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Micro(scopic) 10X Funds

young, kids, students

I wrote both a Twitter thread (I know it’s X now, but habits die hard) and a LinkedIn post recently on student and recent graduate funds. A good friend and I have been seeing a number of small sub-$10M funds run by college students and/or recent grads. And even more since the afore-mentioned social posts came out. In a way, it was my flag in the sand moment inviting additional conversations on the topic.

Full LinkedIn post here. Truncated this to make it easier to read.

The TL;DR version of the post, although the post itself is at most a two-minute read, is that these student funds are interesting. Most will die. But a small, small few will deliver insane returns. As such, as LPs, the underwriting for these funds, where sourcing is extremely predictable (i.e. invest in their peers), needs for these funds to be 10X funds, as opposed to 5X net for the typical seed fund or 3X for the typical Series A fund. Also, we know going in that most, if not all, of these funds won’t be enduring. Most likely one and done.

And so what does the underwriting look like?

I actually elaborated on this in response to a comment that asked what percent of unicorns were founded by students, but thought it made sense to expand here in this blogpost as well.

Venture, at the end of the day, is a game driven by the power law. I’m not the first to say that. And I won’t be the last. In other words, in VC, we are applauded not by our batting average (like buyouts or hedge funds), but by the magnitude of our home runs. We can miss on the vast majority, but as long as we strike one Uber or Coupang or Google or Facebook and it returns multiple times of our portfolio, then… we did it.

To quote a Midas list investor (who’ll go nameless for now, until I have his permission to share his name), who at the time was presenting on stage, “The only reason you are listening to me today is because I’m on the Midas list. And the only reason I’m on the Midas list is because of this one investment I made [redacted] years ago.”

Obviously, there was definitely some modesty there. In fact, he’s hit a number of exits in the years since. Nevertheless, when said in broad strokes, his point stands.

So to the comment that started it all. By numbers, a rather small number of unicorns were founded by active students. I don’t know the exact number (writing this on vacation, and I don’t have Pitchbook access on this small device), but I’m willing to bet that only a small percentage of unicorns are founded by students. And even less when you consider realized unicorn exits. Excluding the crazy markups of 2020-2022. It’s why the average age of a startup founder is 42 at the inception of the company.

That said, “Among the top 0.1% of startups based on growth in their first five years, [an HBR study finds] that the founders started their companies, on average, when they were 45 years old.” In fact, in the same study, they found “[r]elative to founders with no relevant experience, those with at least three years of prior work experience in the same narrow industry as their startup were 85% more likely to launch a highly successful startup.” In a separate Endeavor study, it’s also why there’s only a small sliver of founders with no work experience prior to the founding of their unicorn company.

All that to say, from Alexandr Wang to Jeff Bezos to Mark Zuckerberg to Patrick and John Collison, all were in their early twenties (or earlier) when they started their companies. Each, in their own right, an outlier.

To build a hypothetical portfolio — forgive my generalizations, but doing so for nice, even numbers…

Say one allocates a $10M fund of funds portfolio. It’ll write 10 $1M checks into $5M funds. In other words, for a 20% stake at the fund level. In a bad economy, where $200M is the median ARR to go public, and if we assume a 10x multiple on exit, a $2B unicorn exit in that $5M VC fund returns ~$2.2M in the fund of funds portfolio. 0.6% equity valued at $12M. A 2.4X on the $5M fund alone. And a little over $2.2M back to the LP, as the GP takes 20% carry. This assumes $100K checks, 2% ownership on entry and 70% dilution by the time of exit. Naturally, no reserves. needing about 10-11 unicorns to 2x. A lot to expect for a portfolio of student funds. 10 unicorns out of 400 is quite hard even for most seasoned investors.

And so one must believe that these student funds can find true outliers. And before anyone else. Additionally have enough downstream capital relationships to facilitate intros to funds who will lead current and future rounds. Which luckily for them, a lot of GPs of multi-stage funds are individual LPs in these funds. Playing a pure access approach.

And so, if there’s a $10B exit in one of the VC portfolios, under the same fund strategy assumptions as earlier, a single $10B company exit returns the whole fund of funds portfolio. Every other exit will just be cherries on top. So out of a 400 underlying startup portfolio, only one decacorn exit is needed. Instead of multiple unicorns.

