DGQ 12: What is play to you but work to everyone else?

children playing, not work

What is play to you but work to everyone else? Or said differently, what do you love doing that many others would hate or get bored of quickly?

This isn’t an original self-query. I want to say I heard it years ago on one of Tim Ferriss’ episodes, but the exact one escapes me. Yet, recently, my friends and colleagues remind me of this more and more. In the ultimate shortage of labor, more than ever before, people are rethinking what career means to them and what a meaningful career means. I’ve had friends become full-time live streamers, NFT creators, inventors, fiction novelists, artisans… you name it, and I bet you someone that I know – hell someone you know – has dabbled or jumped head-first into it. It truly is the era of the Great Resignation.

Now this question isn’t a call to arms to leave whatever you’re doing. Rather a direction of clarity that may help you live a more enriching life. Something to pursue in your down time. Until you can find a way to get paid to do so – unless you happen to have 20-30 years of runway from previous riches. The same is true if you’re an aspiring founder. Work on your project part-time, until you are ready to take it full-time either with investment capital or revenue.

For me, the answer to the above question is:

  • Writing (to think)
  • Meeting, and more specifically, learning from passionately curious and curiously passionate people (what can I say, I’m a glutton for inspiration)
  • Becoming a world-class questioner (you’ve probably guessed this one from the DGQ series)
  • Collecting quotes and phrasings that resonate (a few of which are repeat offenders on my blog)
  • Helping people realize their dreams (something that was much easier when I only had 20 friends, but much harder when I’m adding zeros to the right)

Many of the above have become synonymous with my job description over the years. Did I predict I would fall into venture capital? No. Frankly, it was a result of serendipity and staying open-minded to suggestions from people I really respect.

While this may come off as virtue signaling, to me, I’m willing to, did lose, and continue to lose sleep over each and every one of the above activities. And if I know anything about myself, my goalposts are likely to change over time. Not drastically, but fine-tuned over time.

Photo by Robert Collins on Unsplash


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


Subscribe to more of my shenaniganery. Warning: Not all of it will be worth the subscription. But hey, it’s free. But even if you don’t, you can always come back at your own pace.

How Do Investors Think About Early Dilution On The Cap Table?

dilution water investment

A founder recently asked me how investors would perceive her going through two different accelerator programs. Specifically, what would investors think if she took dilutive capital from two investors who care about ownership targets, yet have similar, if not the same, value adds to her business?

How each type of investor thinks about dilution

It’s a great question. Unsurprisingly, a nuanced one as well.

Honestly, a “messy” cap table or early dilution is an excuse investors give when they’re not sold on you or the business. Investors regress to the “why this”, or otherwise known as, traction, when you haven’t convinced them on “why you.”

Investors want to be excited about you. They want to brag about you to their partnership, colleagues and friends. But if you don’t give them a strong reason to, they’re going to regress to what they know will return them capital. Predictability. And that comes in the form of traction. But I digress.

If Max Levchin or Phil Libin or Elon Musk or Justin Kan – pick your favorite serial entrepreneur with unicorn exits under their belt – wanted to raise for a new startup, no matter what it is or how early, people are gonna jump on the opportunity to regardless of how saturated the cap table is.

Let’s stand in the shoes of an investor for a second. Of which there are three main kinds of early investors.

  1. Angels
  2. Non-lead VCs and syndicate leads
  3. VCs who lead rounds

For individual angels, ownership targets don’t matter. They just want a piece of the action. In fact, multiple sources of signal and validation give them more confidence to invest. Especially if you’ve taken previous or current checks from your small handful of top tier VCs. These angels’ check sizes are negligible on the cap table, so they won’t end up crowding anyone else out.

On the other hand, notice how I bucketed non-lead VCs and syndicate leads into the same category. Why? These investors are writing bigger checks. They won’t price the round. And they move a lot faster if someone with a great track record is leading the round. Once again, ownership also doesn’t matter, but great co-investors do. As long as ownership targets don’t matter, the excuse of dilution is merely lip service. The story here is “I just need to get in the best deals, so I can raise my next fund from LPs.” Or “I need build my track record as an investor, so I can raise a fund one day.” I’m going to generalize here really quickly. While it doesn’t apply to every non-lead investor, it does apply to the vast majority. I dare say, 90% of them. These investors move on the combination of three levers:

  1. Great traction
  2. Great team,
  3. And great co-investors – the last of which is often the most important.

The more of the above levers you have as a founder, the faster you’ll get a check from the above individuals and institutions. Why do great co-investors matter so much? Outside of branding and social rapport, their investors – their LPs – also want to invest in these top deals led by these funds, but often can’t invest into these top-tier funds since everyone wants to get into a16z or Sequoia. In fact, for many of these top-tier funds, there’s a massive waitlist of LPs.

Finally, lead VCs. Ownership does matter. Really, this is the only audience you need to worry about when it comes to the topic of early dilution. While you as a founder should be dilution-preserving, sometimes, taking the capital (and subsequently, the dilution) is the best option. Maybe you really need something from an accelerator or an early investor that would be hard to get for you yourself. At that point, their capital becomes optimization capital. Early checks can get you from A to B faster, with less burn potentially, and with less detours.

So, the question you have to figure out if you take subsequent capital injections is that each time you dilute the cap table, did you reach an important milestone? What’s worrying is if you keep diluting your cap table without making meaningful progress each time. Think in the framework of milestone-based financing. Raise what you need, while giving you and your team an appropriate margin of error.

In closing

As a footnote, it’s also important to consider how much equity you as the founder will have left upon exit. If you’re going through large amounts of early dilution, you’re going to have very little upside unless you go through a massive exit. Unlike investors who invest in many businesses and have diversified their risk appetite, you, the founder, have put all your eggs in one basket. So if you care about the upside, you want to reduce dilution unless there is an absolute necessity to raise capital.

Photo by Lucas Benjamin on Unsplash


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

DGQ 11: Was the David from a month ago laughably stupid?

laugh fox smile

Was the David from a month ago laughably stupid?

I’m a big fan of self-deprecating humor, but this isn’t one of those moments. Rather it’s a learning moment. While the above question is a lagging indicator for personal growth, it nevertheless deserves to be measured. After all, as the great Peter Drucker would say, you cannot manage what you cannot measure.

The timeframe of evaluation

Why a month? Why not a week? Or not a year?

In the business world, there’s a concept called the rule of 72. Effectively, 72 divided by the growth rate is the time it takes to double. For instance, if you’re growing 30% month-over-month, 72 divided by 30 is 2.4. So, if you’re growing revenue at 30% every month, you’re going to double your revenue in roughly two and a half months.

