When your message lands in someone’s inbox, do they let out a sigh of relief – excited to click into that email – or are they dreading to click it open – knowing fully well that you may be tracking their open rate?
Your brand is what people say about you when you're not in the room. It's their first reaction when they see an email from you in their inbox. You build that brand – or not – with every interaction.
If you’re helpful, and I don’t mean that you think you’re helpful, you’ll get the former response. Communication, or for that matter, feedback and help, is not measured by what leaves your mouth, but by how much reaches the other person’s ears. If otherwise, you get the latter.
As the saying goes, a friend in need is a friend indeed. It is no less true in the world of startups. Your brand is built on times when others need you most. And there are two types of moments when others need you most:
When they’re in deep shit, and
When they’re an outsider.
The former needs no introduction.
There are 10-15 moments in a startup’s journey when shits hits the fan. And if you’re on speed dial when that happens, founders will remember you for life.
So, let me elaborate on the latter.
Insiders and outsiders
Who’s an insider? Insiders are:
Founders of unicorn startups
Early team members or executives at $1B+ companies
Investors who were some of the first ones to back at least one (ideally many) unicorn companies
Or best friends with at least one of the world’s top investors (or any of the above)
Who’s an outsider? Everyone else. That’s 99.99% of people out there. And I might be missing a few 9’s after the decimal.
Seedscout’s Mat Sherman wrote a great Twitter thread at the beginning of this year, one I’ve cited here and here about how founders who are outsiders can win at fundraising.
The no bullshit guide to raising angel funding/venture capital as an outsider.
If you take the other side of the table as an investor, specifically an early-stage investor, our job is to increase the aperture at the top. We define the archetypes of founders who will get funded by downstream capital. We decide what the funnel looks like. Simply put, we decide what obvious looks like.
Helping one outsider become an insider
If you’re someone who’s excited about putting ‘investor’ on your resume and is willing to put in the legwork for at least a decade to become a great one… Frankly put, if you intend to make early-stage investing your career, then you need to bet one someone non-obvious. Just one. You don’t need to help every founder out there, but every founder you do promise your time to must be worth it.
To me, there are four obvious reasons to bet on one non-obvious founder:
Brand: You’re building a long-term career in the venture space. This/these founders are going to be your reference checks when you raise a fund. And even if you don’t, the startup world is small. Gossip – both good and bad – travel fast. What makes or breaks a business is not in the capital, but in the people. Venture investing is in the business of people.
Deal flow: When that founders’ teammates goes off to build their own businesses, they’ll remember what you did for the founder(s). As such, you’ll be the first person they call when they start great companies.
Value-add: You gain tactical operational expertise. You learn the most when shit hits the fan, not when it’s smooth sailing.
Empathy. You understand to your core what it’s like to build a business today, which will be invaluable in relating to and with founders. Founders you work with in the future know you are capable of being truly founder-friendly, and that it isn’t just lip service.
In closing
When you bet on one non-obvious founder, you don’t have to invest in them (although that would help your own track record). But you need to be on their speed dial. You need to be willing to pick up their calls on weekends and at 2AM in the morning.
It’s going to be tough. Not nearly as tough as being the founder her/himself, but still tough. And it might not go according to plan. In most cases, it doesn’t. But when that founder tries again. You’re there again. Eventually, with superhuman grit and persistence, both of you (and more) will get there.
That is how you build a brand in the world of venture capital. Something I’m personally working towards.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Back in mid-2020, I started writing a piece on 99 Pieces of Unsolicited, (Possibly) Ungooglable Startup Advice. There was no ETA on the piece. I had no idea when I would publish it, other than the fact, that I would only do so once I hit the number 99. Yet, just like how I was inspired to write how similar founders and funders are, it finally dawned on me to start writing a similar piece for investors around mid-2021. The funny thing, is though I started this essay half a year later, I finished writing it one and a half months sooner while I was still on advice #95 for the former.
Of course, you can bet your socks I’ve started my next list of unsolicited advice for investors already. Once again, with no ETA. As I learn more, the subsequent insight that leads to an “A-ha!” moment will need to go deeper and more granular. And who knows, the format is likely to change.
I often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve more nuance, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites for investors below cover everything, in no particular order other than categorical resonance, including:
Unfortunately, many of the below advice came from private conversations so I’m unable to share their names. Unless they’ve publicly talked about it. Nevertheless, I promise you won’t be disappointed.
As any Rolodex of advice goes, you will not resonate with every single one, nor should you. Every piece of advice is a product of someone’s anecdotal experience. While each may differ in their gravitas, I hope that each of the below will serve as a tool in your toolkit for and if the time comes when you need it most.
To preface again, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
General advice
1/ To be in venture capital, you fundamentally have to be an optimist. You have to believe in a better tomorrow than today.
2/ “Everyone has a plan until they get punched in the mouth.” – Mike Tyson. Told to me by an LP who invests in emerging and diverse managers.
3/ Have good fluidity of startup information. “No founder wants to meet a partner and have to answer the same questions again and again. Best partnerships sync and with every discussion, process the questioning.” – Harry Stebbings
4/ The lesson is to buy low, sell high. Not to buy lowest, sell highest.
5/ “The New York Times test. Don’t do anything you wouldn’t want to see on the front page of the NY Times.” – Peter Hebert
6/ “It takes 20 years to build a reputation and five minutes to ruin it.” – Warren Buffett
7/ When you’re starting off as an investor, bet on one non-obvious founder – a real underdog. Support them along their entire journey. Even if there’s no huge exit, the next one will be bigger. When their VPs go off and start their own businesses, they’ll think of you first as well.
8/ When planning for the next generation of your firm’s successors, hire and mentor a cohort of brilliant investors, instead of focusing on finding the best individual. Investing is often a lonely journey, and it’s much easier to grow into a role if they have people to grow together and commiserate with.
9/ “When exit prices are great, entry prices are lousy. When entry prices are great, exit prices are lousy.” – David Sacks
10/ Illiquidity is a feature, not a bug. – Samir Kaji
11/ Three left turns make a right turn. There is no one way to break into VC. Oftentimes, it’s the ones with the most colorful backgrounds that provide the most perspective forward.
12/ “Whenever you find yourself in the majority, it is time to pause and reflect.” As an early stage investor, I find Mark Twain’s quote to be quite insightful.
13/ “It’s not about figuring out what’s wrong; it’s about figuring out what is so right. The job of an investor is to figure out what is so overwhelmingly great, or so tantalizingly promising that it’s worth dealing with all the stuff that’s broken.” – Pat Grady retelling a story with Roelof Botha
15/ Track your deal flow. Here’s how I track mine. Another incredible syndicate lead with over 5x TVPI (total value to paid in capital) I met keeps it even simpler. A spreadsheet with just 4 columns.
Company
Valuation in
Valuation out
Co-investors – This is where you start sharing deal flow with each other here.
16/ One of your best sources of deal flow might not be from other investors, but those who are adjacent to the venture ecosystem, like startup lawyers and VC attorneys.
17/ A WhatsApp group with your portfolio is a great tool for diligencing investments, not as much for sourcing deals.
18/ “Decide once you have 70% conviction.” – Keith Rabois. Don’t make decisions with 40% conviction since that’s just gambling. Don’t wait till 90% conviction because you’ll miss the deal for being too slow.
19/ Ask questions to founders where they show grit over a repeated period of time. They need to show some form of excellence in their life, but it doesn’t have to be in their current field. From a pre-seed manager with 3 unicorns in a portfolio of 70.