Separately, and worth noting, although I’ll be honest, I haven’t had a single conversation with a young GP where any were as deliberate with their sell strategy as this, there are multiple exit paths today outside of M&A and IPO, most notably secondaries (portfolio and fund) (something that the one and only Hunter Walk wrote recently in a blogpost far more eloquently than I could have put it). And so even in a crazy AI hype right now, there are paths to liquidity in these multi billion valuations at the Series B and C, if not earlier. In the increasing availability of such options, my only hope is that these young fund managers have the wherewithal to be disciplined sellers. Perhaps, an additional reason these young VCs should have LPACs.

A blogpost for another day.

Photo by 🇸🇮 Janko Ferlič on Unsplash

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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.

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Chasing Revenue Multiples and Revenue

unicorn, sunset

On Wednesday this week, I hosted an intimate dinner with founders in the windy backdrop of San Francisco. And I’m writing this piece, I can’t help but recall one founder from that evening asking us all to play a little game she built. A mini mobile test to see if we could tell the difference between real headshot portraits and AI-generated ones based on the former. There were 15 picture. Each where we had to pick one of two choices: real or AI.

10/15. 6/15. 9/15. 11/15. 8/15… By the time it was my turn, having seen the looks of confusion of my predecessors, I wasn’t confident in my own ability to spot the difference. Then again, I was neither the best nor the worst when it came to games of Where’s Waldo? 90 quick seconds later, a score popped up. 10/15. Something slightly better than chance.

Naturally, we asked the person who got 11/15 if he knew something we didn’t. To which, he shared his hypothesis. A seemingly sound and quite intellectual conjecture. So, we asked him to try again to see if his odds would improve. 90 seconds later, 6/15.

Despite the variance in scores, none were the wiser.

Michael Mauboussin shared a great line recently. “Intuition is a situation where you’ve trained your system one in a particular domain to be very effective. For that to work, I would argue that you need to have a system, so this is the system level, that it’s fairly linear and stable. So linear in that sense, I mean really the cause and effect are pretty clear. And stable means the basic rules of the game don’t change all that much.”

For our real-or-AI game, we lacked that clear cause and effect. If we received individual question scores of right or wrong, we’d probably have ended up building intuition more quickly.

Venture is unfortunately an industry that is stable, but not very linear. In many ways, you can do everything right and still not have things work out. That same premise led to another interesting thread I saw on Twitter this week by Harry Stebbings.

In a bull market, and I was guilty of this myself, the most predictable trait came in two parts: (a) mark-ups (and graduation rates to the next round), and (b) unicorn status. In 2020 and 2021, growth equity moved upstream to win allocation when they needed it with their core check and stage. But that also meant they were less price-sensitive and disciplined in the stages preceding their core check.

The velocity of rounds coming together due to a combination of FOMO and cheap cash empowered founders to raise quickly and often. Sometimes, in half the funding window during a disciplined market. In other words, from 18 months to 9 months. Subsequently, investors found themselves with 70+% IRR and deploying capital twice or thrice as fast as they had promised their LPs. In attempts to keep up and not get priced out of deals. Many of whom believed that to be the new norm.

While the true determinant of success as an investor is how much money you actually return to your investors, or as Chris Douvos calls it moolah in da coolah, the truth is all startup investors play the long game. Games that last at least a decade. Games that are stable, but not linear. The nonlinearity, in large part, due to the sheer number of confounding variables and the weight distribution changing in different economic environments. A single fund often goes through at least one bull run and one bear run. So, because of the insanely long feedback loops and venture’s J-curve, it’s often hard to tell.

Source: Crunchbase

In fact, in recent news, Business Insider reported half of Sequoia’s funds since 2018 posted “losses” for the University of California endowment. We’re in the beginning of 2023. In other words, we’re at most five years out. While I don’t have any insider information, time will tell how much capital Sequoia will return. For now, it’s too early to pass any judgment.

The truth is most venture funds have yet to return one times their capital to their investors within five years. Funds with early exits and have a need to prove themselves to LPs to raise a subsequent fund are likely to see early DPI, but many established funds hold and/or recycle carry. Sequoia being one of the latter. After all, typical recycling periods are 3-4 years. In other words, a fund can reinvest their early moolah in da coolah in the first 3-4 years back into the fund to make new investments. There is a dark side to recycling, but a story for another time. Or a read of Chris Neumann’s piece will satiate any current surplus of curiosity.

