Brian Chesky did a fireside chat recently where he talks about how he hired for roles at Airbnb, especially in the early days. To which, I highly recommend you checking the above link. Lots of nonobvious lessons worth noting. One thing especially stood out. Probably due to the recency bias of having a few friends text me who were thinking about investing in their first fund.
“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.”
In a similar way, a lot of new LPs in venture have also yet to develop their taste for quality in the venture asset class. If you’ve never hired an executive, you have no idea what a great executive looks like. And if you’ve never invested in a fund, or seen a few, you have no idea what a great fund looks like. Most GPs, given the volume of LPs they pitch to, have more experience bullshitting you as an LP than you have experience detecting their bullshit.
And that’s okay. Everyone starts off this way. So the question then becomes how do you develop taste?
- Talk to as many as you can. Don’t overoptimize for quality. You have no idea what quality looks like, so don’t delude yourself that you do. Ask friends who they’ve talked to. Ask Twitter. And ask the GPs you talk to who are friends they respect who are also building a fund. Hell, try your luck at asking certain “influencers” in the space if they have recommendations. Realistically, if you raise your hand and say you’re an LP, GPs will flock to you. In 2024, deal flow, as measured by quantity, isn’t really hard for any LP out there.
- Prioritize references.
On the first point, as is the advice I give most first-time angel investors investing in startups, don’t invest in the first startup you see. Unless it’s for a reason outside of financial gain. To support a friend. To learn. For impact. To give back. All great reasons. But not if because your friend told you to.
Along the same thread, don’t invest in the first fund you see. Talk to at least 30-50 fund managers. Get a good understanding of what the average fund looks like. What is actually special about a GP versus what they say is special. Most of the time when someone claims that they are the special one, they usually aren’t. For instance, only [insert big name fund] invests with us. Or we are the only [insert industry or function] fund. Hell, if anyone gives you any sort of superlatives, they’re usually wrong. Only. Always. Best. Most. I’m sure there are more, but the rest are escaping me.
Secondly, prioritizes references over your initial judgment when interviewing and doing diligence. Dan Stolar from Colibri and I had a conversation recently about references, where the questions you ask are paramount. If you’re short on time, I’d recommend starting from the 25:50 mark.
In short, to existing LPs, ask:
- How did you get to conviction?
- Who else did you talk to that were comparable to this GP before you reached an investment decision?
- Is there anything you learned about the team after you made the investment?
- What kind of person do you think they should bring onboard either in the next fund or after they get to a close?
- Would it be possible to share your investment memo with me?
- What were some of the pushbacks or hesitations when this deal reached your investment committee?
To LPs more broadly:
- What are your primary motivations to be an LP in venture?
- How do you think about portfolio construction?
- Who are the GPs you’ve talked to that seem to stand above the rest? And why?
To co-investors/other GPs:
- How often do you share deals with this GP?
- How often do they share deals with you?
- Who are your top 3 emerging managers that you love seeing deals from and why?
- Is there an emerging manager you would hire to be a partner or GP at your firm if you could?
- How would you rate this GP on a scale of 1-10, with 10 being perfect?
- What would get this GP to a 10?
- Did you or have you considered investing in their fund?
- What are some of this GP’s hobbies that I might not guess?
- This shows you how well people know each other. You can also use this question for other reference archetypes.
To former colleagues and friends:
- If you were to hire someone under this GP, what traits or skillsets would you look to hire for?
- I hate surprises. Is there anything that could go wrong I should know now about this GP, so that I wouldn’t be surprised when it happens?
- Who is someone you would hire or work together again in a heartbeat?
- Notice if they mention that GP. You don’t have to probe as to why they didn’t mention if they didn’t. But worth noticing. Also probably worth talking to that person they did mention to keep a strong talent network around you.
Obviously the above list isn’t all-inclusive. But nevertheless I imagine they’ll be good starting points. Also, I want to note that going deep is often more insightful than going wide.
Remember, almost everyone is incentivized to say good things about others. Or at least, there is little to no incentive to talk smack about anyone you know. So finding the best way to ask questions that unearth different perspectives and facets of a person is important.
Funnily enough and unintentionally, last week I wrote a similar post from the perspective of a GP, this one happened to be more for the LP.
Photo by Thomas Kelley on Unsplash