20/ As an emerging manager, one of the best reasons for investing in emerging markets: Do you want to see the deals that the top 0.1% see? Or do you want to see the deals that the 0.1% passed on? From the same pre-seed manager with 3 unicorns in a portfolio of 70.
21/ Every day, open your calendar for just one hour (two 30-minute slots) to founders you wouldn’t have had otherwise. Your network will compound. From a manager who’s invested in multiple unicorns and does the above from 10-11PM every night.
22/ The bigger your check size, the harder you have to fight to get into the round.
23/ The best investors frontload their diligence so they can have smarter first conversations with founders.
24/ Perform immersion-based diligence. Become super consumers and super users of a category, as close as you can get to subject-matter experts. That way you know very quickly after meeting a founder if their product is differentiated or unique. While you’re at it, write 2-3 page bug report stress-testing the product. Founders really do appreciate it.
26/ When a founder can’t take no for an answer and pushes back, “I always have to accept the possibility that I’m making a mistake.” The venture business keeps me humble, but these are the benchmarks that the team and I all believe in. Inspired by JCal and Molly Wood.
27/ Win deals by “sucking the oxygen out of the air.” In investing there are two ways to invest: picking or getting picked. Picking is naturally in a non-competitive space. Getting picked is the exact opposite. You have to eat competition for breakfast. And when you’re competing for a deal everyone wants to get into, you have to be top-of-mind. You need to increase the surface area in which founders remember you, not just to take their time, but to be really, really valuable in as much time as you can spend with them. Inspired by Pat Grady on an anecdote about Sarah Guo.
Pitching to LPs
28/ Surprises suck. On Samir Kaji’s podcast, Guy Perelmuter of GRIDS Capital once said: “There’s only one thing that LPs hate more than losing money. It’s surprises.” More here.
29/ Fund I: You’re selling a promise. Fund II: You’re selling a strategy. And, Fund III: You’re selling the returns on Fund I.
30/ Steven Spielberg didn’t know what E.T. should look like, so he had everyone write down people they respected. And so E.T. looked a bit like everyone on that list, including Carl Sandburg, Albert Einstein and Ernest Hemingway. In a very similar way, come up with a list of your ideal LPs. And create a fund based on what they like to see and what you can bring to the table. Oftentimes, it’s easier to ask them for personal checks than checks out of their fund.
31/ Ask the founders you back for intros to their other investors as potential LPs in your fund.
32/ The return hurdles for LPs are different per fund type: *subject to market motions. Timestamped in Sept 2021 by Samir Kaji
Nano-fund (<$20M): 5-7x+
Seed fund: 3-5x+
Series A: 3x+
Growth: 2-2.5x+
Crossover/late growth (driven by IRR, not multiples): 10-12%+
33/ “If you know one family office, you know one family office.” Said by one of the largest LPs in venture funds. Each family office situation is uniquely different.
34/ Family offices are surprisingly closed off to cold emails, but often share a lot of deal flow with each other. Have co-investors or founders introduce you to them.
35/ It takes on average 2 months for an institutional LP to do diligence and reference checks. Plan accordingly.
36/ LPs look for:
Track record (could be as an individual angel as well)
Value add
Operational excellence
37/ Data shows that first-time/emerging managers are more likely to deliver outperformance than their counterparts, but as one, you still need to show you have experience investing.
38/ People, including LPs, tend to remember stories, more than they do data. Teach your LPs something interesting.
39/ LPs have started looking more into two trends: private investments and impact/ESG initiatives. By nature of you reading this blogpost, you’re most likely the former already. The latter is worth considering as part of your thesis.
40/ Every coffee is worthwhile in some form.
41/ LP diligence into VCs break down into two types: investment and operational DD.
Investment DD includes team, incentive alignment, strategy, performance, current market, and terms/fees.
Team: What does leadership look like? How diverse are you?
Alignment: Do you have performance-based compensation?
Strategy: What sectors are you investing into? What does your underwriting discipline look like?
Performance: What do your exits look like? Are you exits repeatable?
Market: What are the current industry valuations? Economies of scale?
Terms/fees: Are they LP friendly? Are the fees based on alphas or betas? Are they aligned with your value add?
Operational DD includes business model, operational controls, tech platforms, service providers, compliance and risk.
42/ If you’re pitching to other venture funds to be LPs, say for $250K checks, larger funds (i.e. $1B fund) typically have fund allocations because check size is negligible. And a value add as deal flow for them at the A. Whereas, smaller funds don’t because it is a meaningful size of their fund. So, GPs write personal checks.
43/ If you’re planning to raise a fund, think of it like raising 10 Series A rounds. For most Series A rounds, a founder talks to about 50 investors. So for a Fund I, you’re likely to talk to 500 LPs to close one.
44/ Send potential LPs quarterly LP updates, especially institutions. Institutions will most likely not invest in your Fund I or II, but keep them up to date on the latest deals you’re getting into, so you’re primed for Fund III.
45/ Family offices want to get in top funds but most can’t because top funds have huge waitlists. Yet they still want access to the same deals as top funds get access to. They’re in learning mode. Your best sell to family offices is, therefore, to have:
Tier 1 investors as your fund’s LPs
Tier 1 investors as co-investors
Deals that they wanted to get into anyway
46/ Your Fund I LPs are going to be mostly individual angels. They believe in you and your promise, and are less worried about financial returns.
47/ Institutional LPs are looking for returns and consistency. If you say you’ll do 70% core checks and 30% discovery checks, they’re checking to see if you stick to it. Institutions aren’t in learning mode, instead you as a fund manager fit into a very specific category in their portfolio. Subsequently, you’re competing with other funds with similar foci/theses as you do.
48/ Be transparent with your IRRs. If you know you have inflated IRRs due to massive markups that are annualized, let your (potential) LPs know. For early stage, that’s probably 25-30%+. Especially when you’re in today’s frothy market (timestamped Jan 2022). Or as Jason Calacanis says it for his first scout fund that had crazy IRRs, “It’s only down from here.”
49/ Don’t waste a disproportionate amount of time convincing potential LPs about the viability of your thesis. Shoot for folks who can already see your vision. If you manage to convince an LP that didn’t previously agree, they may or may not end up micromanaging you if your thesis doesn’t work out as “expected.” Inspired by Elizabeth Yin.
50/ “The irony for us was LPs asking about portfolio construction was a sign that the meeting was going poorly.” – Jarrid Tingle.
51/ Institutional LPs prefer you to have a concentrated startup portfolio – less than 30 companies. They already have diversification across funds, so they’re maximizing the chance that their portfolio has fund returners. That said, you’re probably not raising institutional capital until Fund III. Inspired by Jarrid Tingle.
52/ If you’re an emerging manager with a fund is less than 4 years old, boasting high IRR (i.e. 50%+) is meaningless to sophisticated and institutional LPs. Focus on real comparative advantages instead. – Samir Kaji.
53/ When raising early checks from LPs, ask for double the minimum check size. Some LPs will negotiate down, and when they only have to commit half of what they thought they had to, they leave feeling like they won.
54/ When potential LPs aren’t responding to your follow ups/LP updates, send one more follow up saying: “I am assuming you are not interested in investing into our fund. If I am wrong, please let me know or else this will be your last update.” Told to me by a Fund III manager who used this as her conversion strategy.