But I digress.

In the insane bull run of 2020 and 2021, the startup world became a competition of who could best sell their company’s future as a function of their — the founders’ — past. It became a world where people chased signal and logos. A charismatic way to weave a strong narrative behind logos on a resume seemed to be the primary predictors of founder “success.” And in a market with a surplus of deployable capital and heightened expectations (i.e. 50x or higher valuation multiples on revenue), unicorn status had never been easier to reach.

As of January of this year — 2023, if you’re a time traveler from the future, there are over 1,200 unicorns in the world. 200 more than the beginning of 2022. Many who have yet to go back to market for cash, and will likely need a haircut. Yet for so many funds, the unicorn rate is one of the risks they underwrite.

I was talking with an LP recently where he pointed out the potential fallacy of a fund strategy predicated on unicorn exits. There have only been 118 companies that have historically acquired unicorns. And only four of the 118 have acquired more than four venture-backed unicorns. Microsoft sitting at 12. Google at 8. And Meta and Amazon at 5 each. Given that a meaningful percentage of the 1200 unicorns will need a haircut in their next fundraise, like Stripe and Instacart, we’re likely going to see a slowdown of unicorns in the foreseeable future. And for those on the cusp to slip below the unicorn threshold. Some investors have preemptively marked down their assets by 25-30%. Others waiting to see the ball drop.

The impending future is one not on multiples but one of business quality, namely revenue and revenue growth. All that to say, unless you’re growing the business, exit opportunities are slim if you’re just betting on having unicorn acquisitions in your portfolio.

So while many investors will claim unicorn rate as their metric for success, it’s two degrees of freedom off of the true North.

In the bear market we are in today, the world is now a competition of the quality of business, rather than the quality of words. At the pre-seed stage, companies who are generating revenue have no trouble raising, but companies who don’t are struggling more.

As Andy Rachleff recently pointed out, “Valuations are not the way you judge a venture capitalist, or multiples of their fund. […] The way that I judge a venture capitalist is by how many companies did they back that grew into $100M revenue businesses.” If you bring in good money, whether an exit to the public market or to a partner, you’re a business worth acquiring. A brand and hardly any revenue, if acquired, is hardly going to fetch a good price. And I’ve heard from many LPs and longtime GPs that we’re in for a mass extinction if businesses don’t pivot back to fundamentals quickly. What are fundamentals? Non-dilutive cash in the bank. In other words, paying customers.

Bull markets welcome an age of chasing revenue multiples (expectation and sentiment). Bear markets welcome an age of chasing revenue.

The latter are a lot more linear and predictable than the former.

Photo by Paul Bill on Unsplash

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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.

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#unfiltered #66 Humans and Nonlinear Thinking

Humans are terrible at understanding percentages. I’m one of them. An investor I had the opportunity to work with on multiple occasions once told me. People can’t tell better; people can only tell different. It’s something I wrestle with all the time when I hear founder pitches. Everyone claims they’re better than the incumbent solution. Whatever is on the market now. Then founders tell me they improve team efficiency by 30% or that their platform helps you close 20% more leads per month. And I know, I know… that they have numbers to back it up. Or at least the better founders do. But most investors and customers can’t tell. Everything looks great on paper, but what do they mean?

When the world’s wrapped in percentages, and 73.6% of all statistics are made up, you have to be magnitudes better than the competition, not just 10%, 20%, 30% better. In fact, as Sarah Tavel puts it, you have to be 10x better (and cheaper). And to be that much better, you have to be different.

And keep it simple. As Steve Jobs famously said that if the Mac needed an instruction manual, they would have failed in design. Your value-add should be simple. Concise. “We all have busy lives, we have jobs, we have interests, and some of us have children. Everyone’s lives are just getting busier, not less busy, in this busy society. You just don’t have time to learn this stuff, and everything’s getting more complicated… We both don’t have a lot of time to learn how to use a washing machine or a phone.”

If you need someone to learn and sit down – listen, read, or watch you do something, you’ve lost yourself in complexity.

