admire. For instance, “inception funds” or “superscale funds.” And the logos you admire in each category. Then show the funds that actually follow after your capital. This builds rapport with your LPs and that you’re not just shooting from the hip, where it “just so happens” that some random awesome fund follows your capital. Inspired by Gil Dibner.
69/ “If an LP isn’t following up with an ask for the data room, refs and lays out a path to a potential next meeting, then it’s a pass. Hint — don’t offer the dataroom. I always say yes.” — Endowment Eddie
70/ “[LPs] are underwriting your ability to create signal under uncertainty. If your fund slide can’t do that, your deck is already leaking trust.” — Thorsten Claus
71/ “I’m not here to tell you about Jesus. You already know about Jesus. He either lives in your heart or he doesn’t.” — Don Draper in Mad Men
72/ On GPs answering questions on operational excellence… “The best answer I could ask from a GP is for them to be super honest and say, ‘These are the people I’ve leaned on to help me understand what best practices look like.’” — Nicky Sugarman
73/ When reporting numbers, it’s helpful to have more than one TVPI number. One number should represent last round valuation prices. Another should be the number you believe is authentic to you, which likely includes some companies that have been proactively written down and revenue multiples that reflect where the company is currently at. Nevertheless, always explain your rationale as to why.
74/ When you’re fundraising from institutions, expect “27 months from first meeting to wire, 4.7% of prospects commit,” and “annual costs [of] $2.1M+ in infrastructure.” — Pavel Prata
75/ “Speed to fundraise does not always equate to a strong investor.” — Lisa Cawley
Fund strategy / portfolio construction / exiting
76/ If you have a follow-on strategy or a reserve strategy, track your “follow-on MOIC.” Return hurdles are 10x MOIC for initial capital. And 4-5x MOIC for follow-on capital. The more you invest in follow on, the less TVPI you’ll have. “If you’re going from pre-seed to seed, you’re tracking to a 5x MOIC. If you’re going from a seed to Series A, that goes down to 3x.” — Anubhav Srivastava (timestamped Apr 7, 2023)
77/ The reasons Fund I’s and II’s outperform are likely:
Chips on shoulders mean they hustle more to find the best deals. They have to search where big funds aren’t or come in sooner than big funds do.
Small fund size is easier to return than a larger fund size.
Rarely do they have ownership targets (nor do they need significant ownership to return the fund). Meaning they’re collaborative and friendly on the cap table, aka with most other investors, especially big lead investors.
Price matters less. Big funds really have to play the price game a little bit more since (1) likely to be investing in multiple stages with reserves, and price matters more past the Series A than before, and (2) they’re constrained by check size, ownership targets, and therefore price in order to still have a fund returner.
78/ “Strategy is choosing what not to do.” — Peter Rahal
79/ “We expect GPs to have 1% ownership for every $10M in fund size.” — Large multi-billion family office
80/ “Exiting a position in a company to return DPI to LPs is not a reflection of your stance on the company, but your stance on the market.” — Asher Siddiqui
Fund structure
81/ If you have more than $10M and are not a solo GP, consider separating your GP and management company entities. While there are about $5000-10,000 in costs per year, separating fund structures allows for more optimal tax planning, better liability protection, continuity across GP entities with future funds, and flexibility to adopt W2 employment for future employees which is hard to do under a partnership structure. — Chris Harvey
82/ If you’re a GP at a large fund making >$1-2M in annual fees, consider two metrics: (a) AUM times management fee divided by number of GPs, and (b) NPV of potential future carry on that AUM divided by number of GPs. You never want (a) to be greater than (b).
Portfolio Support
83/ “Just because I have a front row seat at a championships [basketball game] doesn’t mean I can coach an NBA team.” — Brian Chesky
84/ “The thing about working with self-motivated people and driven people, on their worst day, they are pushing themselves very hard and your job is to reduce the stress in that conversation.” — Nakul Mandan
85/ “The median value-add is about zero. The mean is less than zero. Most things work because they just work (right set of users wanted something at the right time) and the executive team builds the right culture to hire a great team to operate in that market, not because of what a VC does. Value-added service is ‘product as marketing’ for 90% of investors who pitch it.” — Kanyi Maqubela
86/ Get access to as many different offices of your portfolio company’s potential customers as possible. Even better if you know them so well, they give you their office keys. — John Gleeson
87/ “I find most meetings are best scheduled for 15-20 minutes, or 2 hours. The default of 1 hour is usually wrong, and leads to a lot of wasted time.” — Sam Altman
89/ If you don’t know what to ask your LPAC, ask about extensions on fund length (i.e. past 10+2 years), exceeding limits on company concentration and recycling, investing in startups across funds, and early DPI. — Hunter Walk
90/ At the annual summit… “When you speak on market/themes, I don’t want to hear from the managing partners. Bring out your young guns and the members of the team who are your ground game/first line.” — Endowment Eddie
“First extension: 63% of funds surveyed allow GPs to authorize the first extension at its sole discretion, typically for one year.
Second extension: 42% of funds surveyed require approval from the LPAC to authorize the second extension.
Third extension: 41% of funds surveyed require consent from the fund investors to authorize the third extension. Note that further extensions can always be approved by an amendment to the fund documents, but this would require consent from at least 50% and usually 75% of investors by commitment or interest.”