55/ It’s easier to have larger checkwriters ($500K+) commit than smaller checkwriters (<$100K). $500K is a much smaller proportion of larger checkwriters’ net worth than checkwriters who write $100K checks. And as such, smaller checkwriters write less checks, have less “disposable income”, and push back/negotiate a lot more with fund managers before committing. Told to me by a Fund III manager.
Fund strategy/management
56/ As an investor, if you want to maintain your ownership, you have to continue requesting pro-rata rights at each round.
58/ “Opportunity funds are pre-established blind pool vehicles that eliminate the timing issues that come with deal-by-deal SPVs. Opportunity funds sometimes have reduced economics from traditional 2/20 structures, including management fees that are sometimes charged on deployed, not committed capital. Unlike individual SPVs, losses from one portfolio company in an opportunity fund offset gains from another when factoring in carried interest.” – Samir Kaji. See the full breakdown of pros and cons of opportunity funds here.
59/ There are two ways to generate alphas.
Get in early.
Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.
60/ Sometimes being right is more important than being in the non-consensus. Inspired by Kanyi Maqubela.
Market risk as a function of ownership – What is the financial upside if exit happens? Is it meaningful enough to the fund size?
Judgment risk – Are you picking the right companies?
Win rate risk – How can you help your portfolio companies win? What is your value add?
62/ By Fund III, you should start having institutional capital in your investor base.
63/ The closer you get to investing in growth or startups post-product-market fit, the closer your capital is to optimization capital. Founders will likely succeed with or without you, but your name on the cap table will hopefully get them there faster and more efficiently.
64/ If you’re a traditional venture fund, you have to invest in venture-qualifying opportunities, like direct startup investments. But you can invest up to 20% of your fund’s capital in non-venture-qualifying opportunities, like tokens/SAFTs (simple agreement for future tokens), real estate, secondaries, and so on.
65/ If increased multiples coming out of various vintage funds, feel free to deviate from the normal 2-20. Many funds have 25 or 30% carry now, or accelerators where 20% scales with multiples (and often with a catch-up back to 1.0x at higher carry). – Samir Kaji
66/ Normally, fund managers take 2% management fees, usually over 10 years, totaling 20% over the lifetime of the fund. These days, I’m seeing a number of emerging managers take larger management fees over less years. For example, 10% as a one-off. Or 5% over 2-3 years.
67/ “The razor I apply to investing and startups is that every decision that increases your probability of wild outlier success should also increase your probability of total failure. If you want to be a shot at being a 10x returning fund? You’ll have to take on the higher likelihood of being a 1x. If you think you’re going to build the next Stripe? You’re going to have to run the risk of going nowhere.” – Finn Murphy
69/ The longer you delay/deprioritize having diverse partners, the harder it’ll be to hire your first one.
Advising founders/executives
70/ A founder’s greatest weakness is his/her/their distraction. Don’t contribute to the noise.
71/ It’s far more powerful to ask good questions to founders than give “good answers”. The founders have a larger dataset about the business than you do. Let them connect the dots, but help them reframe problems through questions.
72/ You are not in the driver’s seat. The founder is.
73/ A great reason for not taking a board seat is that if you disagree with the founders, disagree privately. Heard from a prolific late-stage VC.
74/ Advice is cheap. Differentiate between being a mentor and an ally. Mentors give free advice when founders ask. Allies go out of their way to help you. Be an ally.
75/ The best way to be recognized for your value-add is to be consistent. What is one thing you can help with? And stick to it.
76/ Productize your answers. Every time a founder asks you a question, it’s likely others have the same one. Build an FAQ. Ideally publicly.
77/ If you have the choice, always opt to be kind rather than to be nice. You will help founders so much more by telling them the truth (i.e. why you’re not excited about their business) than defaulting on an excuse outside of their control (i.e. I need to talk with my partners or I’ve already deployed all the capital in this fund). While the latter may be true, if you’re truly excited about a founder and their product, you’ll make it happen.
78/ Help founders with their firsts. It doesn’t have to be their first check, but could also be their first hire, engineer, office space, sale, co-founder, team dispute, and so on.
79/ There are four big ways you can help founders: fundraising, hiring, sales pipeline, and strategy. Figure out what you’re good at and double down on that.
80/ Focus on your check-size to helpfulness ratio (CS:H). What is your unique value add to founders that’ll help them get to their destination faster? Optimize for 5x as a VC. 10x as an angel.
81/ “The job of a board is to hire and fire the CEO. If you think I’m doing a bad job, you should fire me. Otherwise, I’m gonna have to ask you to stay out of my way.” – Frank Slootman to Doug Leone after he was hired as CEO of ServiceNow.
SPVs and syndicates
82/ The top syndicates out there all have 3 traits:
Great team
Great traction
Tier 1 VC
If your deal has all of the above, and if you raise on AngelList, your deal is shared with the Private Capital Network (PCN), which AngelList’s own community of LPs and investors, a lot of which are family offices, who allocate at lest $500K of capital per year.
83/ If you’re raising an AngelList syndicate, you need to raise a minimum of $80K or else the economics don’t really make sense. AL charges an $8K fee.
84/ If you want to include Canadian investors in your syndicate, for regulation purposes, you need to invest 2% of the allocation size or $10K.
85/ Investing a sizeable check as a syndicate lead (e.g. $10K+) is good signal for conviction in the deal, and often gets more attention.
86/ 99% of LPs in syndicates want to be passive capital because they’re investing in 50 other syndicates. You can build relationships individually with them over time, but don’t count on their strategic value.
87/ Historically, smaller checkwriters take up 99% of your time. Conversely, your biggest checkwriters will often take up almost no time. Even more true for syndicates.
88/ LPs don’t care for deals where syndicate leads have time commitment without cash commitment.
89/ Don’t give LPs time to take founders’ time. Most of the time LPs don’t ask good questions, so it’s not worth the effort to set up time for each to meet with founders individually. On the other hand, a good LP update would be to host a webinar or live Q&A session. One to many is better than one to one.
90/ There’s a lot of cannibalism in the syndicate market. The same LPs are in different syndicates.
91/ Choose whether you will or will not send LP updates. Set clear expectations on LP updates. And if you do, stick to that cadence. The people who write you the $1-5K checks are often the loudest and demand monthly updates. If you choose not to, one of my favorite syndicate leads says this to their LPs, “We won’t give any LP updates. I’ve done my diligence, and I won’t give information rights. I have a portfolio of hundreds of deals, and I can’t be expected to give deal-by-deal updates every month or every quarter. So if you are investing, just know you’re along for the ride.” Some LPs won’t like that and won’t invest, but mentioning that upfront will save you from a whole lot of headaches down the road.
92/ If you’re setting up an SPV to solely invest in a fund (or where more than 40% of the SPV is going into the fund), all your SPVs can’t against the 249 LPs cap on a fund <$10M and a 99 cap on a fund >$10. But you can invest in funds if you’re setting up an SPV to invest in more than one fund. Context from Samir Kaji and Mac Conwell.
Evergreen/Rolling funds
93/ Just like vintage years/funds are important for traditional funds, vintage quarters matter to your LPs. If they didn’t give you capital during, say Q2 of 2021, when you invested in the hottest startup on the market, your Q1 and your Q3 LPs don’t have access to those returns.
94/ Whereas GPs typically make capital calls to their LPs every 6 months, AngelList’s Rolling Funds just institutionalized the process by forcing GPs to make capital calls every 3 months.