“Big-check” sales is a game of telephone. For enterprise sales or if you’re working with healthcare providers, the sales cycle is long. Six to nine months, maybe a year. The person you end up convincing has to shop the deal with the management team, the finance team, and other constituents.

For most VCs writing checks north of a million, they need to bring it to the partnership meeting. Persuade the other partners on the product and the vision you sold them.

And so if your product isn’t different and simple, it’ll get lost in translation. Think of it this way. Every new person in the food chain who needs to be convinced will retain 90% of what the person before them told them. A 10% packet loss. The tighter you keep your value prop, the more effective it’ll be. The longer you need to spend explaining it with buzzwords and percentages, the more likely the final decision maker will have no idea why you’re better.

Humans are terrible at tracking nonlinearities. While we think we can, we never fully comprehend the power law. Equally so, sometimes I find it hard to wrap my hear around the fact that 20% of my work lead to 80% of the results. While oddly enough, 80% of my inputs will only account for 20% of my results. The latter often feels inefficient. Like wasted energy. Why bother with most work if it isn’t going to lead to a high return on investment.

Yet at the same time, it’s so far to tell what will go viral and what won’t. Time, energy, capital investments that we expect to perform end up not. While every once in a while, a small project will come out of left field and make all the work leading up to it worth it.

When I came out with my blogpost on the 99 pieces of unsolicited advice for founders last month, I had an assumption this would be a topic that my readers and the wider world would be interested in. At best, performing twice as well than my last “viral” blogpost.

Cup of Zhou readership as of April 2022

Needless to say, it blew my socks off and then some. My initial 99 “secrets”, as my friends would call it, accounted for 90% of the rightmost bar in the above graph. And the week after, I published my 99 “secrets” for investors. While it achieved some modest readership in the venture community and heartwarmingly enough was well-received by investors I respected, readership was within expectations of my previous blogposts.

My second piece wasn’t necessarily better or worse in the quality of its content, but it wasn’t different. While I wanted to leverage the momentum of the first, it just didn’t catch the wave like I expected it to.

Of course, as you might imagine, I’m not alone. Nikita Bier‘s tbh grew from zero to five million downloads in nine weeks. And sold to Facebook for $100 million. tbh literally seemed like an overnight success. Little do most of the public know that, Nikita and his team at Midnight Labs failed 14 times to create apps people wanted over seven years.

When Bessemer first invested in Shopify, they thought the best possible outcome for the company would be an exit value of $400 million. While not necessarily the best performing public stock, its market cap, as of the time I’m writing this blogpost, is still $42 billion. A 100 times bigger than the biggest possible outcome Bessemer could imagine.

Humans are terrible at committing to progress. The average person today is more likely to take one marshmallow now than two marshmallows later.

Between TikTok and a book, many will choose the former. Between a donut and a 30-minute HIT workout, the former is more likely to win again. Repeated offences of immediate gratification lead you down a path of short-term utility optimization. Simply put, between the option of improving 1% a day and regressing 1% a day, while not explicit, most will find more comfort in the latter alternative.

James Clear has this beautiful visualization of what it means to improve 1% every day for a year. If you focus on small improvements every day for a year, you’re going to be 37 times better than you were the day you started.

While the results of improving 1% aren’t apparent in close-up, they’re superhuman in long-shot.

Source: James Clear

Photo by Thomas Park on Unsplash

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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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How to Win at Net Dollar Retention

coffee shop, retaining customers

I was reading Sammy Abdullah of Blossom Street Ventures‘ Medium post not too long ago about the value of auto-price increases in a context I’ve never really thought about. Quoting one of his portfolio companies’ founders:

“We started including auto-price increases in our renewals at the start of this year and it’s been surprisingly effective. Our starting point is 10% and we get it more often than not; some customers negotiate us down to the 3–5% range.

“The automatic price increases are a beautiful thing because they give us leverage:

  1. we can trade an automatic price increase for an earlier renewal, longer contract period, or upselling to more features; and
  2. when we do waive price increases, the customer walks away satisfied. They feel like they’re winning.”

It’s a great way to win on net retention. But as I’ve written about before, the net retention equation is comprised of the upgrades, downgrades, and churn variables.