92/ “Too many calls I get on, it’s a re-hash of what the strategy is. Assume if I’m taking the call, I actually spent five minutes reminding myself of who you are and what you do.” — Chris Douvos
93/ “One thing I hate is when I meet with someone, they tell me about A, B, and C. And then the next time I meet with them, it’s companies D, E, and F. ‘What happened to A, B, and C?’ So I’ve told people, ‘Hey, we’re having serious conversations. Help me understand the arc.’ As LPs, we get snapshots in time, but what I want is enough snapshots of the whole scene to create a movie of you, like one of those picture books that you can flip. I want to see the evolution. I want to know about the hypotheses that didn’t work.” — Chris Douvos
94/ “Every letter seems to say portfolios have ‘limited exposure to tariffs.’ The reality is we’re seeing potentially the breakdown of the entire post-war Bretton Woods system. And that’s going to have radical impacts on everything across the entire economy. So to say ‘we have limited exposure to tariffs’ is one thing, but what they really are saying is ‘we don’t understand the exposure we have to the broader economy as a whole.’” — Chris Douvos
95/ “Bad performance is explainable, but operational failures erode trust and your LPs aren’t going to re-up.” — Liz Ferry
Building a team
96/ “You can’t exceed one associate per partner and expect those associates to have real influence.” — Mike Dauber
97/ “Scaling is not synonymous with increasing fund size. To me, scaling means you’re increasing in sophistication. You’re increasing in focus. And that’s really a sign of maturity and fund size is a byproduct of that.” — Lisa Cawley
Compensation
98/ In a 2024 survey, in regards to junior team members’ compensation, “AUM matters less than you think.” There’s only a 17% pay bump on base pay for associates between $1.5B funds and $156M funds. In addition, levers that can boost a GP’s take-home pay include GP staking and cashless contributions. — Chris Harvey, with reference to Deedy Das and Venture5 Media
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.
This is my third iteration of the 99 series for founders. You can find the first two here and here. The premise for this series was simple. The best, most insightful, unsuspecting lessons are hidden in the deepest, darkest corners of the internet. Hell, many more are hidden in rooms behind closed doors. The goal of this 99 series is to unveil those. Advice you’ve likely never thought about, and most likely have never heard of.
While you don’t need to read all the below at once, it’s helpful to keep the below at your fingertips for when you do need them. As always, unless the advice is not cited, all advice has been backlinked to its source, in case you want the longer, sometimes more nuanced version.
To make it easier for you, I’ve also pooled the advice in categories, depending on your needs:
P.S. Have I started the next one in the 99 series for founders? Yes, I have. Stay tuned!
Fundraising
1/ “Once you take venture capital, the venture capitalist’s business model is your business model. You’ve got to get liquid at a number that makes sense for them. High valuations are good because you take less dilution. Et Cetera. But the reality is that when you have a high valuation, that starts to eliminate your options. ” — Chris Douvos
2/ The employee option pool is easier to negotiate than asking an investor to take less ownership. The pool at the time of term sheet comes out of founder/team’s equity. If the pool becomes completely allocated post-investment, you need to go back to the board and ask for a larger pool, and everyone (you and VCs) gets diluted then.
3/ Beware of the “senior pari-passu,” which means that that investor gets paid paid back before everyone else on the preference stack AND they get equal footing with all the other investors. The thing to watch out for isn’t necessarily for the mechanics of the term itself, but the fact that if you let one investor have that in this round, every subsequent round, investors then will ask for that as well.
4/ Repeat founders often ask for co-sale right immunity (usually 15%) when putting together term sheets. Co-sale rights are usually provisions investors add in to prevent you, the founder, from liquidating before a liquidity event. The rights dictate the when you want to sell your equity, the investor has first dibs to buy your equity AND if not, they can also sell their equity alongside you. Because there are additional provisions, most buyers may not want to put in all the work to diligence just to have an existing investor buy your equity. And also, if your existing investors are also selling, it sends a negative signal to potential buyers.
5/ If any corporates own more than 19.5% of a company, they have to write you off as a subsidiary of the corporate and report your losses as their losses. So they’re less valuation sensitive and care less for ownership.
6/ You’re likely not the only one in market with your solution. If a competitor raises a massive round, that’s market validation. And not a reason to change your pitch. You should only change your pitch if your customers are opting for your competitor, but not if VCs are talking about your competitor. If VCs ask about your well-funded competitor, say “My customers don’t bring this up with me. But rather they bring up incumbents and this is why we’re tackling this space in full force.”
7/ “Once you have $500k+ raised, spend 2/3 of your time on funds, 1/3 on small checks.” — Ash Rust
8/ Beware of SAFE overhangs. You probably don’t want to raise more than 25% on SAFEs in comparison to the next priced round. — Martin Tobias
9/ Don’t say “The market is so large, there are room for many winners.” To a VC, that’s code for “This founder is getting their ass handed to them by competition.” — Harry Stebbings
10/ If a large number of your employee base do not have the experience of being in a startup, “make a choice about how/when/if to be transparent about the things that are happening (good and bad) and the level of startup experience within the group will be a critical factor in whether the decision to be transparent turns out to be a good one.” — Javier Soltero
11/ To fundraise, even if your last X number of months sucked, you need to show just three months of great growth prior to the fundraise. — Jason Lemkin
12/ Rough benchmarks for enterprise revenue growth for things to be interesting to VCs (— Jason Lemkin):
Before $1M ARR, growing 10%-15% a month
Around $1M ARR, growing 8%-10% a month or so
Around $10M ARR, ideally doubling
13/ “An investor is an employee you can’t fire.” — Vinod Khosla
14/ “Things that break the rules have a bigger threshold to overcome to grab the reader’s attention, but once they do, they tend to have a stronger, and more dedicated following. Blandness tends to get fewer dedicated followers.” — Brandon Sanderson on creative writing, but applies just as well to pitches
15/ “Great worldbuilding with bad characters and a bad plot is an encyclopedia. Great characters and a great plot with bad worldbuilding is still often an excellent book. […] The fact that time turners break the entire universe of Harry Potter wide open does not prevent that from being the strongest book in the entire series.” — Brandon Sanderson on story plots, but also applies to markets and founding teams. Replace worldbuilding with market. Replace characters with team, and plot with product-market fit or founder-market fit.
16/ In all great stories, the protagonist (in the case of a pitch, you) is proactive, capable, and relatable. Your pitch needs to show all three, but at the minimum two out of the three. — Brandon Sanderson
17/ “Data rooms are where fund-raising processes go to die.” Prioritize in-person and live conversations. When your investor asks you for documents, ask for 15 minutes on their calendar so you can “best prepare” the information they want. If they aren’t willing to give you that 15 minutes, you’ve lost the deal already. — Mark Suster
18/ “Second conversation with a serious investor is usually around what are you trying to prove and who are you trying to prove that to.” — Fund III GP
19/ “Set your own agenda or someone else will.” — Melinda Gates
20/ “The ‘raise very little’ strategy only works if you’re in a market that most people believe (incorrectly) is tiny or unimportant. If other people are paying attention, you have to beat the next guy.” — Parker Conrad
21/ Beware of stacking SAFEs. And be sure to model out that you as the founder(s), won’t dip below 50% ownership before the Series A. This is a more common problem than most founders think. Inspired by Itamar Novick.