Angel investing
95/ “The best way to get deal access isn’t to be great with founders—it’s to have other investors think you’re great with founders. Build a high NPS with investors, since they have meaningfully more reach than an operator. But of course, fight hard to be great with founders too or else this will all crash down.” – Aaron Schwartz
96/ Make most of your personal mistakes on your own money as an angel (before you raise a fund).
97/ When you’re starting off, be really good at one thing. Could be GTM, growth, product, sales hires, etc. Make sure the world knows the one thing you’re good at. From there, founders and investors will think of you when they think of that one thing. Unless you’re Sequoia or a16z, it’s far better to be a specialist than a generalist if you want to be top of mind for other investors sharing deal flow.
98/ “As an angel investor, it’s more important to be swimming in a pool of good potential investments than to be an exceptionally good picker. Obviously if you’re able to be both, it’s better 🙂 but if you had to choose between being in a position to see great deals and then picking randomly, or coming across average deals and picking expertly, choose the former.” – Jack Altman
99/ “Just like the only way to get good at wine is to drink a lot of wine. The only way to get good at investing is to see a lot of deals.” – Lo Toney.
Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
When winds and waves a mutual contest wage, These foaming anger, those impelling rage; Thy blissful light can cheer the dismal gloom, And foster hopes beyond a wat’ry doom.
– John William Smith, “The Lighthouse,” 1814
Marc Andreessenanswered a few weeks back to a question that has been ringing in many founders’ minds. What product do founders want to buy from investors? For the past few years, the natural answer rose as operational expertise. A notion that still holds true for the earliest stages of starting a business when you bring on strategic angels as small checks to help you find product-market fit. As you continue down the path and start raising institutional capital, the answer becomes more and more amorphous.
I've always thought the biggest thing a founder buys from a VC is a bridge loan of credibility in advance of tangible evidence.
Why do investors look for signal in the first place? A means to de-risk a very early, and very risky bet. A product of asymmetric information. Investors invest in lines not dots, but the truth is, most investors don’t have the time – luxury or ability – to see all lines. So what they must do instead is look for specific dots – be it traction, co-investors, or founding team “legitimacy” – that would help them trace out of a line of best fit. As Precursor’s Charles Hudson wrote earlier this week,
After 8ish years of pre-seed investing in 300+ companies, the biggest gap I see between VCs and founders is the relative weight placed on current traction by founders and the importance the next VC puts on market opportunity. Only gets bigger with each extra round raised.
1. Founders focus on traction – it's quantitative, many want fundraising to be deterministic (it isn't) 2. VCs have better market intel on what "great" traction looks like 3. For a co w top 10% traction, that can be the story. Applies to very few.
By definition, signal should be a leading indicator of long-term business value. Yet, for most investors in the world, what they look for are lagging indicators of conviction.
The signal paradox
In the investing world, there’s a paradoxical notion of signal. Through many conversations with syndicate leads, data teams of investing platforms, and LPs, I realized a common thread. For the majority of investors in the world, at the early stages, signal comes not from the founder, but from other funders.
In a syndicate, there are three things that make a deal move fast:
Great co-investors
Great traction
And, great team
Arguably in that order. Synonymously, as an emerging fund manager, the best way to raise from family offices* (I’ll explain below why FO’s are my reference point here) who are notoriously closed off to cold emails, you need:
Tier 1 VCs as your co-investors
Tier 1 GPs as your fund’s LPs
Or, deals that family offices wanted to get into anyway (which isn’t mutually exclusive from the above as well)
Quite noticeably, for many investors out there, signal comes in the form of people with a proven track record already. Or to break it down even more. Signal comes in the form of familiarity. Familiarity in the form of warm intros or college classmates or pattern recognition. The easiest pattern to follow for any investor without needing to do too much diligence or requiring too much personal conviction (I know, it’s funny), but to be able to write fast checks, is other top-tier investors. If you’re a founder who’ve fundraised before, you’re probably very familiar with this notion. Consciously or subconsciously. I’m gonna bet money that you’ve been asked, “Which other investors are you talking to? And how far along the process are you with them?” Or simply, “Do you have a lead investor?”
While there are some nuances to the last question, like the inability for smaller investors to pay for legal counsel fees, to have the resources to completely diligence a startup, or just that the check size required to lead/fill the round is just too large for them, generally speaking, my argument still stands. Put nicely, for many investors, they’re looking for external validation of the product. Put harshly, that question is a band-aid approach to their inability to get to conviction.
As a founder, you have to realize that capital has become a commodity. Investors are in the business of selling money. And subsequently, making $1 become $2. Or for a great early-stage investor, $1 becomes $5. There are many ways to underwrite risk. The one that requires the least amount of new thinking, or thought leadership, is following firms who have proven their investing acumen already and consistently.
*Additional context on family offices
I specifically mention family offices above since most LPs in Fund I’s are individuals and angels. Mostly small checks. And can quickly fill up the limit the SEC has set for how many accredited investors you can have investing in your fund. And their reason to invest is based on the founding GPs – very similar to why investors would back startups at the pre-seed stage.
While some GPs do pitch to institutional LPs (i.e. endowments, pension funds, fund of funds, etc.), very, very little institutional capital goes to Fund I’s and II’s – very similar to the fact that Tiger or Coatue very rarely invest before the A. You have yet to have a track record where they can fit into their financial model. They’re underwriting a very different type of risk. And so, if you’re a Fund I GP looking for larger checks, you’re looking to generational wealth in the form of family offices, who are surprisingly closed off to cold emails. But I digress.
The surplus of “signal” in 2021
In the last year, we’ve seen some record-breaking numbers. We’ve been in an exciting boom market. There have never been more venture dollars poured into the ecosystem. In fact, there were 1,148 concurrent unicorns in 2021. Half of which were new. In comparison, 2020 minted just 167 unicorns. Just looking at the two charts from Crunchbase below, we see just how crazy 2021 was.
And quite reflectively, there have never been as many “experts” in the market. To be fair, when everyone’s portfolio and/or startup is raising consecutive rounds of funding and mark ups are a dime a dozen, psychologically, I would also feel good about myself too. Everyone’s an “expert” in a boom market, especially if a16z or Tiger is leading the round. And a16z’s done double the number of deals they did in 2020. And Tiger’s invested 4 out of every 5 business days. In full disclosure, I did feel quite proud of myself as well. Nevertheless, I do my best to stay humble in this business.
Interestingly enough, while there were more seed, pre-seed and angel dollars going into startups, progressively, less startups were getting funded. Effectively, while the overall number of dollars invested look great, less founders come to bat. A smaller top of funnel means a more concentrated funnel in consecutive rounds.
The truth is fundraising will get harder over the next year and valuations won’t be as high. You can expect the current market correction in the public markets to soon be reflected in the private ones. So you may need to spend 12 months longer growing into your next round’s target valuation.
So where should investors look for signal?
In fairness, I am ill-equipped to answer this question for the masses. And most likely will never be fully equipped to make generalist statements. That said, I have and will continue to share what signal looks like for me. And if you’re a founder, here’s my template to conviction.
Two weeks ago, I broke down my sense of intuition around startup investing. I won’t go too deep in this essay, but I do share a more detailed internal calculus there. To put it simply, I look for different signals across the spectrum of idea plausibility and stages.
Signal by idea plausibility
Idea Plausibility
Key Question
Context
Plausible
Why 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.