NDR = (starting MRR + upgrades – downgrades – churn)/(starting MRR)

So to maximize retention, you can:

  1. Level up your customers into higher tiers
    • Or convert more users into customers, if you’re running a freemium model
  2. Reduce the number of customers downgrading to lower tiers
  3. Reduce churn – customers leaving your platform
  4. Some permutation of the above variables

Leveling up upgrades

Shivani Berry, founder of Ascend’s Leadership Program, once wrote: “Buy-in is the result of showing your team why your idea achieves their goals.” In a similar sense, buy-in is the result of showing your customers why your product achieves their goals. The best thing is that their goals will change over time. As so, your product must contain increasingly more value to your customers as they level up in their lifecycle. As they grow, you have product offerings that grow with their needs.

Take, for example, one of my favorite startups these days, Pulley, a cap table management tool for startups. Don’t worry, this isn’t a sponsored blogpost. Although it’d be nice if it was. I have no chips in the bag; I just like them. They have three tiers of pricing. The lowest for startups with 25 stakeholders. The middle for startups with 40. And the highest is for larger businesses.

Why 25? The average seed-stage startup has about 25 stakeholders. Subsequently, top of mind for them is what SAFEs and convertible notes look like on their cap table and how to structure early equity pools.

As a startup levels up to 40 stakeholders, they’re probably jumping into their first priced round. As such, they’ll need a 409A valuation to appraise their fair market value, as well as finally putting together their first official board.

Every time founders raise another round of funding, the more complicated their cap table becomes. The more they need Pulley’s software. And it so happens, the less price sensitive they become. For Pulley, that means they can charge more as their customers have greater purchasing power.

You also always want an enterprise pricing tier, where pricing is custom. Don’t be afraid to charge more. As I mentioned in a previous essay, when Intercom was only charging IBM $49, an IBM exec once told the Intercom team, “You know, I go on a coffee run for the team that costs a lot more than your product. That’s why we’re wary of investing too much more in you. We just don’t see how you’re going to survive.” If it helps as a reference point, the median ACV (annual contract value) for public SaaS companies is $27,000.

Do note that the more you charge, the longer the sales cycle will be. For ACVs over $20K, expect 4-6 months of a sales cycle. For contracts over $100K, expect 6-9 months. Of course, the contrapositive would be that the lower the price point, the easier and faster it takes to make a decision.

Reducing downgrades and churn

I’ve been in love with Clayton Christensen’s “jobs-to-be-done” (JTBD) framework ever since I learned of it a few years ago. At the end of the day, you’re delivering value. Value in the form of doing a job. As Christensen says, “when we buy a product, we essentially ‘hire’ it to help us do a job. If it does the job well, the next time we’re confronted with the same job, we tend to hire that product again. And if it does a crummy job, we ‘fire’ it and look for an alternative.”

The better it can do the job your customer needs to get done, the more you can optimize for the variables in the net retention equation. Sunita Mohanty, Product Lead at Facebook, shared an amazing JTBD framework they use back at Facebook and Instagram:

When I… (context)
But… (barrier)
Help me… (goal)
So I… (outcome)

Here’s another way to look at it:

  1. What features should we have that would make our product great?
  2. What features should this product have that would make it a no-brainer purchase for our customers?

The “no-brainer” part especially matters. And to be a “no-brainer”, you have to deliver the best-in-class. Your features have to solve a fundamental job that your customer is trying to solve. The difference between a “great product” and a “no-brainer” is the difference between a 5 out of 5-star rating and a 6-star out of a 5-star rating. Effectively, the outcome in Facebook’s JTBD framework exceeds the goal, which makes the barrier irrelevant. As David Rubin, CMO of The New York Times and former Head of Global Brand at Pinterest once said: “Your service shouldn’t lead with ‘saving money’. You must create an offering that is so compelling, it stands by itself in the consumer’s mind.”

In closing

At the end of the day, in the words of Alex Rampell, building a startup is “a race where the startup is trying to get distribution before the incumbent gets innovation.”

You’re in a race against time. You’re trying to reach critical mass and growth before your incumbents realize your space is a money-making machine. And growth comes in two parts: acquisition and retention. While many founders seemed to have over-indexed on acquisition over the last couple of years, the pandemic has reawakened many that retention is often times much more difficult to attain than acquisition. While it may not be true for every type of business, hopefully, the above is another tool in your toolkit.