It is equally as analogous for personal growth.

time it takes to shock yourself = 72 / rate of learning

Let’s say you’re a first-time founder, and you only knew 10 things about how to start a business. But every day, you learn one more thing – via podcasts, articles, blogs, classes, you name it. Give or take a 10% growth rate. You will double your knowledge in about a week. Hopefully enough to shock the you from a week prior. Or take another example, many self-help books ask you to commit to getting 1% better every day. Assuming you consistently do that, you would have doubled your experience in about 2.5 months.

That goes to say, the faster you want to grow, the shorter the timeframe should be for you to look back and reflect on your “stupidity.” For me, it is in my nature to be hungry for knowledge, and I really love learning about things I thought I knew and what I didn’t know. For now, as learning is a top priority for me, a month sounds like a reasonable timeframe to shock myself. I also use the term “stupidity” lightly and with notes of self-deprecating love.

The shock factor

But how do you measure personal growth? Something rather intangible. It isn’t a number like revenue or user acquisition. Some people might have a set of resolutions or goals that is tangible and quantitative – say read two books a month or exercise an hour four days a week. Great goals, but they are often based on the assumption that movement is progress. The two aren’t mutually exclusive, but neither are they synonymous. The former – movement – lacks retrospection.

There were, are, and will be days, weeks, and months, we may just be busy. Our schedule is packed. We’re a duck paddling furiously underwater. And we’re gasping for air. And while our body and mind are exhausted, our body and mind have not expanded. I know I’m not alone when I think to myself, “Wow, I did a lot, but I still feel like I’m not moving anywhere.”

Our brains are unfortunately also poor predictors of the future. We use past progress as indicators of future progress. But while history often rhymes, it does not repeat. Our predictions end up being guesstimates at best.

So I look into the past. I measure my own personal growth emotionally – by shock, very similar to how Tim Urban measures progress of the human race (which I included at the end of a previous essay). I don’t know what the future will hold and neither will I make many predictions of what the future will hold for me. If I knew, I’d have made a fortune on the stock market already, in startups, or on crypto already. What I can commit to is my relentless pursuit of taking risks, making mistakes, and trying things that scare the bejesus out of me. Since only by making new mistakes will I grow as a person. What I am equipped with now can be mapped out by the scar tissue I’ve accumulated.

Coming full circle, what’ll make me realize and appreciate my mistakes and failures more is knowing that as a greenhorn I was laughably stupid.

But if, in retrospect, David from a month ago sounds like quite the sensible person, my growth will have gone from exponential to linear. Or worse, flatlined.

For founders

And now that I’m thinking aloud – or rather, writing aloud (which may deserve its indictment into the #unfiltered series), this might be a great line of questions to ask founders as well.

As a founder, what was the last dumb thing you did? When was that?

And before that, what was the second most recent dumb thing you did?

And the third most recent?

There’s the commonly repeated saying in the venture world. Investors invest in lines, not dots. Two’s a line. Three’s a curve. I want to see how fast you’ve been growing and learning.

Why such a question?

  1. If we’re in it for the long run, I wanna assess how candid and self-aware you are. Pitch meetings often depict a portrait of perfection. But founders, like all humans, aren’t perfect. For that matter, neither are investors.
  2. Venture capital is impatient capital. We demand aggressive timelines, and honestly, quite toxic to most people in the world. Given that, if you’re going to learn how to hustle after investors invest, you’re going to have a tough time convincing investors. But if the hustle is already in your DNA, that bias to action lends much better to the venture model.

Photo by Peter Lloyd on Unsplash


Thank you to V. who inspired this blogpost.


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.


Subscribe to more of my shenaniganery. Warning: Not all of it will be worth the subscription. But hey, it’s free. But even if you don’t, you can always come back at your own pace.

#unfiltered #63 How To Be Selfish To Be Selfless

Back in my sophomore year of college, I was running to be the vice president of a business organization. Part of the requirement to run as one was to shadow at least two executives from previous generations who held the same role. Brownie points if you shadowed the broader executive team as well. The goal was to better prepare yourself by increasing the context you had about a new role.

I checked off those boxes with flying colors. In fact I ended up talking to more than 20 other executives and other key campus constituents we would be interfacing with. Along the way, I shared what I would do, not do, and do differently compared to previous roles. I also told them how I would forever change the organization and its impact on campus and students. Frankly, I felt like I was a on a roll. I was on top of the world.

Yet one winter night (it’s always the winter nights that get you), when I was on my haughty high horse, one person stopped me in my tracks. With one simple question. “What is your selfish motivation?”

“I’m going to change…”

“No, David… what is your selfish motivation?

Flash-forward

Last week, one of my favorite hustlers reached out to me. She was planning to start a newsletter soon and wanted some advice from a fellow writer. After a few exchanges asynchronously, it became apparent that her biggest obstacle was keeping to a schedule. If you’re a frequenter here, you’ll have noticed I’ve already lost all semblance of a schedule other than publishing weekly. Some weeks I publish on Mondays. Others on Tuesdays. Some weeks see two essays. Others only one. But I have yet to lose my streak of publishing weekly. But I digress.

There’s a large graveyard filled with content creators who post ten or less times. Off the cuff, I dare say 90%. Prior to this blog, two of my other blogs were also no stranger to the obituary.

So, I posed the same question that stumped me all those years back. What is your selfish motivation?

What is your selfish motivation?

Most people, especially in the realm of entrepreneurship, job interviews, politics, and PR stunts, share their selfless motivations. Everyone’s a Samaritan. While there is some truth to it, everyone needs a really good selfish motivation.

On your best days, if your project is doing really well and you’re absolutely crushing it, your selfless motivation will be what you tell the latest press release, your cousins over the holidays – the story you pitch to others. The story you also tell yourself to give your job meaning. But on your worst days, when you want to give up, your selfish motivation is what’ll keep you going. When you’re at your worst, you won’t want to care for others. You care about yourself. What’ll keep you sane? If your selfish North Star isn’t strong enough, it’s easy to give up.

You need both. Your selfless motivation will help you reach for the stars. Your selfish motivation will prevent you from hitting rock bottom.

For example, for this blog, my selfless motivations are:

  1. Democratizing access to resources and education to help people move the world’s economy forward,
  2. Empowering founders to not fall through the same potholes I or other founders fell through – to make new mistakes not old, and
  3. Empowering and inspiring others to live more enriching lives.

It’s what I tell others. My lofty goal that’ll make writing this blog meaningful to me.

On the other hand, my selfish motivations are:

  1. I write to think. My thoughts are so much clearer on paper than if I just speak them. If I don’t write things down, I’m a mess.
  2. I forget things easily. Short term memory loss. And my blog is a way for me to catalogue my own learnings.
  3. I feel much more comfortable being vulnerable with strangers than with friends. So my blog helps me relieve much of my stress and anxiety.
  4. I am neither as good as people say I am nor as bad as people say I am. This blog keeps me honest.