22/ “Before you send a single email or take your first call, you should have a fully-researched pipeline CRM with a minimum number of qualified target investors.” — Chris Neumann
Pre-Seed: 100 – 150 qualified target investors (a mix of angel investors and VCs)
Series A: 60 – 80 qualified target investors (all VCs)
Series B: 40 – 60 qualified target investors (all VCs)
Governance
23/ Find your independent board member before shit hits the fan (usually when your investor representation and you the founders disagree). Because by the time you find an independent board member when things go south, your investor will recommend someone who’ll most likely take their side. Board members recommended by VCs usually have long standing relationships with investors and are likely to sit or have sat on other boards with that investor previously. And because they have a longer standing relationship with that VC, they will likely side with the VC when there’s a disagreement.
24/ “Board members can’t make companies but they can destroy companies.” — Brian Chesky
25/ Ask your prospective investors how long they plan to be at their firm. The worst thing that can happen is you bring on a board member and they switch firms after a year, then you’re left with a someone you didn’t pick. It’s probably also a good idea to let the investor have their board seat, contingent on them working at that firm. — Joseph Floyd
26/ Consider incorporating the company in Nevada or Texas, as Delaware courts are becoming more judiciously activist. Especially consider this if you are either politically exposed or you want more leeway and protection as a founder. — Elad Gil
27/ “When you build with other people’s money, you don’t just owe them outcomes—you owe them truth. And selling your cash to a zombie isn’t a strategy. It’s a story you tell yourself to avoid facing the music.” — Lloyed Lobo
Hiring/Team/Culture
28/ “If you raise a lot of money, do a hiring freeze and don’t hire anybody for 90 days. Money’s not going to solve your problems. You are going to solve them.” — Ryan Petersen
29/ “If you had to hire everyone based only on you knowing how good they are at a certain video game, what video game would you pick?” — Patrick O’Shaughnessy. People’s choices can be quite revealing. You can likely ask the same question for any activity/sport/topic of choice.
30/ “I hate surprises. Can you tell me something that might go wrong now so that I’m not surprised when it happens?” — Simon Sinek. A great question on how to ask weaknesses without candidates giving you a non-answer.
31/ Beware of candidates who can’t stick to a job for at least 18 months. — Jason Lemkin.
32/ Beware of candidates who love what’s on their resume. You want to be sure you’d hire them even if they didn’t have those logos/titles. — Jason Lemkin.
33/ Beware of candidates who don’t have good reasons to leave their last job. Or any job for that matter. Also watch out for candidates that leave because of salary. — Jason Lemkin.
34/ As soon as you raise capital, you should move out of a coworking space. Because as long as you are there, you cannot shape your company’s culture when the culture of the rest of the coworking space is more prevalent. — A VC who was the first institutional check into 5+ unicorns
35/ “First time founders brag about how many employees they have. Second time founders brag about how few employees they have.” — Dan Siroker.
36/ 20 years of experience is more impressive than 20 one-year experiences for deeply technical problems.
37/ 20 one-year experiences is more impressive than 20 years of experience for cultural (consumer) problems.
38/ Great founders don’t delegate understanding. Senior execs aren’t hired until founders themselves prove out the playbook.
39/ Inspired by Marc Randolph. Set boundaries around your work. Ask yourself, do you want to be starting your 7th startup and their 7th wife/husband? If not, be uncompromising with boundaries around work and life. Usually, I see most founders not have that versus most tech employees, who set boundaries almost in the opposite direction.
40/ “My two rules of thumb for CEOs (and all leaders) are:
‘if you feel like a broken record, you’re probably doing something right’ and
‘always craft your comms for the person who just started this week.'” — Molly Graham
41/ At Starbucks, no matter what seniority you are, every employee has lowercase titles. And it isn’t a typo.
42/ If you don’t know how to hire a 10/10 CTO looks like, find a world-class CTO then have them help you interview CTO candidates. It’s important to nail this right in the beginning no matter how long that takes. — Jason Lemkin
43/ “People duck as a natural reflex when something is hurled at them. Similarly, the excellence reflex is a natural reaction to fix something that isn’t right, or to improve something that could be better. The excellence reflex is rooted in instinct and upbringing, and then constantly honed through awareness, caring, and practice. The overarching concern to do the right thing well is something we can’t train for. Either it’s there or it isn’t. So we need to train how to hire for it.” — Danny Meyer
44/ Prioritize references over interviewing when hiring. “Executives have more experience bullshitting you than you have experience detecting their bullshit. So it’s like an asymmetric game where you’re a white belt fighting a black belt and they’re just going to punch you in the face repeatedly.” — Brian Chesky
45/ At the end of a candidate interview process, try to convince them out of joining the company. If you only paint them the rosy picture of joining, even if they join, they’ll joined disillusioned and with expectations that this job will be a country club, which it shouldn’t be.
46/ One of the best job ads out there by Ernest Shackleton, a 19th/20th century Antarctic explorer: “Men wanted for hazardous journey, small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful, honor and recognition in case of success.”
47/ “The health of an organization is the relationship between engineering and marketing. Or in enterprise, the relationship between engineering and sales.” — Brian Chesky
48/ “Great leadership is presence, not absence.” — Brian Chesky
49/ “I want the guy who understands his limitations instead of the guy who doesn’t. On the other hand, I’ve learned something terribly important in life. I learned that from Howard Owens. And you know what he used to say? Never underestimate the man who overestimates himself.” — Charlie Munger
50/ “If you pay great people internally, you can push back on the external fees. If you don’t pay great people internally, then you’re a price taker.” — Ashby Monk
51/ “Expect 60% of your VPs to work out — and that’s if you do it right.” — Dev Ittycheria
52/ Be generous with startup equity for your first 10 employees, “as much as leaving 30% of the pool to non-founders.” Be willing to give your early engineers 3-5% of equity, as opposed to only 50-100 basis points. — Vinod Khosla
53/ “A company becomes the people it hires. […] Experience has shown me that successful startups seldom follow their original plans. The early team not only determines how the usual risks are handled but also evolves the plans to better utilize their opportunities and to address and redefine their risks continuously.” — Vinod Khosla
54/ “I often tell pensions you should pay people at the 49th percentile. So, just a bit less than average. So that the people going and working there also share the mission. They love the mission ‘cause that actually is, in my experience, the magic of the culture in these organizations that you don’t want to lose.” — Ashby Monk
55/ “Innovation everywhere, but especially in the land of pensions, endowments, and foundations, is a function of courage and crisis.” — Ashby Monk
56/ “You stay obstinate about your vision; you stay really flexible about your tactics. […] Nobody ever got to Mount Everest by charting a straight path to the peak.” — Vinod Khosla
What criteria would you use to hire someone to do this job if you were in my seat?