Photo by Joshua Rodriguez on Unsplash

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Should You Make Investors Sign NDAs?

Years ago, when I first started in venture at SkyDeck, I met a founder who made me sign an NDA before he pitched. At the time, I had no idea that it wasn’t the norm. So, I ended up signing it without a second thought. It wasn’t my first time I signed one, and certainly not the last. He spent 20 minutes pitching his idea to me. I don’t remember the exact details of the pitch, but I remember it being an intriguing pre-launch idea outside of my realm of expertise.

In our last five minutes, out of curiosity, I asked him why he had me sign an NDA – something I’d never been asked to do since I jumped into VC.

He said, “I can’t afford to have you take my idea.”

Nevertheless, I had a couple names in mind that might be useful to him. At least more useful to him than I could be. But given the NDA, I needed written consent for every person I wanted to send his startup to. As well as consent for what I could and could not tell them. After two weeks of back and forth emails, he only allowed me to pass his idea to one other person. Even so, in a very limited scope. With very little context. Far from enough for my investor friend to say yes to a meeting. All in all, regrettably, the long slog of asynchronous communication heavily drained my willingness to help. And at the end of the two weeks, I was happy to get that load off my chest.

It was a lesson for myself. Ever since then, I err on the side of not making people sign NDAs. Why?

  1. Most people don’t care enough about your problem space to pursue the idea you’re going for. If they were, they’d have pursued the idea/solution already.
  2. Sharing your idea helps you more than it helps them. You get free advice and feedback, all of which are ammunition to further your idea. The more you share, the faster you learn, the faster you can iterate and grow your startup.
  3. If you make a potential partner sign an NDA, it implicitly shows a lack of trust in the partnership, and there could lead to future friction between you 2, which would detract you from focusing on actually building the business. I’ve seen it happen. And I’ve seen businesses crumble because of a lack of trust. And it could start from the smallest thing and exacerbate into a full-blown drama.
  4. On the off chance, they do take your idea and run with it to the market, they become a competitor to your business. And if you’re scared of competition, you’re probably in the wrong industry. Or if you want to run a lifestyle business (one at your own pace) – like a side hustle or one you find great joy in doing, it really doesn’t matter what other people are doing.

The success of a business is determined by how well you can execute. The first mover advantage is about who can get to product-market fit first, not who birthed the idea first. Before Google, AltaVista, Aliweb, and Yahoo! existed, just to name a few. Equally so, Myspace and Friendster started before Facebook.

A week after my intro, my investor friend hit me up again to tell me he turned down that founder before the founder even pitched. He told me, “It’s unnecessary red tape and not worth my time. And I’m not short on deal flow.”

Almost a year after that, in an effort to keep a complete record of the deals I’ve sent to investors, I revisited that startup. A quick LinkedIn search told me they’d closed up shop. I never checked back in with them to ask why. It could have been trouble in their go-to-market motions. It could have been co-founder disputes. Or it could have been their inability to find investment. I don’t know. But I imagine that their inability to find investors contributed to their closure.

Photo by Scott Graham on Unsplash

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Startup Growth Metrics that will Hocus Pocus an Investor Term Sheet

Founders often ask me what’s the best way to cold email an investor. *in my best TV announcer voice* Do you want to know the one trick to get replies for your cold email startup pitches that investors don’t want you to know? Ok, I lied. No investor ever said they don’t want founders to know this, but how else am I going to get a clickbait-y question? Time and time again, I recommend them to start with the one (at most two) metrics they are slaying with. Even better if that’s in the subject line. Like “Consumer social startup with 50% MoM Growth”. Or “Bottom-up SaaS startup with 125% NDR”. Before you even intro what your startup does, start with the metric that’ll light up an investor’s eyes.

Why? It’s a sales game. The goal of a cold email is to get that first meeting. Investors get hundreds of emails a week. And if you imagine their inbox is the shelf at the airport bookstore, your goal is to be that book on display. Travelers only spend minutes in the store before they have to go to their departure gate. Similarly, investors scroll through their inbox looking for that book with the cover art that fascinates them. The more well-known the investor, the less time they will spend skimming. And if you ask any investor what’s the number one thing they look for in an investment, 9 out of 10 VCs will say traction, traction, traction. So if you have it, make it easy for them to find.