In closing

That same winter night was the day of the winter equinox. I don’t mean to dramatize my little anecdote, but I nevertheless I do find it provides a little flavor to the story.

“No, David… what is your selfish motivation?”

“I don’t follow.”

“I ask every officer candidate this question. There will be days that you will hate the job more than you will love it. And I need to know if you have it in you to weather those days.”

I don’t remember what I told him that night. I don’t think it was a particularly honest answer. Or maybe I was honest. But it wasn’t enough. I didn’t get his vote of confidence, but I did enough legwork to get the approval of others.

In the end, I got the position. And he was right. Times got tough. There were days I hated the job. And on those days, in particular, I didn’t do anything remotely close to “changing the organization and its impact on campus.”

In his words, I wasn’t selfish enough.

Photo by Ian Chen on Unsplash


#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.


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

2021 Year in Review

Kintsugi.

The Japanese art of finding beauty in imperfection. More specifically, the art of mending broken pottery. Kintsugi finds an object’s value and beauty is a result of its imperfections, rather than the lack thereof.

Much like the year prior, and like for most, 2021 was a year of imperfections. What could have gone wrong went wrong. And what could have been weighed heavily on many people’s minds. It’s been a trying year for almost everyone. From Delta to Omicron, from the insurrection in January to military withdrawal from Afghanistan, from forest fires to the increase in crime in the Bay Area. Despite still wrestling with the constraints imposed by the pandemic and the broader socio-political-economic world, 2021 was the worst and best year I could have ever hoped for. The beauty was not that these events happened, but that these events led us to form deeper relationships, greater awareness for macro issues, and a general movement forward to change what hasn’t and will not work in tomorrow’s world. Simply put, I’ve never been more bullish on being human.

This year was the year of saying “Yes.” In contrast to my track record of regressing to “No.” And so far, I’m on a roll. That also means that I’m busier than ever. Nevertheless, because of my intentionality behind finding serendipitous moments in my life, I’ve had the pleasure of finding myself in a constant state of inspiration. To quote one of my good friends, who’ll appear in a blogpost soon enough: “Inspiration is the disciplined pursuit of unrelated [and unexpected] inputs.”

I wrote almost 90,000 words this year, excluding this blogpost, which for better or for worse, means I wrote just enough to fill the average nonfiction book and a half. In terms of the number of blogposts and words I’ve written, I’ve slipped in comparison to last year. Last year, I minted over 100 essays. And this year, I’m 20% shyer in quantity on both fronts. Yet, while recency bias may play a role, I’ve never been prouder of the content I’ve put out. Fundamentally, what I learned is that I have to take longer per blogpost.

My writing journey pre-2021

In 2019 and 2020, I took pride in minting a blogpost in under 24 hours at best. 48 hours at worst. I would start writing each piece during the night, right after my shower. Go to sleep. And finish editing the next morning before publishing.

Under those circumstances, while there were a number of pieces that I am still proud to have written to this date, there were many that would have been orders of magnitude better if I just let it sit for a few days longer. If I just let the content marinate a bit longer.

… In 2021

This year, unintentionally, I did just that. It started with a steep ramp up in my day-to-day schedule, rendering me unable to commit large chunks of time to sit down, write and edit. On average, each piece took 5-7 days before it went from conception to presentation. Of course, a small handful took 2-4 weeks. Equally so, there were a few on the other end of the spectrum that took less than 24 hours. But the more time I gave myself to think about each piece, the more robust each piece became. So, my process evolved as a function of my schedule.

Today, at least twice a week, I still allocate two hours to sit down, write and edit. I still find my creativity at its height right before I hit the haystack. And I still make the bulk of my edits in the morning. But I also give myself time to be bored. Time to just think with no intended purpose or goal, when I take long drives or in the shower or during a morning exercise routine. And as long as there seems to be a strong correlation between time to be bored and my creative output, I’ll continue this process in the foreseeable future.

2021’s Most Popular

Essays published in 2021, ranked by most views:

  1. How to Pitch VCs Without Ever Having to Send the Pitch Deck – One of the most insightful lessons I learned this year from an incredible serial founder. And especially useful for founders who don’t have a pre-existing investor network.
  2. Rolling Funds and the Emerging Fund Manager – A deeper dive to AngelList’s Rolling Funds and what that means for the emerging manager. Since then, I have learned some new insights on that front, which I’ll include in a future blogpost. That said, as an addendum to this blogpost, while much easier to raise capital from accredited investors, do beware of vintage quarters, especially for LPs. If you miss out on a quarter where the GP makes an incredible investment, you miss out on the carry there.
  3. Should you get an MBA as a founder? – Admittedly, this one’s ranking came as a surprise to me, but in hindsight, I know many founders, and professionals in general, wrestle with the pros and cons of advancement education as a means of career development.
  4. #unfiltered #57 True Vulnerability Is Messy – I’ve hosted a number of social experiments as well as vulnerability circles, but it wasn’t till my conversation with my good friend, Sam, that I realized what true vulnerability meant. Not the kind that’s been romanticized by Silicon Valley and the wider media.
  5. My Top Founder Interview Questions That Fly Under The Radar – Investors rarely share their rolodex of questions with founders. And understandably with good reason. But I’ve never been one to optimize for ‘gotcha’ moments. If you’re building a business that the world needs, the last thing you should be worried about is what kind of curveball questions investors can ask you. In this piece, I share my top 9 questions (outside of the usual few every investor asks) and my rationale behind each.
  6. The Smoke Signals of a Great Startup From the Lens of the Pitch Deck – From the perspective of an investor, I break down the foci points on the pitch deck depending on what stage your startup is fundraising at.
  7. Losing is Winning w/ Jeep Kline, General Partner at Translational Partners and Venture Partner at MrPink VC – One of my more contrarian posts from the insights of Jeep. What makes seemingly no sense at first glance carries a lot more depth than meets the eye.
  8. How to Find Product-Market Fit From Your Pricing Strategy – The broader business world has always found PMF through some cousin of the NPS score and/or usage metrics. While those are still extremely pertinent, I find it illuminating to view PMF through leading indicators like pricing, rather than lagging indicators, like usage.
  9. 14 Reasons For Me Not to Source This Deal – One of my more tongue-in-cheek posts about founder red flags. I imagine a large contributor to its current ranking is due to the fact that my buddy, DC, reposted this on his blog as well.
  10. #unfiltered #56 How Thirteen Technology and Thought Leaders Break Down Self-Doubt – One of my favorite blogposts I wrote this year, written during one of my most emotionally-turmoiled times. These 13 were my North Stars, when I found it hard to see the night sky. Hopefully, they might serve as yours in some capacity as well.