How would your spouse or sibling describe you with ten adjectives?
I think we’re aligned in wanting this to be a good fit, you don’t want us to counsel you out in six months and neither do we. Let’s take the perspective of ourselves in six months and it didn’t work. What’s your best guess of what was going on that made it not work?
What are the names of your last five managers, and how would they each rate your overall performance on a 1-100?
What are you most torn about right now in your professional life?
How did you prepare for this interview?
How do you feel this interview is going?
58/ Empower your entire team to be owners in the success of your company. “Take ownership and don’t give your project a chance to fail. Dumping your bottleneck on someone and then just walking away until it’s done is lazy and it gives room for error and I want you to have a mindset that God himself couldn’t stop you from making this video on time. Check. In. Daily. Leave. No. Room. For. Error.” — Jimmy Donaldson “Mr. Beast”
59/ “CEOs are pinch hitters. We should be working on the things that nobody else can or nobody else is.” — Jensen Huang
60/ It’s only after you’ve seen excellence first hand do you no longer need to outsource the recognition of excellence to others (brands, titles, other references).
61/ “When you’re speaking with backchannel references, you know that some of these are also mentors to the candidate, and accordingly will have influence. They’ll likely call the candidate right after your call anyway to tell them how you’re thinking about them. So ask the pointed questions you need to, but then take 10 mins at the end to also tell this person what you’re building, why it could be a special company, the momentum you have in the market and why you’re particularly excited about the candidate for this role. Get the reference excited about this opportunity for the candidate.” — Nakul Mandan
62/ “Every meeting with a great candidate is a buy-and-sell meeting, and you want to build their excitement about you to its peak right before you make the offer. Making the offer too early—before they’re fully sold—can be just as bad as losing momentum by moving too slow on someone you know you want.” — Samantha Price
63/ On co-founders being in the same boat with no Plan B… “We actually wrote this in the shareholder’s agreement and it lived there all the way until the IPO. If one of us took another job or a side hustle or took any income from any other source, we should have to give up our shares. We wanted to be fully committed. If we’re going to fail, we’re not going to fail for lack of effort.” — Olivier Bernhard
64/ “You have made a mis-hire if your Customer Success leader doesn’t understand the pains, needs, and desires of your customers as well as you do within 90 days.” — John Gleeson
65/ Ask a candidate to explain a technical challenge and to talk through how they’d approach it. Then ask them to think through how they’d do it again – but in half the time.” — Keller Rinaudo Cliffton / Sarah Guo
66/ “Your org chart either accelerates or impedes your velocity. Conway’s Law inevitably shapes output—teams structured for pace will produce systems designed for pace.” — Sarah Guo
67/ “Just look at ARR per Employee. It’s the canary in the unicorn coal mine.” — Lloyed Lobo
68/ While your co-founders should excel in areas you lack and love growing further on that wavelength, they must also at some point in their career want to grow in the area you excel in. Otherwise, they’ll never truly appreciate the work you do. And unspoken expectations lead to quiet resentments.
69/ “I find most meetings are best scheduled for 15-20 minutes, or 2 hours. The default of 1 hour is usually wrong, and leads to a lot of wasted time.” — Sam Altman
70/ “Strategy is choosing what not to do.” — Peter Rahal
71/ When hiring talent, ask yourself: Are this candidate’s best days ahead of her or behind her?
Product/Customers
72/ The best way to slow a project down is to add more people to it.
73/ “Never delegate understanding.” — Charles and Ray Eames
74/ There’s this great line in a book I was recently gifted by a founder. “There is only one boss — the customer. And he can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else.”
75/ A community or 1000 true fans built without big brands and logos is far more impressive than a community built by leveraging someone else’s brands.
76/ If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good. A compelling value prop is a comment on high operating margins. You shouldn’t need to spend a lot on sales and marketing. So the metrics to highlight would be good new ARR/S&M, LTV:CAC ratios, payback periods, or percent of organic to paid growth. — Pat Grady
77/ “If we don’t create the thing that kills Facebook, someone else will.” — Mark Zuckerberg, via a red book titled Facebook Was Not Originally Created to Be a Company, given to every employee pre-IPO
78/ The best sales people are often those who communicate the most with the engineers and product team. They tend to understand the product the best. Rule of thumb should be 80% inside, 20% outside. — Former founder with a 9-figure exit
79/ “Concentration of force is the first principal strategy. Spreading yourself too thin means not concentrating resources on the sales you could win because you are spreading time on lower quality prospects. Doing 90% of what it takes to win doesn’t result in 90% of the revenue, it results in zero. You must pick the battles you can win and win the battles you pick.” — Rick Page
80/ “One of our clients said this about a large defense contractor with multiple subsidiaries: ‘having business at one business unit not only doesn’t help me at the next one, it actually hurt me. They hate each other so much that if one business unit is for me, the other ones are against me. But they are all united in one value: they hate corporate. So the potential for working my way to the corporate offices and coming down as their worldwide standard is impossible in an account like this.” — Rick Page
81/ “Pain doesn’t come from the business problem, it comes from the political embarrassment of the business problem. If the pain or lost opportunity is not visible, then it’s not embarrassing and it will not drive business buying activity to a close.” — Rick Page
82/ “Mr. Prospect, we’ve announced a 6% price increase. We’d hate to see you buy the same proposal later at a higher price, so we really need to get this business in by the end of the quarter to secure this price. — Not only is this technique predictable, but after months of building value for your solution, you have now commoditized yourself. You have turned it from value to price on order to close business at the end of the quarter. Once you have offered a discount, you have announced what kind of vendor you are and the only question now is the price. Let the games begin.” — Rick Page
83/ “You must refocus off the imagined political benefit of a lower price, and on the longer term benefits of the overall project. ‘Mr. Prospect, how are you measured and what you will be remembered for three years from now won’t be the price, it will be the success of the project. If this goes well, the cost will be a detail. If the project goes poorly, no one will say ‘well at least we got a bargain.”” — Rick Page
84/ “Try not to take no from a person who can’t say yes.” — Rick Page
85/ Stacking the bricks, a Steve Jobs’ concept. If you have a pile of bricks and lay them on the ground, then no one will notice the ground. If you stack them up vertically, you create a tower; and everyone will notice the tower. Consider this when you have product features, launches and fixes.