Possible
Why 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.
Preposterous
Why 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.
Signals by stage
Stage of investment
Key Question
Context
Pre-seed
Why you?
The earlier you go, the less quantitative data you have to support your bet. And therefore, your bet is largely on the founder. For me, it matters less their XX years of experience, but more so their expertise. In other words, insight. Can I learn something new in my first meeting (and consecutive ones too) with them?
At the pre-seed, there is also one more key signal I look for in founders – their level of focus. Rather than wanting to do everything, can they streamline their resources to tackle one thing? What is their minimum viable assumption they have to prove before they can build their MVP (or MLP – minimum lovable product)? Startups often die of indigestion, not starvation.
Seed
Why now?
By the seed stage these days, you’ve either found your product-market fit or really close to finding it. The larger your round, the more you’re feeling the pull of the market. Whereas pull can come be measured (i.e. daily organic sign ups, demand converting to supply in a marketplace, etc.), sometimes when you’re at the cusp of it, there’s a level of foresight that is required. Some leading indicator for the business often comes as a lagging indicator from industry trends. What is the inflection point(s) (political, socio-economic, technological, cultural) we are at today that is going to have compounding effects on the business?
Series A
Why this?
By the time you get to the A, you’re ready to scale. In other words, what you mainly need is to add fuel to the fire. I place a larger emphasis on traction here. Admittedly for me, compared to the two earlier stages, this is more of a numbers conversation. The best founders here have a very clear picture of what worked and didn’t work for the business. They’re already familiar with their main GTM channel, but are exploring new opportunities for channel-market fit where they need capital to test.
Not incredibly pertinent yet, but founders will have started thinking about their Act II. What’s the next product they’re going to offer to secure their immortality in the market?
In closing
A simple litmus test I often share with founders on signal is:
Your ability to raise capital is directly correlated with your ability to inspire confidence in your investor that you will get straight A’s with little to no help.
This isn’t just true for myself, but also most investors out there. While the best investors out there will always be there for you in your time of need, before they decide to jump aboard the same ship with you, you need to convince them that you’re a top 10% founder. Or a top 1% in-the-making.
While I dislike using the dating analogy, it’s an apt comparison in this case. You’re not going to share your deepest, least desirable secrets on your first date. You’re also not going around saying you’re the perfect – and I underscore perfect – partner without any flaws. ‘Cause that’s as much baloney as an unknown African prince in your inbox telling you to help him secure $5 million in gold bars by helping him set up a Swiss bank account with a deposit of $10K. It’s too good to be true. In reality, you’re most likely going to share that you have a number of great qualities, but you’re still growing in many ways.
Admit what you don’t know or don’t have. As long as it’s not mission critical or the biggest risk in your business (and if it is, figure that out before you raise VC funding), the investors who truly believe in you will understand. Always err on the side of honesty, but not bravado.
‘Cause you yourself are a signal. If you’ve got your bases covered and still have to go out of your way to convince an investor or try to flip their “no”, they’re probably not worth your time.
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
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).
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…
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.
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I was doomscrolling through Twitter when I stumbled on Samir Kaji‘s recent tweet:
A reason that emerging managers have done so well in early funds is not due to smaller funds sizes but because when gp/thesis is often strongest. Return atrophy usually happens when thesis drift happens at a magnitude that is more significant and faster than firm evolution.
I’ve written before that the difference between an emerged fund manager and an emerging manager is one’s raised a Fund III and the other hasn’t.
In Fund I, you’re selling a promise – a dream – to your LPs. That promise is often for angels, founders, and other GPs who write smaller checks. You’re split testing among various investments, trying to see what works and what doesn’t. More likely than not, you’re taking low to no management fees, and only carry. No reserve ratio either. And any follow-on checks you do via an SPV, with preference to your existing LPs. You’re focused on refining your thesis.
In Fund II, you’re pitching a strategy – the beginnings of pattern recognition of what works and what doesn’t. You’re thesis-driven.
Fund III, as Braughm Ricke says, “you’re selling the returns on Fund I.” On Fund III and up, many fund managers start deviating from their initial thesis – minimally at first. Each subsequent fundraise, which often scales in zeros, is a lagging indicator of your thesis and strategy. And across funds, the thesis becomes more of a guiding principle than the end all, be all of a fund. There are only a few firms out there that continue to exercise extreme fundraising discipline in. Which, to their credit, is often hard to do. ‘Cause if it’s working, your LPs want to put more money into you. And as your fund size scales, so does your strategy.
Subsequently, it becomes a race between the scalability of a fund’s strategy and fund size.
Softbank’s mistake
In 2017, Softbank’s Vision Fund I (SVF I) of $100B was by far the largest in the venture market. In fact, 50 times larger than the largest venture funds at the time. Yet, every time they made a bad bet, the media swarmed on them, calling them out. The reality is that, proportionally speaking, Softbank made as many successful versus unsuccessful bets as the average venture fund out there. To date, SVF I’s portfolio is valued at $146.5 billion, which doesn’t put it in the top quartile, but still performs better than half of the venture funds out there. But bigger numbers warrant more attention. Softbank has since course-corrected, opting to raise a smaller $40B Fund II (which is still massive by venture standards), with smaller checks.
While there are many interpretations of Softbank’s apparent failure with SVF I (while it could be still too early to tell), my take is it was too early for its time. Just like investors ask founders the “why now” question to determine the timing of the market, Softbank missed its “why now” moment.
Bigger funds make sense
I wrote a little over a month ago that we’re in a hype market right now. Startups are getting funded at greater valuations than ever before. Investors seem to have lost pricing discipline. $5 million rounds pre-product honestly scare me. But as Dell Technologies Capital‘s Frank told me, “VCs have been mispricing companies. We anchor ourselves on historical valuations. But these anchors could be wrong.” Most are vastly overvalued, yet future successes are grossly undervalued.
Allocating $152 billion into VC funds, LPs are excited about the market activity and that the timeline on returns are shorter. Namely:
Exits via SPAC,
Accelerated timelines because of the pandemic (i.e. healthcare, fintech, delivery, cloud computing, etc.)
And secondary markets providing liquidity.
We’ve also seen institutional LPs, like pension funds, foundations, and endowments, invest directly into startups.
Moreover, we’re seeing growth and private equity funds investing directly into early-stage startups. To be specific over 50 of them invested in over $1B into private companies in 2021 so far.
As a result of the market motions, the Q2 2021 hit a quarterly record in the number of unicorns minted. According to CB Insights, 136 unicorns just in Q2. And a 491% YoY increase. As Techcrunch’s Alex Wilhelm and Anna Heimputs it, “Global startups raised either as much, or very nearly as much, in the first two quarters of 2021 as they did in all of 2020.”
Hence, we see top-tier venture funds matching the market’s stride, (a) providing opportunity for their LPs to access their deal flow and (b) meeting the startup market’s needs for greater financing rounds. Andreessen recently raised their $400M seed fund. Greylock with their $500M. And most recently, NFX with their $450M pre-seed and seed Fund III.
In his analysis of a16z, writer Dror Poleg shares that “you are guaranteed to lose purchasing power if you keep your money in so-called safe assets, and a handful of extremely successful investments capture most of the available returns. Investors who try to stay safe or even take risks but miss out on the biggest winners end up far behind.” The a16z’s, the Greylocks and the NFXs are betting on that risk.