All-Time Most Popular

All the essays I’ve ever written, ranked by most views:

  1. 10 Letters of Thanks to 10 People who Changed my Life – Every year, during the holiday season, I write a plethora of letters of thanks to the people who changed my life in my short years of being alive so far. I wrote this piece back in 2019 sharing what I wrote word-for-word publicly for the first time. I never expected this essay alone to account for a plurality of your views. This is the only one of my now 200 blogposts that draws in readership almost every day since its inception. In 2021 alone, this one blogpost accounts for over a third of this blog’s viewership. The power law is truly incredible.
  2. #unfiltered #30 Inspiration and Frustration – The Honest Answers From Some of the Most Resilient People Going through a World of Uncertainty – Part one of two, where I ask 42 world-class professionals about their greatest motivators. I ask them two questions, but the catch is they’re only allowed to answer one of them.
  3. How to Pitch VCs Without Ever Having to Send the Pitch Deck – I imagine this one will be a repeat offender on this list. Time will tell.
  4. My Cold Email “Template” – I’ve had the fortune of meeting some of the most respectable people in the world and in their respective industries. Many of whom I met through a cold email. In this essay, I share my playbook as to how I did and do so.
  5. The Third Leg of the Race – An oldie, but a goodie. This notion is as true now as it was when I wrote it last year. The third leg of the race is always the hardest, but it’s the one that’ll decide if you win or lose.

My most memorable pieces in 2021

Because of this blog, I’ve had the chance to share my voice and thoughts, yet also pick the brains of some of the most brilliant people in the world. So I hesitate to even rank my favorites ’cause almost every blogpost I write has a special place in my heart. Nevertheless, if I had to pick and if I’m being honest, there are a handful that would go on my personal Mount Rushmore this year. In no particular order…

  • #unfiltered #56 How Thirteen Technology and Thought Leaders Break Down Self-Doubt – Same as above.
  • #unfiltered #57 True Vulnerability Is Messy – Same as above.
  • The Investor Purity Test – People in venture capital often take themselves as well as their work too seriously. And not that they shouldn’t, but everyone deserves a little satire about their job. Ours is no exception. So I created a mini quiz to see how pure you are from the woes of early-stage capitalism. Have fun!
  • #unfiltered #61 How To Host A Fireside Chat 101 – After hosting a series of fireside chats, panels, and podcast episodes (the latter yet to released), I share what I’ve learned in this essay. It includes not only how I think about asking questions during the chat, but also how I prepare for the conversation.
  • The Hype Rorschach Test: How To Interpret Startup Hype When Everything’s Hyped – In a market of noise, I break down how I think about finding the signal above it all.
  • Startup Growth Metrics that will Hocus Pocus an Investor Term Sheet – I always tell founders to lead with the metric that will “wow” an investor in every cold email and/or warm intro. Earlier this year, I broke down just what kinds of metrics and their respective benchmarks that will wow an investor.
  • Creativity is a Luxury – Back in May, I sat down with one of the most creative people I know – DJ Welch. And asked him how he regularly found inspiration. To this day, I still re-read this blogpost to help me out of a writer’s block when I’m in one.
  • #unfiltered #53 A Different Way To Count – Most people count their lives by the years that pass. But, what if our unit of measurement wasn’t years, but the number of presidents we live to see or the number of vacations we get to have with our significant other? You might see life quite differently.
  • #unfiltered #51 The Fickle Jar – I have a lot of ideas. Most of which are either completely silly, ludicrous or require time I am willing to prioritize. I’ve known anecdotally that very few actually make it past the Mendoza line. Nevertheless, thanks to my friend, I now have a visual way of tracking my promiscuity between ideas.

Photo by Riho Kitagawa on Unsplash


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

Three Types of Risk An Early-Stage Investor Takes

risk

From market risk to product risk to execution risk, I’ve written many a time the types of risks a founder takes, including here, here, and here. As well as shared that the first and foremost question founders need to answer is: What is the biggest risk of this business? Subsequently, is the person who can solve the biggest risk of this business in the room (or on the team slide)?

Over the weekend, I heard an incredible breakdown of the other side of the table. Rather than the founder, the three types of risks an investor takes. The same of which need to be addressed for LPs to invest. From Kanyi Maqubela on Venture Unlocked.

  1. Market risk as a function of ownership
  2. Judgment risk
  3. Win rate risk

Market risk as a function of ownership

If you’re investing in an consensus market – be it hot, growing, and is garnering a lot of attention, you don’t need a huge percentage. I mentioned before that every year there are only 20 companies that matter. And the goal of a great VC is to get into one of these 20 companies. Ownership doesn’t matter. Even 1% of a $10B outcome is a solid $100 million.

On the other hand, if you’re in a small or non-consensus market, you need a meaningful ownership to justify your bets. For the same $100 million return, you need to maintain 10% at the time of a unicorn exit.

Going back to economics 101, revenue is price multiplied by quantity. Revenue in this case is your returns, your DPI, or your TVPI. Price is the valuation of the business. Quantity is how much you own in that business. Valuation, as a function of market size, and percent ownership are inversely proportional to reach the same returns. The smaller the market, the more ownership matters. The bigger the market, the less it matters.

Judgment risk

At the top of the funnel, the job of any investor is to pick or to get picked. I’ll take the latter first. Getting picked is often far less risky. But far harder to get allocations for, especially if you’re a fund that has ownership targets, vis a vis the market risk above. At the same time, the larger your check size, the harder it is to squeeze into the round.

To generate alphas from picking, there are two ways:

  1. Get in early.
  2. Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.

The question to ask yourself here is: What do you know that other investors are overlooking, underestimating, or altogether not seeing? And how did you reach that conclusion as a function of your experience and analysis?

As Kanyi said on the podcast, “We think we’ve got unusually good judgment and nobody else likes this, but we like it for reasons that are unfair.” The unfair part is key.

Win rate risk

Win rate risk breaks down to what unique advantage you, as an investor, bring to the table that will help the company win. In simpler terms, what is your value add? Of the businesses you say “yes” to, can you increase the number of those who win? As an early-stage investor – angel or VC, there are four main ways an investor can help founders:

  1. Access to downstream capital or capital from strategic investors
  2. Access to talent – How can you increase the output of the business?
  3. Sales pipeline – How can you help grow revenue directly?
  4. Strategy – Do you have unique insight into the industry, business model, product, GTM, or team management that will meaningfully move the business forward?

In closing

If you’re an investor, I hope you found the above as useful of a reframing as I did. If you’re a founder reading this, I often find it useful to stand in the shoes of your investors. And in understanding how your investors think, you can better formulate your pitch that’ll align your collective incentives.

The conversation around risk management, at the end of the day, is a conversation of prevention. A realm of prevention while useful to hedge your bets is a strategy to not lose. It’ll help your LPs find comfort in investing dollars into you. But to truly stand as a signal above the rest and to win, you have to look where other investors aren’t. The non-obvious. Specifically the non-obvious that’ll become obvious one day. And you have to do so consistently.