86/ As of Q4 2024, it takes about 70 days to close a $100K contract for enterprise customers. Use that as your benchmark. If you’re faster, brag about it. If you’re slower than that, figure out how to close faster. — Gong State of Revenue Growth 2025 report
87/ Beware of “annual curiosity revenue.” “AI companies with quick early ARR growth can lead to false positives as many are seeing massive churn rates.” — Samir Kaji
88/ Your job is to get to innovation retention before your incumbents get to innovation.
89/ If you didn’t help create the proposal with your customer, you’ve already lost.
90/ People don’t change when they’ve made a mistake. People change when there’s a public embarrassment of them making a mistake.
91/ Know your customers intimately. Go visit your customers as often as you can. In fact, get as many passes / office keys to their offices as possible, and spend time with them.
92/ “Every other week, we have a customer join for the first 30 minutes of our management team meeting: they share their candid feedback, and ~40 leaders from across Stripe listen. Even though we already have a lot of customer feedback mechanisms, it somehow always spurs new thoughts and investigations.” — Patrick Collison
93/ “I see a lot of b2b startups moving to multiyear pricing from monthly or annual. I think this is usually a bad idea. It hides customer delight issues. It lengthens sales cycles. Overall, it just reduces the signal startups need.” — Brian Halligan
94/ Customers will still highly rate your customer service even if they didn’t get what they wanted if you show you care. That you care for their plight, and you really try to help them get what they want. — Simon Sinek
Competition
95/ “When you get outreach from multiple VC associates out of nowhere, your competitor is out raising and they’re just doing their homework.” — Siqi Chen
Legal
96/ “If you’re selling the business, tell as few people as possible and do everything you can to make sure past employees or former business associates do not find out.” Beware of moths who can start lawsuits. — Sammy Abdullah
97/ When you’re working with boutique investment banks, to protect yourself in case the banker sues when you choose to go with a different buyer… “Make sure the banker contract says they only get paid on intros they make directly and have a 6 month tail. Terminate any banker agreement as soon as they’re no longer working and the process is over; do not let these agreements linger.” — Sammy Abdullah
Expenses
98/ “Never buy a SaaS product owned by private equity unless you have to. Main exception: if founder is still CEO. Why: Impossible to cancel, Price increases out of the blue, Lose any real customer success, Innovation slows down or even ends, Support usually terrible” — Jason Lemkin
Secondaries
99/ If you’re planning to sell founder secondaries, beware of signaling risk. Sometimes, you do have a major life event that needs capital (i.e. buying a home, having a baby, hospital bills, etc.). If you are to sell, don’t sell until the Series B. “And even then I’d suggest titrating up… 2% at A, 5% at B, 10% at >=C.” — Hari Raghavan
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.
Last week, Youngrok and I finally launched our episode together on Superclusters. In the midst of it all, we wrestle with the balance between the complexity and simplicity of questions to get our desired answer. Of course, we made many an allusion to the DGQ series. One of which, you’ll find below.
In many ways, I started the DGQ series as a promise to myself to uncover the questions that yield the most fascinating answers. Questions that unearth answers “hidden in plain sight”. Those that help us read between the lines.
Superclusters, in many ways, is my conduit to not only interview some of my favorite people in the LP landscape, but also the opportunity to ask the perfect question to each guest. Which you’ll see in some of the below examples.
Asking Abe Finkelstein about being a Pitfall Explorer and how it relates to patience (1:04:56 in S2E1)
What Ben Choi’s childhood was like (2:44 in S1E6) and how proposing to his wife affects how he thinks about pitching (1:05:47 in S1E6)
How selling baseball cards as a kid helped Samir Kaji get better at sales (45:05 in S1E8)
In doing so, I sometimes lose myself in the nuance. And in those times, which happen more often than I’d like to admit, the questions that yield the best answers are the simplest ones. No added flare. No research-flexing moments. Where I don’t lead the witness. And I just ask the question. In its simplest form.
For the purpose of this essay, to make this more concrete, let’s focus on a question LPs often ask GPs.
“Tell me about this investment you made.“
In my mind, ridiculously simple question. Younger me would call that a lazy question. In all fairness, it would be if one was not intentionally aware about the kind of answer they were looking to hear OR not hear.
The laziness comes from regressing to the template, the model, the ‘what.’ But not the ‘why’ the question is being asked, and ‘how’ it should be interpreted. For those who struggle to understand the first principles of actions and questions, I’d highly recommend reading Simon Sinek’s Start with Why, but I digress.
Circling back, every GP talks about their portfolio founders differently. If two independent thinkers have both invested Company A, they might have different answers. Won’t always be true, but if you look at two portfolios that are relatively correlated in their underlying assets AND they arrive at those answers in the same way, one does wonder if it’s worth diversifying to other managers with different theses and/or approaches.
But that’s exactly what makes this simple question (but if you want to debate semantics, statement) special. When all else is equal, VCs are left to their own devices unbounded from artificial parameters.
Then take that answer and compare and contrast it to how other GPs you know well or have invested in already. How do they answer the same question for the exact same investment? How much are those answers correlated?