Fund returners are increasingly harder to come by
As more money is put into the private markets, with startups on higher and higher valuations, unicorns are no longer the sexiest things on the market. A unicorn exit only warrants Greylock with a 2x fund returner. With the best funds all performing at 5x multiples and up, you need a few more unicorn exits. In due course, the 2021 sexiest exits will be decacorns rather than unicorns. Whereas before the standard for a top performing fund was a 2.5%+ unicorn rate, now it’s a 2.5% decacorn rate.
The truth is that in the ever-evolving game of venture capital, there are really only a small handful of companies that really matter. A top-tier investor once told me last year that number was 20. And the goal is an investor is to get in one or some of those 20 companies. ‘Cause those are the fund returners. Take for example, Garry Tan at Initialized Capital, earlier this year. He invested $300K into Coinbase back in 2012. And when they went public, he returned $2B to the fund. That’s 6000x. For a $7M fund, that’s an incredible return! LPs are popping bottles with you. For a half-billion dollar fund, that’s only a 4x. Still good. But as a GP, you’ll need a few more of such wins to make your LPs really happy.
I also know I’m making a lot of assumptions here. Fees and expenses still to be paid back, which lowers overall return. And the fact that for a half-billion dollar seed fund, check sizes are in the millions rather than hundreds of thousands. But I digress.
There is more capital than ever in the markets, but less startups are getting funded. The second quarter of this year has been the biggest for seed stage activity ever, measured by dollars invested. Yet total deal volume went down.
Each of these startups will take a larger percentage of the public attention pie. Yet, most startups will still churn out of the market in the longer run. Some will break even. And some will make back 2-5x of investor’s money. Subsequently, there will still be the same distribution of fund returners for the funds that make it out of the hype market.
In closing
As funds scale as a lagging indicator of today’s market, the discipline to balance strategy and scale becomes ever the more prescient. We will see bigger flops. “Startup raises XX million dollars closes down.” They might get more attention in the near future from media. Similarly, venture capitalists who empirically took supporting cast roles will be “celebretized” in the same way.
The world is moving faster and faster. As Balaji Srinivasan tweeted yesterday:
But as the market itself scales over time, the wider public will get desensitized to dollars raised at the early stages. And possibly to the flops as well. Softbank’s investment in Zume Pizza and Brandless turned heads yesterday, but probably won’t five years from now. It’s still early to tell whether a16z, Greylock, NFX, among a few others’ decisions will generate significant alphas. I imagine these funds will have similar portfolio distributions as their smaller counterparts. The only difference, due to their magnitudes, is that they’re subject to greater scrutiny under the magnifying glass. And will continue to stay that way in the foreseeable future.
Nevertheless, I’m thrilled to see speed and fund size as a forcing function for innovation in the market. There’s been fairly little innovation at the top of the funnel in the venture market since the 1970s. VCs meet with X number of founders per week, go through several meetings, diligence, then invest. But during the pandemic, we’ve seen the digitization of venture dollars, regulations, and new fund structures:
Quoting a good friend of mine, “It’s a good time to be alive.” We live in a world where the lines between risk and the status quo are blurring. Where signal and noise are as well. The only difference is an investor’s ability to maintain discipline at scale. A form of discipline never before required in venture.
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As I am co-leading a VC fellowship with DECODE (and here’s another shameless plug), a few fellows asked me if I had a repository of questions to ask founders. Unfortunately, I didn’t. But it got me thinking.
There’s a certain element of “Gotcha!” when an investor asks a founder a question they don’t expect. A question out of left field that tests how well the founders know their product, team or market. In a way, that’s the sadist inside of me. But it’s not my job, nor the job of any investor, to force founders to stumble. It’s my job to help founders change the world for the better. By reducing friction and barriers to entry where I can, but still preparing them as best as I can for the challenges to come.
I’m going to spare you the usual questions you can find via a quick Google search, like:
What is your product? And who is your target audience?
How big is your market? What is your CAGR?
What is your traction so far?
How are you making money? What is your revenue model?
And many more where those come from.
Below are the nine questions I find the most insightful answers to. As well as my rationale behind each. Some are tried and true. Others reframe the perspective, but better help me reach a conclusion. I do want to note that the below questions are described in compartmentalized incidents, so your mileage may vary.
Here’s to forcing myself into obsolescence, but hopefully, empowering the founders reading this humble blog of mine to go further and faster.
The questions
I categorize each of the below questions into three categories:
The market (Why Now)
The product (Why This)
And, the team (Why You)
Together, they form my NTY thesis. The three letters ordered in such a way that it helps me recall my own thesis, in an unfortunate case of Alzheimer’s.
Why Now
What are your competitors doing right?
This is the lesser-known cousin of “What are your product’s differentiators?” and “Why and how do you offer a better solution than your competitors?”. Founders are usually prepared to answer both of the above questions. I love this question because it tests for market awareness. Too often are founders trapped in the narratives they create from their reality distortion fields. If you really understand your market, you’ll know where your weaknesses are, as well as where your competitors’ strengths are.
There have been a few times I’ve asked this question to founders, and they’d have an “A-ha!” moment when replying. “My competitors are killing it in X and Y-… Oh wait, Y is our value proposition. Maybe I should be prioritizing our company’s resources for Z.”
Why is now the perfect time for your product to enter the market?
As great as some ideas are, if the market isn’t ripe for disruption, there’s really no business to be made here… at least, not yet. What are the underlying political, technological, socio-economical trends that can catapult this idea into mass adoption?
For Uber, it was the smartphone and GPS. For WordPress and Squarespace, it was the dotcom boom. And, for Shopify, it was the gig economy. For many others, it could be user habits coming out of this pandemic that may have started during this black swan event, but will only proliferate in the future. As Winston Churchill once said, “Never let a good crisis go to waste.”
A great way to show this is with numbers. Especially your own product’s adoption and retention metrics. Numbers don’t lie.
What did your customers do/use before your product?
What are the incumbent solutions? Have those solutions become habitual practices already? How much time did/do they spend on such problems? What are your incumbents’ NPS scores? In answering the above questions, you’re measuring indirectly how willing they are to pay for such a product. If at all. Is it a need or a nice-to-have? A 10x better solution on a hypothetical problem won’t motivate anyone to pay for it. A 10x on an existing solution means there’s money to be made.
Before we can paint the picture of a Hawaiian paradise, there must have been several formative volcanic eruptions. It’s rare for companies to create new habits where there weren’t any before, or at least a breadcrumb trail that might lead to “new” habits. As Mark Twain says, “History doesn’t repeat itself, but it often rhymes.”
Why This
What does product-market fit look like to you?
Most founders I talk to are pre-product-market fit (PMF). The funny thing about PMF is that when you don’t have it, you know. People aren’t sticking around, and retention falls. Deals fall through. You feel you’re constantly trying to force the product into your users’ hands. It feels as if you’re the only person/team in the world who believes in your vision.
On the flip side, when you do have PMF, you also know it. Users are downloading your product left and right. People can’t stop using and talking about you. Reporters are calling in. Bigger players want to acquire you. The market pulls you. As Marc Andreessen, the namesake for a16z, wrote, “the market pulls product out of the startup.”
The problem is it’s often hard to define that cliff when pre- becomes post-PMF. While PMF is an art, it is also a science. Through this question, I try to figure out what metrics they are using to track their growth, and inevitably what could be the pull that draws customers in. What metric(s) are you optimizing for? I wouldn’t go for anything more than 2-3 metrics. If you’re focusing on everything, you’re focusing on nothing. And of these 1-3 metrics, what benchmark are you looking at that will illustrate PMF to you?