That said, in terms of traction, most likely around the A, what growth metrics would be the attention grabber in that subject line?

Strictly annual growth

A while back, my friend, Christen of TikTok fame, sent me this tweetstorm by Sam Parr, founder of one of my favorite newsletters out there, The Hustle. In it, he shares five lessons on how to be a great angel investor from Andrew Chen, one of the greatest thought leaders on growth. Two lessons in particular stand out:

And…

Why 3x? If you’re growing fast in the beginning, you’re more likely to continue growing later on. Making you very attractive to investors’ eyes – be it angels, VCs, growth and onwards. Neeraj Agrawal of Battery Ventures calls it the T2D3 rule. Admittedly, it’s not R2-D2’s cousin. Rather, once your get to $2M ARR (annual recurring revenue), if you triple your revenue each year 2 years in a row, then double every year the next 3 years, you’ll get to $100M ARR and an IPO. More specifically, you go from 2 to 6, then 18, 36, 72, and finally $144M ARR. More or less that puts you in the billion dollar valuation, aka unicorn status. And if you so choose, an IPO is in your toolkit.

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Source: Neeraj Agrawal’s analysis on public SaaS companies that follow the T2D3 path

For context, tripling annually is about a 10% MoM (month-over-month) growth rate. And depending on your business, it doesn’t have to be revenue. It could be users if you’re a social app. Or GMV if you’re a marketplace for goods. As you hit scale, the SaaS Rule of 40 is a nice rule of thumb to go by. An approach often used by growth investors and private equity, where, ideally, your annual growth rate plus your profit margin is equal to or greater than 40%. And at the minimum, your growth rate is over 30%.

For viral growth, many consumer and marketplace startups have defaulted to influencer marketing, on top of Google/FB ads. And if that’s what you’re doing as well, Facebook’s Brand Collabs Manager might help you get started, which I found via my buddy Nate’s weekly marketing newsletter. Free, and helps you identify which influencers you should be working with.

But what if you haven’t gotten to $2M ARR? Or you’ve just gotten there, what other metrics should you prepare in your data room?

Continue reading “Startup Growth Metrics that will Hocus Pocus an Investor Term Sheet”
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How to Build Fast and Not Break (As Many) Things – A Startup GTM Playbook

The tech world, particularly Silicon Valley, in the past 2 decades, has accelerated its growth ’cause of one mantra: “Move fast and break things.” Some of the most valuable products we know today were built because of that. Facebook, whose founder coined the phrase. Google. Amazon. LinkedIn. Uber. The list goes on. In sum, be “agile”. Simultaneously, I see founders, on the regular, take this mental model too far. They move fast, but they rarely give enough time to test their hypotheses.

Equally so, some companies cannot afford to “break things”. Take Dropbox, for example. Ruchi Sanghvi, founder of the South Park Commons Fund, former VP of Operations at Dropbox, and Facebook’s earliest female engineer, told VentureBeat in 2015, “Quality is really, really important to Dropbox, and as a result we needed to move slower — not slowly, but slower than Facebook.” Ruth Reader, who wrote for VentureBeat at the time, further extrapolated, “What was right for Facebook — fast-paced iteration and fixing bugs in real time — didn’t work for DropBox, an application people entrusted with personal documents like wedding photos or the first draft of a novel. What was valuable to DropBox was the details.”

On the other extreme, there are founders who spend day after day, week after week, and sometimes year after year, pursuing the “perfect” product before launching. If they were right on the money before, by the time they launch 6 months later, they might be 6 months off the money. Take the situation we’re all in today for example – the pandemic. No one could have predicted it. In fact, I had many a few predictions before the pandemic, which all proved to be unfortunately wrong.

  • The Marketplace of Startups, written on February 24, 2020 – I alluded to an opinion I held that consumer social was almost dead. The consumer app market had become so saturated that it was hard for new players to play in.
  • Myths around Startups and Business Ideas, written on October 12, 2020 – Pre-COVID, I was more bullish on Slack than Zoom as a public stock investment. History proved otherwise.

… and more to come. Mistakes are inevitable. And “the rear view mirror is always clearer than the windshield”, as Warren Buffett would describe. Seth Godin said in his recent interview on The Tim Ferriss Show: “Reassurance is futile because you never have enough of it.”