It matters less that the facts are the same. Albeit, useful to know how each investor does their own homework pre- and post-investment. But more so, it’s a question on thoughtfulness. How well does each investor really know their investments? How does it compare to the answer of a GP I admire for their thoughtfulness and intentionality?
(Part of the big reason I don’t like investing in syndicates because most outsource their decision-making to larger logos in VCs. On top of that, most syndicate memos are rather paltry when it comes to information.)
The question itself is also a test of observation and self-awareness. How well do you really know the founder? Were you intentional with how you built that relationship with the founder? How does it compare to the founder’s own self-reflection? It’s also the same reason I love Doug Leone’s question, which highlights how aware one is of the people around them. What three adjectives would you use to describe your sibling?
Warren Buffett once described Charlie Munger as “the best thirty-second mind in the world. He goes from A to Z in one go. He sees the essence of everything even before you finish the sentence.” Moreover in his 2023 Berkshire annual letter, he wrote one of the most thoughtful homages ever written.
As early-stage investors, as belief checks, as people who bet on the nonobvious before it becomes obvious, we invest in extraordinary companies. I really like the way Chris Paikdescribes what we do. “Invest in companies that can’t be described in a single sentence.”
Invest in companies that can’t be described in a single sentence
And just like there are certain companies that can’t be described in a single sentence — not the Uber for X, or the Google for Y — their founders who are even more complex than a business idea cannot be described by a single sentence either. Many GPs I come across often reduce a founder’s brilliance to the logos on their resume or the diplomas hanging on their walls. But if we bet right, the founders are a lot more than just that.
Of course, the same applies to LPs who describe the GPs they invest in.
In hopes this would be helpful to you, personally some areas I find fascinating in founders and emerging GPs and, hell just in, people in general include:
Their selfish motivations (the less glamorous ones) — Why do this when they can be literally doing anything else? Many of which can help them get rich faster.
What part of their past are they running towards and what are they running away from?
All the product pivots (thesis pivots) to date and why. I love inflection points.
If they were to do a TED talk on a subject that’s not what they’re currently building, what would it be?
Who do they admire? Who are their mentor figures?
What kind of content do they consume? How do they think about their information diet?
What promises have they made to themselves? No matter how small or big. Which have they kept? Which have they not?
How do they think about mentoring/training/upskilling the next generation of talent at their company/firm?
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Earlier this week, I was listening to a fascinatingly thoughtful conversation between Tim Ferriss and Kindred’s Steve Jang, where Tim said one line that stood out in particular: “I’ve been paying a lot of attention, but I’ll be honest, I don’t know how to pay proper attention.”
And well, it got me thinking. About the difference between knowing what to look at and knowing how to look at it.
One of my favorite TED talks is by Will Guidara (quite honestly I think it deserves more views on YouTube than it has). Will is probably best known for co-founding one of New York’s hottest fine dining restaurants, Eleven Madison Park, and for writing the book, Unreasonable Hospitality. And in it, he talks about how just listening to the conversations that are happening at the tables and delivering these small, unexpected pockets of joy can create experiences that transcend money and time.
In the afore-mentioned talk, he talks about how there are four diners at Eleven Madison Park. That they went to all the top restaurants in NYC. Le Bernardin. Per se. And so on. And Eleven Madison Park was the last on their to-do list. But the only regret they had was that they never got to try a New York hot dog. Of course, upon hearing that, Will storms out the door to buy a $2 dog, brings it back to the kitchen and convinces the chef to serve it over the aged duck that took years to perfect. And when he finally delivered the next course on the menu as the hot dog he just bought, the four guests went bonkers. That despite on the multiple courses and the brilliant food, that their favorite dish was the NYC hot dog.
That it was because Will paid proper attention to his guests that he was able to deliver a truly unforgettable experience.
The truth is how to pay proper attention to anything that deserves our attention is the million-dollar question.
Paying proper attention
There’s the famous selective attention test, where viewers are asked to count the number of times the ball is being passed between the players, only to fail to realize that there is gorilla that walks across the screen. We’re told to pay attention to the ball passes, but only by paying proper attention to the purpose of why the test is being administered, do we catch what is hiding in plain sight.
Similarly, Raymond Joseph Teller (or better known for being half of the dynamic magic duo Penn & Teller) did a fascinating talk a decade and a half ago about the illusion of expectation. That magic in all of its novel facets feeds off of the expectations of its onlookers. When one tries to pay attention to the coins that are “magically” jumping from one hand to the next, you might fail to catch the sleight of hand in between. But only after he reveals his secrets is the simple magic act all the more impressive. In other words, in the second half, he teaches you how to pay proper attention.
If you have eight minutes in your day, would highly recommend watching the below video.
I can’t speak for every topic, industry, relationship, and so on out there, but at least for the cottage industry of venture capital, why I choose to write an angel or an LP check is similar. I don’t really look for what will change. ‘Cause damn, it’s so hard to predict what will change and how things will change. If I knew, and if one day, I know, please invest in my public markets fund, which will be the best performing fund of all time. But I don’t. We, as pundits sitting around the table, might draw predictions. But even the smartest of us (not sure why I say us, ’cause not sure if I can put myself in that category yet) would be lying if we knew what would happen in foresight.
Instead, I look at what doesn’t change.
What doesn’t change?
The great Charlie Munger passed away last week at the age of 99. And without question, a great loss to the world we live in today. Just half a year prior, he and Warren Buffett were hosting their 2023 annual meeting. And just two weeks prior, he was still doing CNBC interviews. And one of my favorite lines from that May annual meeting was:
“Well, it’s so simple to spend less than you earn, and invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, et cetera, et cetera, and do a lot of deferred gratification because you prefer life that way. And if you do all those things, you are almost certain to succeed. If you don’t, you’re going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game where you’re very likely to win without having any unusual luck.”
In reducing the requirement to need luck, one of the most effective ways to find what is constant in life. That despite changing times and technologies, these stay true. Or as Morgan Housel and Naval Ravikantput it, If you lived your life 1000 times, what would be true in 999 of them? In investing jargon, pattern recognition. Across my investments and more, where have I seen outperformance? What characteristics do they all share? What about human nature won’t change?