For example, Rahul Vohra of Superhuman defines PMF with a fresh take on the NPS score, which he borrows from Sean Ellis. In feedback forms, his team asks: “How would you feel if you could no longer use the product?” Users would have three choices: “very disappointed”, “somewhat disappointed”, and “not disappointed”. If 40% or more of the users said “very disappointed”, then you’ve got your PMF.
Founders don’t have to be 100% accurate in their forecasts. But you have to be able to explain why and how you are measuring these metrics. As well as how fluctuations in these metrics describe user habits. If founders are starting from first principles and measuring their value metric(s), they’ll have their priorities down for execution. Can you connect quantitative and qualitative data to tell a compelling narrative? How does your ability to recognize patterns rank against the best founders I’ve met?
If in 18 months, this product fails. What is the most likely reason why?
This isn’t exactly an original one. I don’t remember exactly where I stumbled across this question, but I remember it clicking right away. There are a million and one risks in starting a business. But as a founder, your greatest weakness is your distraction – a line in which the attribution goes to Tim Ferriss. Knowing how to prioritize your time and your resources is one of the greatest superpowers you can have. Not all risks are made equal.
As Alex Soktold me a while back, “You can’t win in the first quarter, but you can lose in the first quarter.” The inability to prioritize has been and will continue to be one of the key reasons a startup folds. Sometimes, I also walk down the second and third most likely reason as well, just to build some context and see if there are direct parallels as to what the potential investment will be used for.
On the flip side, one of my favorite follow-ups is: If in 18 months, this product wildly succeeds. What were its greatest contributing factors?
Similar to the former assessing the biggest threats to the business, the latter assesses the greatest strengths and opportunities of this business. Is there something here that I missed from just reading the pitch deck?
What has been some of the customer feedback? And when did you last iterate on them?
I’m zeroing in on two world-class traits:
Open-mindedness and a willingness to iterate based on your market’s feedback. As I mentioned earlier with Marc Andreessen’s line, “the market pulls product out of the startup.” Your product is rarely ever perfect from the get-go, but is an evolving beast that becomes more robust the better you can address your customer’s needs.
Product velocity. How fast are your iteration cycles? The shorter and faster the feedback loop the better. One of the greatest strengths to any startup is its speed. Your incumbents are juggernauts. They’ll need a massive push for them to even get the ball rolling. And almost all will be quite risk-averse. They won’t jump until they see where they can land. Use that to your advantage. Can you reach critical mass and product love before your incumbents double down with their seemingly endless supply of resources?
Why You
What do you know that everyone else doesn’t know, is underestimating, or is overlooking?
Are you a critical thinker? Do you have contrarian viewpoints that make sense? Here, I’m betting on the non-consensus – the non-obvious. While it’s usually too early to tell if it’s right or not, I love founders who break down how they arrived at that conclusion. But if it’s already commonly accepted wisdom, while they may be right, it may be too late to make a meaningful financial return from that insight.
But if you do have something contrarian, how did you learn that? I’m not looking for X years of experience, while that would be nice, but not necessary. What I’m looking for is how deep founders have gone into the idea maze and what goodies they’ve emerged with.
Why did you start this business?
Here, unsurprisingly, I’m looking for two traits:
Your motivation. I’m measuring not just for passion, but for obsession and the likelihood of long-term grit. In other words, if there is founder-market fit. Do you have a chip on your shoulder? What are you trying to prove? And to whom? Do you have any regrets that you’re looking to undo?
Most people underestimate how bad it’s going to get, while overestimating the upside. The latter is fine since you are manifesting the upside that the wider population does not see yet. But when the going gets tough, you need something to that’ll still give you a line of sight to the light at the end of the tunnel. Selfless motivations keep you going on your best days. Selfish motivations keep you going on your worst days.
Your ability to tell stories. Before I even attempt to be sold by your product or your market, I want to be sold on you. I want to be your biggest champion, but I need a reason to believe in the product of you. You are the product I’m investing in. You’re constantly going to be selling – to customers, to potential hires, and to investors. As the leader of a business, you’re going to be the first and most important salesperson of the business.
What do you and your co-founders fundamentally disagree on?
No matter how similar you and your co-founders are, you all aren’t the same person. While many of your priorities will align, not all will. My greatest fear is when founders say they’ve never disagreed (because they agree on everything). To me, that sounds like a fragile relationship. Or a ticking time bomb. You might not have disagreed yet, but having a mental calculus of how you’ll reach a conclusion is important for your sanity, as well as the that of your team members. Do you default on the pecking order? Does the largest stakeholder in the project get the final say after listening to everyone’s thoughts?
Co-founder and CEO of Twilio, Jeff Lawson, once said: “If your exec team isn’t arguing, you’re not prioritizing.”
I find First Round’s recent interview with Dennis Yu, Chime’s VP of Program Management, useful. While his advice centers around high-impact managers, it’s equally as prescient for founding teams. Provide an onboarding guide to your co-founders as to what kind of person are you, as well as what kind of manager/leader you are. What does your work style look like? What motivates you? As well as, what are your values and expectations for the company? What feedback are you working through right now?
In closing
Whether you’re a founder or investor, I hope these questions and their respective rationale serve as insightful for you as they did for me. Godspeed!
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Many of my friends are no stranger to the ephemeral nature of my creative outbursts. Some of these ideas are whimsical in nature. Where, from the start, they carried no real weight behind their punch. A deplorable few collected dust in the attic, as a product of giving myself the time to think twice. To second-guess myself. In fact, partly due to being in VC, I became quite proficient at saying “No.” I was so good at saying “No” that I forgot how to say “Yes”. And as I wrote before, the theme of this year is to say “Yes” to more opportunities to experience growing pains. So, when my friend brought up something she used to track things she repeatedly says “Yes”, then “No” to, I was intrigued. She called it her fickle jar. And of course, I had to ask.
Both she and I share common ground. In the sense, that we happen to be promiscuous when it comes to ideas. We mint and host a multitude of ideas. But often don’t give most of our thoughts a double take before we abandon them. They retire from our lips before they have an opportunity to marinate in our minds.
So both of us needed this fickle jar. The fickle jar is a jar chronicling everything you might be fickle on. Soft commitments of “I should do X.” Or “It’d be cool to do Y”. It’s a visualization of the loose promises you make to yourself. Every time you think of a something you want to or should do, write it down. Draw it in its own bubble. Each idea isolated from the next – though some might be related. And each time you follow through and act on the idea, you color your bubble in. When you finish a jar, make another one. Over time, you can visually see what your creativity to commitment ratio is.
Over the next few months to years, I know I’ll accumulate enough fickle jars to have my own fermentation station in my basement. The goal of all of this is to visually track my partiality between creativity and commitment. But moreover, to emphasize intentionality. In the event I propose an idea – which is inevitable – it’s not a fleeting thought. And those of a less ephemeral nature, I take it and give it a go, regardless of the outcome. Hesitation has always been the enemy of my progress. Ideally, over time, I commit to most ideas that spring up. But realistically, I know it isn’t possible. Neither should it be a priority.
Yesterday morning, I was reading First Round’s interview with Irving Fain, co-founder of Bowery Farming, who recently announced their $300M Series C round. While not your first-time founder, having built CrowdTwist (acq. Oracle) and iHeartRadio, with Bowery, he, nevertheless, jumped into an industry he knew little about.