Photo by Matthew Sleeper on Unsplash


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

Where Does Implicit Gender Bias In The Startup World Come From

Last Thursday, I had an extremely thought-provoking conversation with an attorney-turned-investor. Out of the incredible array of topics our open-ended exploration on the topic of diversity – geographically and demographically – led us to, there was one thing in particular that I had to double click on.

She shared, “Men typically get asked promotion questions. ‘What does your upside look like?’ Whereas women and other underrepresented founders get asked prevention questions. ‘How do you prevent your startup from going out of business?’ And promotion questions begets more promotion questions. Similarly, prevention questions leads to more prevention questions. Founders who are typically asked prevention questions raise less capital than those who are asked promotion questions.”

I found that inextricably fascinating. I’ve never thought about investing through those lens before. It makes complete sense. The more an investor asks how are you not going to fail, the more they has convinced themselves this won’t be a good investment. On the flip side, the more an investor asks how awesome will you be, the more they’ve convinced themselves that this will be an investment worth their time.

And subsequently, I ended up reexamining the way I ask questions. I’ve never tracked the way I ask questions by demographic. But I fear that I may, in the past, have done something along the same veins.

When we closed out our conversation, she left me with one name: Dana Kanze. And well, if you know me, I had to look into her.

Lack of Venture Dollars

Dana Kanze is an assistant professor of organizational behavior over at London Business School. She wrote a paper titled We Ask Men to Win and Women Not to Lose: Closing the Gender Gap in Startup Funding back in 2018 that won her the Academy of Management Journal’s Best Article of the Year award, which she inevitably did a TED talk on that I highly recommend checking out.

She cites in that research that “although women found 38% of US companies, they only get 2% of the venture funding.” While that metric is a few years old, recent trends echo the same notion. Despite the increase in conversations to include diversity at the table, in board rooms and as decision makers, Crunchbase found in a study back in August that women still only get 2.2% of venture funding, which is actually lower than any of the previous five years.

Source: Crunchbase

And despite larger round sizes, we don’t see a rise in round sizes to female-only and mixed-gender teams either.

Source: Crunchbase

Cynthia Franklin, director of entrepreneurship at Berkley’s Innovation Labs at NYU, did say, “The bets are being made, but they’re smaller.” Which accounts for the fact that 61% of total funding for female founders happens at the early stages. Frankly, it might be too early to tell. Nevertheless, Dana has a point.

Why female founders raise less capital

Originating from E. Tory Higginsregulatory focus, Dana shares the bifurcation of questions that male and female founders get. Promotion and prevention questions, respectively. “A promotion focus is concerned with gains and emphasizes hopes, accomplishments, and advancement needs, while a prevention focus is concern with losses and emphasizes safety, responsibility, and security needs.”

After analyzing nearly 2,000 questions and answers asked at TechCrunch Disrupt to presenting founders, she found that investors often ask male founders promotion questions. And investors ask female founders prevention questions. Specifically, 67% of questions to males were promotion questions. And 66% to females were prevention ones.

Yet I found one notion Dana shared particularly fascinating. “All VCs displayed the same implicit gender bias manifested in the regulatory focus of the questions they posed to male versus female candidates.” That both female and male investors had the exact same implicit cognitive biases against females.

Promotion questions beget promotion answers, which beget more promotion questions, reinforcing favorable opinions. It becomes a virtuous feedback loop, which culminates often times in a “yes”. On the other hand, prevention questions beget prevention answers. Which leads to more prevention questions. This, subsequently, leads founders down a negative feedback loop, reinforcing loss-correlated opinions. When it came down to it, “startups who were asked predominantly promotion questions went on to raise seven times as much funding as those asked prevention questions.”

The silver lining, as Dana shares, is that if founders respond to prevention questions with promotion answers, they raise 14 times more funding than those who answer prevention with prevention. The lesson is reframe your answers positively, betting on the long term potential and vision. Or in Alex Sok‘s words, focus on a strategy to win rather than a strategy not to lose.

In closing

Investors invest in lines, not dots. And often times, VCs don’t realize they’re spending more time analyzing the y-intercept than the slope. And that mentality actualizes in the form of questions founders get.

As a founder, understand your investor intention – subconscious and conscious. Playing off of Matt Lerner‘s language/market fit, find your fundraising language/investor fit. Once you understand their intention, capture their attention. In a saturated market of information, attention is your audience’s scarcest resource. Frame the dialogue with a promotion focus to get your investors over the activation energy to book the next meeting.

As an investor, pay attention to your cognitive biases. Most of the time, and often the most detrimental, are the ones we don’t realize. If anything, this blogpost is me pinching myself to wake up.

Photo by Garrett Jackson on Unsplash


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

VCs Are Science Fiction, Not Non-Fiction Writers

science fiction, camera lens, city

With the crazy market we’re in today, VCs are frontloading their diligence. They’re having smarter conversations earlier. Before 2021, most investors would have intro conversations with founders before taking a deeper dive into the market to see if the opportunity is big enough. Nowadays, investors do most, if not all, their homework before they start conversations with founders. And when they’ve gotten a good understanding of the market and a more robust thesis, then:

  1. They go out finding and talking to the founders who are solving the problems and gaps in the market they know exist.
  2. They incubate their own companies that solve these same issues.

Subsequently, they are more exploratory than ever before. In frontloading their diligence, VCs have become more informed, if not better, predictors of not only where the market is today, but where the market is going to be tomorrow. They have a better grasp on the non-obvious. Or at the very minimum, have a much better understanding on the obvious, so that the boundaries of the non-obvious are pushed further. In turn, they can truly invest in the outliers. Outliers that are more than three standard deviations from the mean.

Startup ideas are often pushing the boundaries of our understanding of the world we live in. The team at Floodgate use an incredible breakdown to frame the amount of data that needs to be present to qualify the validity of a team and idea. “[W]e like to say some secrets are plausible, some are possible, and some are preposterous, all different types of insights. It matters what type it is because the type of team you need, the type of people you need to hire, the fundraising strategy, the risk profile, the amount of inflections that have to come together. All of those things vary, depending on the type of secret about future that you’re pursuing,” said Mike Maples Jr. recently on the Invest Like the Best podcast.

Science fiction is, by definition, preposterous. But so are the true outliers. And as any great investor knows, that’s where the greatest alphas are generated.

Preposterous ideas are backed by logic and insight

To quote PG from an essay he wrote earlier this year, “Most implausible-sounding ideas are in fact bad and could be safely dismissed. But not when they’re proposed by reasonable domain experts. If the person proposing the idea is reasonable, then they know how implausible it sounds. And yet they’re proposing it anyway. That suggests they know something you don’t. And if they have deep domain expertise, that’s probably the source of it.