At the end of the day, as a startup founder, your raison d’être is creating value in the world where there wasn’t before. As Bill Gates puts it: “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.” Analogized, your startup is that platform.

So, in this post, using the lessons from other subject-matter experts (SMEs), I’ll share how startup teams can balance speed with intentionality in their go-to-market (GTM) strategy.

Continue reading “How to Build Fast and Not Break (As Many) Things – A Startup GTM Playbook”
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Part-time vs. Full-time Founders

Over the weekend, my friend and I were chatting about the next steps in her career. After spending quite some time ironing out a startup idea she wants to pursue, she was at a crossroads. Should she leave her 9-to-5 and pursue this idea full-time, or should she continue to test out her idea and keep her full-time job?

Due to my involvement with the 1517 Fund and since some of my good friends happen to be college dropouts, I spend quite a bit of time with folks who have or are thinking about pursuing their startup business after dropping out. This is no less true with 9-to-5ers. And some who are still the sole breadwinner of their family. Don’t get me wrong. I love the attention, social passion, literature and discourse around entrepreneurship. But I think many people are jumping the gun.

Ten years back, admittedly off of the 2008 crisis, the conversations were entirely different. When I ask my younger cousins or my friends’ younger siblings, “what do you want to be when you grow up?” They say things like “run my own business”, “be a YouTuber”, and most surprisingly, “be a freelancer”. From 12-yr olds, it’s impressive that freelancing is already part of their vocabulary. It’s an astounding heuristic for how far the gig economy has come.

Moreover, media has also built this narrative championing the college dropout. Steve Jobs and Apple. Bill Gates and Microsoft. And, Mark Zuckerberg and Facebook. There’s nothing wrong in leaving your former occupation or education to start something new. But not before you have a solid proof of concept, or at least external validation beyond your friends, family and co-workers. After all, Mark Zuckerberg left Harvard not to start Facebook, but because Facebook was already taking off.

Honing the Idea

The inherent nature of entrepreneurship is risk. As an entrepreneur (and as an investor), the goal should always be to de-risk your venture – to make calculated bets. To cap your downside.

Marc Benioff started his idea of a platform-as-a-service in March 1999. Before Marc Benioff took his idea of SaaS full-time, he spent time at Oracle with his mentor, Larry Ellison, honing this thesis and business idea. When he was finally ready 4 months later, he left on good terms. Those terms were put to the test, when in Salesforce’s early days, VCs were shy to put in their dollar on the cap table. But, his relationship he had built with Larry ended up giving him the runway he needed to build his team and product.

Something that’s, unfortunately, rarely talked about in Silicon Valley and the world of startups is patience. We’ve gotten used to hearing “move fast and break things”. Many founders are taught to give themselves a 10-20% margin of error. What started off as a valuable heuristic grew into an increase in quantity of experiments, but decrease in quality of experiments. Founders were throwing a barrage of punches, where many carried no weight behind them. No time spent contemplating why the punch didn’t hit its mark. And subsequently, founders building on the frontlines of revolution fight to be the first to market, but not first to product-market fit. Founders fight hell or high water to launch their MVP, but not an MLP, as Jiaona Zhang of WeWork puts it.

In the words of the one who pioneered the idea of platform-as-a-service,

The more transformative your idea is, the more patience you’ll need to make it happen.”

– Marc Benioff

As one who sits on the other side of the table, our job is to help founders ask more precise questions – and often, the tough questions. We act more as godmothers and godfathers of you and your babies, but we can’t do the job for you.

The “Tough” Questions

To early founders, aspiring founders, and my friends at the crossroads, here is my playbook:

  • What partnerships can/will make it easier for you to go-to-market? To product-market fit? To scalability?
  • What questions can you ask to better test product feasibility?
  • How can you partner with people to ask (and test) better questions?
  • What is your calculus that’ll help you systematically test your assumptions?
  • Do you have enough cash flow to sustain you (and your dependents) for the next 2 years to test these assumptions?

Simultaneously, it’s also to important to consider the flip side:

  • What partnerships (or lack thereof) make your bets more risky?
  • How can you limit them? Eliminate them?

And in sum, these questions will help you map out:

At this point in your career, does part-time or full-time help you better optimize yourself for reaching my next milestone?

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