In fairness, pattern recognition gets a bad rap. And for a lot of investors, that’s because they choose to only invest in their comfort zone, and what they know best. Their former colleagues. Their Stanford GSB classmates. People who look like them, think like them, act like them. But recognizing thematic threads stretch across all facets of our life. We learn that not brushing our teeth well can lead to cavities. We learn that after stubbing our toe on the kitchen counter numerous times, we take a wider turn before turning into the kitchen. And we learn that eating piping hot foods kills your tastebuds for the next few days.
The venture corollary
In venture, we’re always taught to look at the team, product, and market. And that all are important. But if you tell a new grad or an ex-founder or an emerging angel to do just that. To them, that means nothing. They wouldn’t know how to judge. They have no benchmarks, nor do they know what’s right versus wrong. Now I don’t want to sound like a broken record, but I do believe previous blogposts like this and this are quite comprehensive for how I pay proper attention as an investor.
Emerging LPs are not immune to the lack of perspective as well. My hope and my goal is for how to be just as important if not more than the what. And for the why to be just as or more important than the how. It’s because of that, I write essays like this and this. And of course, it’s why I started Superclusters because I, too, am looking for how to pay proper attention to the next generation of venture investors. (Stay tuned for the coming Monday for episode four where we unpack the bull and bear case of early distributions in a fund!)
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.
Some of you reading here are busy, so we’ll keep this top part brief, as an abstract sharing our top three observations of leading fund managers.
Generally speaking, don’t sell your fast growing winners early.
Except when…
Selling on your way up may not be a crazy idea.
You might sell when you want to lock in DPI. Don’t sell more than 20% of your fund’s positions unless you are locking in meaningful DPI for your fund. For instance, at each point in time, something that’s greater than 0.5X, 1X, 2X, or 3X of your fund size.
You might consider selling when you’ve lost conviction. Consider selling a position when you feel the market has over-priced the actual value, or even up to 100% if you’ve lost conviction.
You might consider selling when one is growing slower than your target IRR. If companies are growing slower and even only as fast as your target IRR, consider selling if not at too much of a discount (Note: there may be some political and/or signaling issues to consider here as well. But will save the topic of signaling for another blog post).
Do note that the above are not hard and fast rules. Every decision should be made in context to other moving variables. And that the numbers below are tailored to early-stage funds.
Net TVPI Benchmarks from Years 5-15Net DPI Benchmarks from Years 5-15
Let’s go deeper…
On a cloudless Friday morning, basking in the morning glory of Los Altos, between lattes and croissants, between two nerds (or one of whom might identify as a geek more than a nerd), we pondered one question:
Everyone seems to have a financial model for when and how to invest, but part of being a fiduciary of capital is also knowing when to distribute – when to sell. When RVPI turns into DPI. And we haven’t seen many models for selling yet. At least none have surfaced publicly or privately for us. The best thought piece we’ve seen in the space has been Fred Wilson’s Taking Money “Off the Table”. At USV, they “typically seek to liquidate somewhere between 10% and 30% of our position in these pre-IPO liquidity transactions. Doing so allows us to hold onto the balance while de-risking the entire investment.”
As such, it gave birth to a thought… What if selling was more of a science?
What would that look like?
Between two Daves, it was not the Dave with sneakers and a baseball cap and with the profound disregard to healthy diets, given the fat slab of bacon in his croissan’wich, who had the answer there.
“To start off, in a concentrated portfolio of 30 investments, a fund returner is a 30x investment. For a 50-investment fund, it’s 50x. And while hitting the 0.5x DPI milestone by years 5-8, and a 2x DPI milestone by years 8-12, is the sign of a great fund, you shouldn’t think about selling much of your TVPI for DPI unless or until your TVPI is starting to exceed 2-3x.” Which seems to corroborate quite well with Chamath Palihapitiya’s findings that funds between 2010 and 2020 convert have, on average, converted about 25% of their TVPI to DPI.
“Moreover, usually you shouldn’t be selling more than 20% of the portfolio at one time (unless you’re locking in / have already locked in 3X or more DPI). You should be dollar-cost averaging – ensuring time diversity – on the way out as well. AND usually only if a company that’s UNDER-growing or OVER-valued compared to the rest of your portfolio. Say your portfolio is growing at 30% year-over-year, but an individual asset is growing slower at only 10-20% OR you believe it is overvalued, that’s when you think about taking cash off the table. Sell part (or even all) of your stake, if selling returns a meaningful DPI for the fund, and if you’re not capping too upside in exchange for locking in a floor.”
Meaningful DPI, admittedly, does mean different benchmarks for different kinds of LPs. For some, that may mean 0.25X. For others that may mean north of 0.5X or 1X.
“On the other hand, if a company is outperforming / outgrowing the rest of the portfolio, generally hold on to it and don’t sell more than 10-20% (again, unless you’re locking in meaningful DPI, or perhaps if it’s so large that it has become a concentration risk).”
I will caveat that there is great merit in its counterpart as well. Selling early is by definition capping your upside. If you believe an asset is reaching its terminal value, that’s fine, but do be aware of signaling risk as well. The latter may end up being an unintended, but self-fulfilling prophecy.
So, it begged the question: Under the assumption that funds are 15-year funds, what is meaningful DPI? TVPI? At the 5-year mark? 7.5 years in? 10 years? And 12.5 years?
The truth is the only opportunities to sell come from the best companies in your portfolio. And probably the companies, if anything, you should be holding on to. By selling early, you are capping your downside, but at the same time capping your upside on the entire portfolio. When the opportunity arises to lock in some DPI, it’s worth considering the top 3-5 positions in your fund. For instance, if your #2 company is growing quickly, you may not be capping the upside as much.
Do keep in mind that sometimes it’s hard to fully conceptualize the value of compounding. As one of my favorite LPs reminded me, if an asset is growing 35% year-over-year, the last 20% of the time produces 56% of the return. Or if an asset is growing 25% YoY, if you sell 20% earlier (assuming 12 year time horizons), you’re missing out on 45% of the upside.
As a GP, you need to figure out if you’re IRR or multiple focused. Locking in early DPI means your IRR will look great, but your overall fund multiple may suffer.