“Such ideas are not merely unsafe to dismiss, but disproportionately likely to be interesting.”

But no matter how implausible your startup idea sounds, there still has to fundamentally be an audience. And while it may not be obvious today, the goal is that it will be obvious one day. Frankly, if it’s forever non-obvious and forever in the non-consensus, you just can’t make any money there. If Airbnb stuck only with the convention industry or Uber only with the black cab, or Shopify only with snowboards, they would never have the ability to be as big as they are today.

Shopify’s Alex Danco has this great line in his essay World Building. “If you can create a world that’s more clear and compelling than the complex, ambiguous real world, then people will be attracted to that story.”

As investors, we have to start from first principle thinking. Investors, in frontloading their diligence, find the answers to “why now” and “why this”. All they’re looking for after is the “why you.” The further down the line towards preposterous science fiction you are, the more you need to sell investors on “why you”.

Idea PlausibilityKey QuestionContext
PlausibleWhy this?Most people can see why this idea should exist. Because of the consensus, you’re competing in a saturated market of similar, if not the same ideas. Therefore, to stand out, you must show traction.
PossibleWhy now?It makes sense that this idea should exist, but it’s unclear whether there’s a market for this. To stand out, you have to convince investors on the market, and subsequently the market timing.
PreposterousWhy you?Hands down, this is just crazy. You’re clearly in the non-consensus. Now the only way you can redeem yourself is if you have incredible insight and foresight. What’s the future you see and why does that make sense given the information we have today? If an investor doesn’t walk out of that meeting having been mind-blown on your lesson from the future, you’ve got no chance.

And when answering the “why you”, it’s not just on your background and years of experience, but your expertise. As Sequoia’s Roelof Botha puts it, “So what was the insight? What is the problem that you’re addressing? And why is your solution compelling and unique in addressing that problem? Even if it’s compelling, if it’s not unique there’re going to be lots of competitors. And then you’re probably going to struggle to build a distinctive business. So it’s that unique and compelling value proposition that I look for.” So before anything else, the best investors, like Roelof, “think of value creation before value capture.”

In order to find that earned secret – that compelling and unique secret sauce – in the first place, you have to love what you’re working. And not just passionate, but obsessive. The problem you’re trying to solve keeps you up at night. You have to be more of a “missionary” than a “mercenary” as Roelof would put it. If you’re truly a missionary, even the most preposterous idea will sound plausible if you can break down why it truly matters.

The Regulatory Dilemma

The most important and arguably the hardest part about writing science fiction – and this is equally true for funders as it is for founders – is that we have to self-regulate. Regulation will always be a lagging indicator of technological development. Regulators won’t move until there’s enough momentum.

But, as we learned in high school physics, with every action, you need an equal and opposite reaction. The hard about momentum, and I imagine this’ll only be more true in a decentralized world, is that it’s second order derivative is positive. In other words, it’ll only get faster and faster. On the other hand, regulation follows the afterimage of innovation. It sees where the puck was or, at best, is at, but not, until much later, where the puck is going. And truth be told, innovation will eventually plateau, as it follows a rather step-wise function, as I’ve written before. And when it does, regulation will catch up.

S-Curves
Source: Tim Urban’s “The AI Revolution: The Road to Superintelligence

So, in the high school physics example of Newtonian physics, the reaction, in this case, regulation, needs to be equal and opposite force comparative to where the puck will be. But as you’ve guessed, that will stop innovation. And I don’t think the vast majority of the world would want that. Progress fuels the human race.

Science fiction needs rules

Brandon Sanderson, one of my favorite fictional authors, has these three laws that govern great worldbuilding. To which, he coined as Sanderson’s Three Laws. The second of which reads:

Limitations > powers

In fantastical worlds, we are often used to how awesome things can be. Making the impossible possible. But as Brandon explains, “the truth is that it’s virtually impossible to come up with a magical effect that nobody else has thought of. Originality, I’ve seen, doesn’t come so often with the power itself as with the limitation.”

As the infamous line goes, “with great power comes great responsibility.” If you end up having access to every single person on this planet’s data, what makes you a company worth betting on isn’t your power, but how you use that power. How you self-regulate in using that power. Take, Open AI’s GPT-3. Instead of sharing the entire AI with the world, they limited that power to prevent malicious actors through an API.

What does self-regulation mean? Simply, aligning incentives so that all stakeholders win. When you have two people, you have a 2×2 matrix to account for four possible outcomes. There’s a situation where both people win, two situations where one wins, one loses, and another where both lose. Needless to say, we want to be maximizing for win-win situations.

As Balaji Srinivasan said on the Tim Ferriss Show recently, “When you have three people, it’s a 2x2x2, because there’s eight outcomes, win/lose times win/lose times win/lose. It’s a Cartesian product.. […] When you have N people, it’s two by two by two to the Nth power. It’s like this hypercube it as it gets very complicated.” Subsequently, the greater the organization, the more stakeholders there, and the harder it is to account for the “win” to the Nth power outcome. Nevertheless, it’s important for founder and funders at the frontier of technological and economic development to consider such outcomes. And at what point is there a divergence of incentives.

There’s usually a strict alignment in the value creation days. But as the business grows and evolves to worry more about value capture, there needs to be a recalibration of growth and an ownership of responsibility as the architects who willed a seemingly preposterous idea into existence.

In closing

We live in a day in age that is crazier than ever before. To use Tim Urban’s analogy, if you brought someone from 1750 to today and had them just observe the world we live in, that person will not only be mind-blown, but literally, die of shock. To get the same effect of having someone die of shock in 1750, you can’t just bring someone from 1500, but you’d have to go further back till 12,000 BC. The world is changing exponentially. And new technologies further that. Who knows? In 50 years, we in 2021, might die of shock from what the world will have become.

And rightly because of such velocity, innovators – founders and investors – will have to lead the charge not only technically and economically, but also morally.

Photo by Octavian Rosca on Unsplash


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

We’re More Similar Than You Think: The Founder and the Funder

Last weekend, I tuned into Samir Kaji’s recent episode with LPs (limited partners). Not once, but twice. And as you might’ve guessed, was damn inspired by their conversation. The more I listened to it, the more synonymous the paths of a founder and an emerging manager (EM) seemed to be. Or what I call the entrepreneur and the entrepreneurial VC. If you’re a regular here, you’ll know I love writing about the intellectual horsepower of both sides of the table. But in this post, rather than delineating the two, I’d love to share how similar founders and funders actually are.

Surprises suck, but pivots are okay

On Samir’s podcast, Guy Perelmuter of GRIDS Capital voiced: “There’s only one thing that LPs hate more than losing money. It’s surprises.”