“I could sit on a chair and think my way around this problem for another decade, but when building a company, you never avoid that moment where you have to jump off the cliff. In some respects, what you want to try to make the cliff-to-ground ratio as small as you can. But there is no amount of work and research that avoids the fact that at some point you’re jumping off into the abyss.” So like Irving, I need to have the nerve to jump into the abyss – at least more so than the status quo. I just have to say “yes” to the genre of ideas that have historically left me in decision paralysis.
Fain goes on to say, “Before I started my first company, I spent enormous amounts of time evaluating, evaluating, evaluating, saying no, and evaluating, evaluating, evaluating, and saying no. And in hindsight, I look back and say, ‘Wow, I said no to some great ideas.’ I spent way too much time getting to the wrong answer, arguably.”
I recently realized that some of the biggest risks I ended up taking is spending undue time amidst inaction. The risk is the opportunity cost of the time I could be spending elsewhere. Yet I choose indecision – an infertile stalemate. Crops won’t grow if the soil hasn’t been tilled.
She also noted, “Fickle also rhymes with pickle.”
Ironically, this essay almost became a fickle pickle ’cause I was too lazy to transcribe my fickle jar.
#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.
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While I don’t always ask this question, when I do, it provides me enormous context to how the founding team works together. What do you and your co-founders fundamentally disagree on? Over the years, I’ve heard many different answers to this question. “We disagreed on which client to bring into our alpha.” “On our last hire.” “Our pricing strategy.” And so on. As long as you contextualize the point of friction, and elaborate on how, why, and what you do to resolve it, then you’re good. There’s no right answer, but there is a wrong answer.
The answer that scares me the most is: “We agree on everything.” Or some variation of that. While people may share a lot of similarities, even potentially the same Myers Briggs personality type (although I do believe people are more nuanced than four letters), no two people are ever completely the same. Take twins, for example. Genetically, they couldn’t be any more similar. Yet, to any of us, who’ve met any pair of twins in our lifetime know they are vastly different people.
Priorities lead to disagreements
One of my favorite counterintuitive lessons from the co-founder and CEO of Twilio, Jeff Lawson, is: “If your exec team isn’t arguing, you’re not prioritizing.” He further elaborates:
“As an executive team, we never actually argued — which is a strange thing to bother a CEO. But in fact, something always felt not quite right to me when we always agreed. Clearly, we must not be making good enough decisions if we all agree all the time.
“What I came to realize was that the reason why we didn’t argue is we weren’t prioritizing. One person says, ‘I like idea A,’ and the other person says, ‘I like idea B,’ and you say, ‘Great, put them both down, we’ll do it all!’ And in fact, when you look back on those documents at the end of the year, we rarely got around to very much of anything in those documents.
“Be vigorous not just about what makes the list, but the specific order in which priorities fall. “We realized it’s not just about all the things we could do, but the order of importance — which is first, which is second. Now you get disagreements and a lot of vigorous, healthy debate.”
Starting the tough conversation
Admittedly, it’s not always easy to have these tough conversations with the people you trust most. In fact, often times, it’s even harder to have these conversations because you’re scared about what it can do to your relationship. Arguably, a fragile one at best. At the end of last year, Yin Wu, founder of Pulley, shared an incredible mindset shift when building an all-star team, which led to my conversation with her.
3/ We are not a family. We are a world class team, purpose built to win. Most founder-types do not want a 2nd family, they want to excel.
We push each other to improve. We own our mistakes so we can avoid making same mistake twice. We celebrate our joint success as a team.
You’re a team driven to change the world we live in. And to do so, you need a system of priorities.
One of the best ways I’ve learned to address conflicts – explicit and implicit, the latter more detrimental than the former – is taking the most obvious, but the one that most people try to avoid. Address the elephant in the room at the beginning.
I love the way Elizabeth Gilbertapproaches that elephant, “The truth has legs. It’s the only thing that will be left standing in the end. So at the end of the day, when all the drama has blown up, and all the trauma has expressed itself, and everyone has acted up and acted out, and there’s been whatever else is happening, when all of that settles, there’s only going to be one thing left standing in the room always, and that’s going to be the truth. […] Since that’s where we’re going to end up, why don’t we just start with it? Why don’t we just start with it?”
When it hasn’t happened yet
If you haven’t disagreed with your team yet, you either haven’t established your priorities or one or the other or both has yet to bring it up. A mentor of mine once told me, “Whatever you least want to do or talk about should be your top priority.” And the goal is to sit down with your team and figure it out. To come into the conversation suspending immediate judgment and trying to see where your other team members are coming from.
As the CEO of a startup or a leader of a team, you don’t have to use every piece of feedback or input you get from your teammates. But you should make sure your teammates feel heard. That you’ve put thought and intention behind considering their ideas and opinions. Whether you choose to deviate from your teammates’ opinions or not, you should clearly convey the rubric that you used to make that decision. And why and how it aligns with the company’s mission.
In closing
And of course, the follow-up to the first question about disagreement would be: How often do these disagreements happen? And how do you move forward after the disagreement comes to light?
I go back to a line Naval Ravikant, co-founder of AngelList, once said, “If you can’t see yourself working with someone for life, don’t work with them for a day.” Indubitably, you’re going to be working with your co-founders for a long time. And if you haven’t dissented with your co-founders – or for that matter, other team members, investors, and customers – yet, you will. And knowing what, how and why you disagree with others can be invaluable for your company’s survival and growth.
This past weekend I heard a new phrasing of disagreement I really liked from a friend of mine. “Creative conflict.” I’m adding that phrase to my dictionary from now on. And well, this is my preface to you all before I do.
Prioritize. Communicate. And embrace creative conflict.
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In the past few months, Rolling Funds by AngelList have been the talk of the town. Instead of having to raise a new fund every 2-3 years, fund managers can now continuously accept capital on a quarterly basis, where LPs (limited partners, like family offices or endowments or fund of funds (FoF)) typically invest with 1-2 year minimum commitments. Under the 506c designation, you can also publicly talk about your fundraise as a fund manager. Whereas the traditional Fund I typically took 11 months to fundraise for a single GP (general partner of a VC fund), 11.9 if multiple GPs, now with Rolling Funds, a fund manager can raise and invest out of a fund within a month – and as quick as starting with a tweet. AngelList will also:
Help you set up a website,
Verify accredited investors,
Help set up the fund (reducing legal fees),
And with rolling funds, you can invest as soon as the capital is committed per quarter, instead of waiting before a certain percentage of the whole fund is committed as per the usual 506b traditional funds.
Moreover, Rolling Funds, under the same 506c general solicitation rules, are built to scale. Both for the emerging fund manager playing the positive sum game of investing upstream as a participating investor, and for the experienced fund manager who’s leading Series A rounds. In the former example with the emerging fund manager, say a solo GP investing out of a $10M initial fund size, 20 checks of $250K, and 1:1 reserves. Or the latter, $50-100M/partner, writing $2-3M checks. Maybe up to $7-10M for a “hot deal“, which by its nature, are rare and few in between. In the words of Avlok Kohli, CEO of AngelList Venture, Rolling Funds are what funds would have looked like if they “were created in an age of software”.
I’m not gonna lie, Rolling Funds really are amazing. Given the bull case, what is the bear case? And how will that impact both emerging and experienced fund managers?
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.