As an LP, that also means if the gains are taxable (meaning they don’t qualify for QSBS or are sold before QSBS kick in), you need to pay taxes AND find another asset that’s compounding at a similar or better rate. As Howard Marks puts it, you need to find another investment with “superior risk-adjusted prospective returns.”
And so began the search for not just moolah in da coolah, but how much moolah in da coolah is good moolah in da coolah? And how much is great?
Net TVPI Benchmarks from Years 5-15Net DPI Benchmarks from Years 5-15
Some caveats
Of course, if you’ve been around the block for a minute, you know that no numbers can be held in isolation to others. No facts, no data points alienated from the rest.
Some reasons why early DPI may not hold as much weight:
Early acqui-hires. Usually not a meaningful DPI and a small, small fraction of the fund.
There’s a possibility this may be the case for some 2020-2021 vintages, as a meaningful proportion of their portfolio companies exit small but early.
In other words, DPI is constructed of small, but many exits, rather than a meaningful few exits.
TVPI is less than 2-3x of DPI, only a few years into the fund. In other words, their overall portfolio may not be doing too hot. Obviously, the later the fund is to its term, the more TVPI and DPI are alike.
As a believer in the power law, if on average it takes an outlier 8 years to emerge AND the small percentage of winners in the portfolio drive your return, your DPI will look dramatically different in year 5 versus 10. For pre-seed and seed funds, it’s fair to assume half (or more) companies go to zero within the first 3-5 years. And in 10 years, more than 80% of your portfolio value comes from less than 20% of your companies. Hell, it might even be 90% of your portfolio value comes from 10% of your companies. In other words, the power law.
GPs invested in good quality businesses. Some businesses may not receive markups, but may be profitable already, or growing consistently year-over-year that they don’t need to raise another round any time soon.
Additionally, if you haven’t been in the investing game for long, persistence of track record, duration, and TVPI may matter more in your pitch. If you’ve been around the block, IRR and DPI will matter more.
As the great Charlie Munger once said, “selling for market-timing purposes actually gives an investor two ways to be wrong: the decline may or may not occur, and if it does, you’ll have to figure out when the time is right to go back in.” For private market investors, unless you can buy secondaries, you’ll never have a time to go back in until the public offering. As such, it is a one-way door decision.
Some LPs are going to boast better portfolios, and we do admit there will be a few with portfolios better than the above “benchmarks.” And if so, that’s a reason to be proud. In terms of weighting, as a proponent of the power law, there is a high likelihood that we’ve underestimated the percent of crap and meh investments, and overestimated the percent of great investments in an LP’s portfolio. That said, that does leave room for epic fund investments that are outliers by definition.
We do admit that, really, any attempt to create a reference point for fund data before results speak for themselves is going to be met with disagreement. But we also understand that it is in the discourse, will we find ourselves inching closer to something that will help us sleep better at night.
One more caveat for angels… The truth is as an angel, none of the above really matter all that much. You’re not a fiduciary of anyone else’s capital. And your time horizons most likely look different than a fund’s. It’s all yours. So it’s not about capping your downside, but more so about capping your regret. In other words, a regret minimization framework (aka, “spouse regret/yelling minimization insurance”).
That will be so unique to you that there is no amount of cajoling that we could do here to tell you otherwise. And that your liquidity timelines are only really constrained by your own liquidity demands.. For instance, buying a new home, sending kids to college, or taking care of your parents (or YOU!) in their old age.
But I do think the above is a useful exercise to think through selling if you had a fund. You would probably break it down more from a bottoms up perspective. What is your average check size? Do you plan to have a concentrated portfolio of sub-30 investments? Or more? Do you plan to follow on? How much if so? And that is your fund size.
In closing
Returning above a 3x DPI is tough. Don’t take our words for it. Even looking at the data, only 12.5% of funds return over a 3x DPI. And only 2.5% return three times their capital back on more than 2 separate funds.
In the power law game we play, as Michael Mauboussin once said, “A lesson inherent in any probabilistic exercise: the frequency of correctness does not matter; it is the magnitude of correctness that matters.” Most will return zero, or as Jake Kupperman points out: More than 50%.
But it’s in the outliers that return meaningful DPI, not the rest. Not the acqui-hire nor really that liquidation preference on that small acquisition.
At the end of the day, the goal isn’t for any of the above to be anyone’s Bible, but that it’d start a conversation about how people look at early returns. If there is any new data points that are brought up as a result of this blogpost, I’ll do my best to update this thread post-publication.
Big thank you to Dave McClure for inspiring and collaborating on this piece, and to Eric Woo and all our LP friends who’ve helped with the many revisions, sharing data, edits, language and more. Note: Many of our LP friends chose to stay anonymous but have been super helpful in putting this together.
Footnotes
For the purpose of this piece, we know that “good” and “great”, in fact all of the superlative adjectives, are amorphous goalposts. And those words may mean different things to different people. This blogpost isn’t meant to establish a universal truth, but rather serve as a useful reference point for both LPs, looking for “benchmarking” data, and GPs to know where they stand. For the latter, if your metrics do fall in the “good” to “great” range, they’re definitely worth bragging about.
And so with that long preamble, in the piece above, we defined “good” as top quartile, and “great” as top decile. “Good” as a number on its own, enough for an LP to engage in a conversation with you. And “great” as a number that’ll make LPs running to your doorstep. Or at least to the best of our portfolios, leveraging both publicly reported and polled numbers as well as our own.
Our numbers above are also our best attempt in predicting steady state returns, divorcing ourselves from the bull rush of the last 3-5 vintage years. As such, we understand there are some LPs that prefer to do vintage benchmarking, as opposed to steady state benchmarking. And this blogpost, while it has touched on it, did not focus on the former’s numbers.
EDIT (Aug 18, 2023): Have gotten a few questions about where’s the data coming from. The above numbers in the Net DPI and Net TVPI charts are benchmarks the LPs and I agreed on after looking into our own anecdotal portfolios (some spanning 20+ years of data), as well as referencing Cambridge data. These numbers are not the end-all-be-all, and your mileage as an LP may very much vary depending on your portfolio construction. But rather than be the Bible of DPI/TVPI metrics, the purpose of the above is give rough reference points (in reference to our own portfolios + public data) for those who don’t have any reference points.
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.