Be transparent. Be clear on your expectations, and steer clear of left hooks. As a fund, something I’ve heard a number of GPs and LPs say is don’t deviate on your thesis. LPs invest in you for your strategy. But as soon as you deviate from that initial strategy, you become increasingly unpredictable.

Take, for example, you go to a steakhouse and order steak. But they serve you sushi instead. If it’s not good sushi, obviously you’re not coming back. Not only did they surprise you, but it was also a poorly executed one. This goes in the column of one-star Yelp reviews.

But, say it was great sushi. You had one great dining experience and you’re a happy customer. Some time in the future, you think of getting sushi again. And you remember what a great experience you had at the steakhouse. So you go back to the steakhouse, only to realize it was a fluke and the sushi wasn’t like the last time you’ve had it. Your inability to replicate surprises scares LPs, which limits your ability to raise a subsequent fund.

Nevertheless, these days markets are changing quickly. And sometimes your initial thesis may not serve you as well in today’s market as it did yesterday. As John Maynard Keynes, father of Keynesian economics, once said, “When the facts change, I change my mind.” But, if you do need to deviate, communicate it clearly, formulate a new strategy, and preemptively tell your LPs. Then at that point, it’s no longer a surprise, but a strategy. Great examples include:

  • Accelerators making discovery checks part of their core business
    • Note: LPs historically dislike GPs (general partners) writing discovery checks because they’re:
      1. Not investing via their fund strategy (i.e. typically ad hoc),
      2. Require less diligence and therefore less conviction,
      3. Send negative signals to other investors if the GP doesn’t do a follow-on check at the next round, and
      4. Because of (2) and (3) are usually cash sinks.
  • The On Deck Accelerator (ODX) – Backing founders at the earliest stages (i.e. pre-product, pre-revenue) as long as they have deep conviction in their own business.
  • The recent announcement of The Sequoia Fund – a systematic and predictable strategy to invest in not just startups, but venture funds backing incredible founders as well.

The same holds for founders. Don’t get me wrong. Startups pivot. And they should. Mike Maples Jr., founder of one of the best performing seed stage venture firms, recently shared: “Most investors are going to look at what the company does and evaluate the business for what it is, but 90% of our exit profits have come from pivots.” And just like fund managers, clearly convey why, how, and what you’re pivoting to to your shareholders. It’s always better to preempt these conversations than leave these as surprises. Often times, you’ll find your investors, having seen as many pivots as they have and knowing that is the name of the game, can offer you much more feedback and insight than you imagined for your pivot.

Optimize for the “Oh shit! moment*

In every conversation, your goal should just be to teach your investors something. An earned secret. A unique insight. What do you know that other people don’t, overlook, or underestimate? What do you know that other people would find it very hard to learn organically? This is especially true for consensus ideas – or obvious ideas. The best obvious products may seem obvious at first glance, but usually have non-obvious insights to back them up.

If you’re a fund, what is your insight – your access point – that’ll win you an asymmetric upside?

I’ve talked to too many founders and EMs that claim to be experts with X years of experience in a particular field. Yet after 30 minutes, I realized I learned nothing from them. I realize that for half an hour straight I ended up with a prep book full of buzzwords and vague jargon that would rival the SAT vocab section. But let’s be real. The SAT doesn’t get me excited to want to retake the test.

The best founders and funders out there are able to break down deep, technical, esoteric, and sometimes crazy concepts into simple bitesize ideas. The equivalent of taking the whole universe and simplifying it to its origin. A single point. The Big Bang.

I’ve also realized over the years that the world’s smartest teachers – and when you’re trying to convince people to join you in a non-obvious vision, you are teaching – lead with analogies. And the best analogies lead investors to that “Oh Shit! moment.”

COVID made capital cheaper

Equally true for startups and funds. Capital is digital. If you think about capital in the frame of investor acquisition cost, you no longer have to travel to your investors to pitch to them. This means you can take far more meetings than before. Less travel and more meetings mean your investor acquisition cost goes down.

Founders no longer have to book a week to Sand Hill Road or South Park to have introductory conversations with investors. Only to have 80-90% turn down a second conversation. This becomes even more costly the earlier you are in your startup journey. You have to have a lot more first conversations as a pre-seed founder than you do as a founder raising an A. At the same time, you have many more options for raising capital today: accelerators, syndicates, equity crowdfunding, and roll-up vehicles (RUVs). While it’s not that these resources didn’t exist before COVID, the pandemic made it much more apparent that VC money didn’t have to be the only way to raise capital. And that you can also leverage speed and your community to help you grow.

Similarly, EMs no longer have to travel across the states to talk to institutional capital. Even more so, as an EM, you’re most likely raising from individual investors. Raising a rolling fund or a 506c lets you generally solicit investments, where you couldn’t with a 506b. Subsequently, Twitter and having a community became your superpower. Mac at Rarebreed, Packy’s Not Boring Fund I, and Harry at 20VC all raised during the time of COVID, leveraging the power of their following and community to do so.

Keep it simple

“There’s no favorable wind for the sailor who doesn’t know where to go.” – Seneca

Two Saturdays ago, I caught up with my ridiculously smart engineer friend from college – “Fred”. We were reminiscing about the “good ol’ days” when we first started punching above our weight class. Particularly in regards to cold outreaches to individuals we really admired. While I was an operator at two startups that shaped my entrepreneurial career, I spent many a night struggling on how to best position our products in the market. Many hours of copy and rephrasing and reframing. In both we were competing against the existing saturation of information and solutions on the market. How do we tell our customers and investors the reason we’re awesome is because of A and B and C, and also D?

Most people, friends, customers, and investors didn’t understand the value we thought we were obviously conveying. And subsequently, we were rejected more often than I would have liked to admit. In the early days, we didn’t lose on price nor on quality, but on brand and messaging. And while we thought and strove to prove we were better in areas that mattered, both startups eventually ended up having exceedingly simple one-liners.

On the other hand, “Fred” was working on something related to liquid fuel and cold fires. Something extremely technical. But he was able to win proportionally more yes’s than I was able to. When I asked him how, he said it was simple. “We’re putting a rocket into space. That’s it. And that’s really exciting.”

I made something extraordinarily simple into something extraordinarily complex. In all honesty, I sounded really, really smart. And I felt like I was the shit. Except no one else did. “Fred” took something extraordinarily complex and made it extraordinarily simple. He didn’t sound as smart. But celebrities, sponsors, companies – people just got it.

The true value of a product is usually exceedingly simple. The fallacy of including a Rolodex of esoteric jargon comes in two-fold. Either you’re trying to sound smarter than you actually are. Or you’re trying to cram too many things in too little space. As economist Herbert A. Simon said, “A wealth of information creates of poverty of attention.”

In closing

Whether you’re an entrepreneur or an emerging manager, you’re swinging for the fences. I was chatting with an investor yesterday who had an incredible analogy. “It’s like a pinball machine. The ball goes up, and you never know how it’ll fall down. You don’t know how many bounce pads and flippers it will hit. You don’t know how many points you’re going to get. But no matter how many points you’ll get, the ball has to go up first.” Similarly, whether you start a company or a fund, you have to step up to the plate to bat. You don’t know what the upside will be. You don’t know if you’re going to return your investors 2x, 5x or a 100x.

You’re taking an asymmetric bet on the compelling future you bring. Your valuation as a startup is not how much your startups is worth, which is why the 409a valuation is always different from the valuation your investors set for you. Your valuation is a bet your investors made that you will be as big as the major players in the market. If you’re valued at $10M today, your investors are saying you are 10 in 1000, or a 1% chance, to be a unicorn. And a 0.1% chance to be a decacorn.

Valuations might seem crazy today. VC firms are also raising larger and larger funds, which lead many to be skeptical on their ability to return capital. In fairness, most funds will return a modest 2-3x over their lifetime, if at all. Most startups are and will be overvalued. On the same token, the best ones, despite their crazy price, are still undervalued. Imagine if you were an investor who could invest in Facebook’s then-unicorn valuation. You’d have made a lot of money. But we’re in an optimistic market.

At the end of the day, both parties are just managing someone else’s capital. And as such, through a fiduciary responsibility, in that regard, both are cut from the same cloth.

Photo by Luke Leung on Unsplash


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

Why Product-Market Fit Is Found In Strategically Boring Markets

streets, ordinary, boring

In the past decade or two, there have been a surplus of talent coming into Silicon Valley. In large part, due to the opportunities that the Bay had to offer. If you wanted to work in tech, the SF Bay Area was the number one destination. If you wanted to raise venture money, being next door neighbors to your investors on Sand Hill Road yielded astounding benefits. Barring the past few months where there have been massive exoduses leaving the Bay to Miami or NYC, there’ve been this common thread that if you want to be in:

  • Entertainment, go to LA
  • Finance and fashion, go to NYC
  • Tech/startup ecosystem, go to the Valley.

While great, your early audience – the innovators on your product adoption curve – should not be overly concentrated there. All these markets carry anomalous traits and aren’t often representative of the wider population. Instead, your beachhead markets should be representative of the distribution of demographics and customer habits in your TAM (total addressable market).

While Keith Rabois could have very much built Opendoor in Silicon Valley, where more and more people were buying homes to be close to technological hubs, he led the early team to test their assumptions in Phoenix, Arizona. On the same token, Nikita Bier started tbh, not in the attention-hungry markets of LA, but in high schools in Georgia.

“Boring” virtual real estate

Strategically boring markets aren’t limited to just physical geographies. They’re equally applicable to underestimated virtual real estate. You don’t have to build a mansion on a new plot of land. Rent an Airbnb and see if you like the weather and people there first.

As Rupa Health‘s Tara Viswanathan said in a First Round interview, “Stripping the product down to the bare bones and getting it out in front of people for their reactions is critical. It’s rare for a product not to work because it was too minimal of an MVP — it’s because the idea wasn’t strong to begin with.”

As she goes on, “If you have to ask if you’re in love, you’re probably not in love. The same goes with product/market fit — if you have to ask if you have it, you probably don’t.”

Test your market first with the minimum lovable product, as Jiaona Zhang says. You don’t have to build the sexiest app out there. It could be a blog or a spreadsheet. For example, here are a few incredible companies that started as nothing more than a…

BlogsSpreadsheets
HubSpotNerdWallet
GlossierSkyscanner
GrouponStitch Fix
MattermarkFlexiple
Ghost

The greatest incumbents to most businesses out there really happen to be some of the simplest things. Spreadsheets. Blogs. Facebook groups. And now probably, Discord and Slack groups. There are a wealth of no-code tools out there today – Notion, Airtable, Webflow, Zapier, just to name a few. So building something quick without coding experience just to test the market has been easier than ever. Use that to your advantage.

Patrick Campbell once wrote, quoting Brian Balfour, CEO of Reforge, “It’s much easier to evolve with the market if your product is shaped to fit the market. That’s why you’ll achieve much better fit between these two components if you think market first, product second.”

Think like a designer, not like an artist

The biggest alphas are generated in non-obvious markets. Markets that are overlooked and underestimated. At the end of the day, in a market teeming with information and capital and starved of attention, think like a designer, not like an artist. Start from your audience, rather than from yourself. Start from what your audience needs, rather than what you want.

As ed-tech investor John Danner of Dunce Capital and board member at Lambda School, once wrote, “[the founders’] job is to find the absolute maximum demand in the space they are exploring. The best cadence is to run a new uncorrelated experiment every day. While demanding, the likelihood that you miss the point of highest demand with this approach is quite small. It is incredibly easy to abandon this kind of rigor and delayed gratification, eat the marshmallow and take a good idea and execute on it. Great founders resist that, and great investors do too.”

Spend more time researching and talking to your potential market, rather than focusing on where, how, and what you want your platform to look like. Obsess over split testing. Be scrappy.

Don’t fail the marshmallow test

We’re in a hype cycle now. Speed is the name of the game. And it’s become harder to differentiate signal from noise. Many founders instantly jump to geographically sexy markets. Anomalous markets like Silicon Valley and LA. But I believe what’ll set the winners from the losers in the long run is founder discipline. Discipline to spend time discovering signs of early virality, rather than scale.

For instance, if you’re operating a marketplace, your startup is more likely than not supply-constrained. To cite Brian Rothenberg, former VP of Growth at Eventbrite, focus on early growth loops where demand converts to supply. Ask your supply, “How did you hear about our product?” And watch for references of them being on the demand side before.

Don’t spend money to increase the rate of conversion until you see early signs of this growth dynamic. It doesn’t matter if it’s 5% or even 0.5%. Have the discipline to wait for organic conversion. It’s far easier to spend money to grow than to discover. Which is why startup life cycles are often broken down into two phases:

  • Zero to one, and
  • One to infinity

Nail the zero to one.

In an increasingly competitive world of ideas, many founders have failed the marshmallow test to rush to scale. As Patrick Campbell shared in the same afore-mentioned essay, “Product first, market second mentality meant that they had a solution, and then they were searching for the problem. This made it much, much more difficult to identify the market that really needed a solution and was willing to pay for the product.”

The more time you spend finding maximum demand for a big problem, the greater your TAM will be. The greater your market, the greater the value your company can provide. So, while building in anomalous markets with sexy apps will help you achieve quick early growth, it’s, unfortunately, unsustainable as you reach the early majority and the late majority of the adoption curve.

Photo by rawkkim on Unsplash


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