Tag: fundraising

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My Top Founder Interview Questions That Fly Under The Radar

questions

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:

  1. The market (Why Now)
  2. The product (Why This)
  3. 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 Sok told 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:

  1. 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.
  2. 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:

  1. 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.
  2. 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!

Photo by mari lezhava 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.

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Why It’s Important to Disagree with Your Co-Founders Early

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.

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 Gilbert approaches 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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How to Build Your Investor Pipeline Without a Network

One of the most common questions I get from first-time founders, as well as those outside the Bay Area, is: “Who is/How do I find the best investor for our startup?” Often underscored by circumstances of:

  • Raising their first round of funding
  • Finding the best angel investors
  • Doesn’t have a network in the Bay Area or with investors

While I try to be as helpful as I can in providing names and introductions, more often than not, I don’t know. I usually don’t know who’s the best final denominator, but I do know where and how to start. In other words, how to build a network, when you don’t think you have one. I emphasize “think” because the world is so connected these days. And you’re at most a 2nd or 3rd degree connection from anyone you might wanna meet. Plus, so many early-stage investors spend time on brand-building via Medium, Quora, Twitter, Substack, podcasting, blogging, and maybe even YouTube. It’s not hard to do a quick Google search to find them.

“Googling” efficiency

While I do recommend starting your research independently first, if you really are stumped, DM me on my socials or drop me a line via this blog. Of course, this is not a blog post to tell you to just “Google it”. After all, that would be me being insensitive. Here’s how I’d start.

One of the greatest tools I picked up from my high school debate days was learning to use Google search operators. Like:

  • “[word]” – Quotes around a word or words enforces that keyword, meaning it has to exist in the search items
  • site: – Limits your search query to results with this domain
  • intitle: – Webpages with that keyword in its title
  • inurl: – URLs containing that keyword

Say you’re looking for investors. I would start with a search query of:

site: docs.google.com/spreadsheets intitle: investors

Or:

site: airtable.com inurl: investors

Feel free to refine the above searches to “angel investors” or “pre-seed funds”.

Landing and expanding your investor/advisor network

I was chatting with a friend, first-time founder, recently who’s gearing up for her fundraising frenzy leading up to Demo Day. She asked me, “Who should I be talking to?” While I could only name a few names since I wasn’t super familiar with the fashion industry, I thought my “subject-matter expert network expansion” system would be more useful. SMENE. Yes, I made that name up on the spot. If you have a better nomination, please do let me know. But I digress.

First, while you might not think you have the network you want, leverage who you know to get a beachhead into the SMEN (SME network) you want. Yes I also made up that acronym just now. But don’t just ask anyone, ask your friends who are founders, relative experts/enthusiasts, and investors. Ideally with experience/knowledge in the same/similar vertical or business model.

Second, if you feel like you don’t have those, just reach out to people who are founders, relative experts/enthusiasts, and investors. Via Twitter, Quora, LinkedIn, Clubhouse. Or maybe something more esoteric. I know Li Jin and Justin Kan are on TikTok and Garry Tan and Allie Miller are on Instagram. You’d be surprised at how far a cold email/message go. If it helps, here’s my template for doing so.

Then you ask them three questions:

  1. Who is/would your dream investor be? And two names at most.
    • Or similarly, who is the first (or top 2) people they think of when I say [insert your industry/business model]?
  2. Who, of their existing investors, if they were to build a new business tomorrow in a similar sector, is the one person who would be a “no brainer” to bring back on their cap table?
  3. Who did they pitch to that turned them down for investment, but still was very helpful?

For each of the above questions, why two names at most? Two names because any more means people are scraping their minds for “leftovers”. And there’s a huge discrepancy between the A-players in their mind and the B-players. Then you reach out/get intro’ed to those people they suggested. Ask them the exact same question at the end of the conversation (whether they invest or not). And you do it over and over again, until you find the investor with the right fit.

Photo by Andrew Ly 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.

image001
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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#unfiltered #46 Soon May the Investor Fund

Not long ago, there was this massive TikTok craze on sea shanties. And while I don’t have a TikTok account, the ripple effects have reached me as well. What started as a shower thought after a founder recommended I gamify my advice to founders fundraising, well… turned into this. To the tune of Soon May the Wellerman Come:

There once was a team that put to sea
The name of that team was Friends ‘N Me
The winds blew hard, but growth tipped up
O’, burn that midnight oil (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

She had not been two years from start
When push became the pull we sought
The founder called all hands and wrought
The product to scale now (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

The servers’ now a right real mess
We had to call the AWS
They had us pay for more bandwidth
But that’s okay with us (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

We’ve tripled our growth last year, oh yus
With dollar retention as one cause
When we were asked what it was
We said ’twas one twenty (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

We’ve ten cust’mers that five of which
Are referenceable you’ll find on pitch
That one of which is kinda rich
They’re paying hundy K (huh)

Soon may the investor fund
To bring us money and help and some
One day, when the term sheet’s done
We’ll take the dough to grow

Photo by Katherine McCormack on Unsplash

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

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Should you take VC money or just money money?

Not too long ago, I came across a question on Quora that I had to double click on: Why should founders care about VC brand? Money is money, isn’t it? While the question itself seemed to have a come from a less-informed perspective, I found it to be a useful exercise to once again go through the checklist of founder-investor fit.

Money, frankly, is just money. A Benjamin will look the same and work the same as any other Benjamin out there. Assuming you don’t need anything else other than money, I’d recommend other sources of funding other than venture funding, i.e.:

  • (Equity) crowdfunding,
  • Rev share,
  • Angels – high net-worth individuals who write checks in the 1000s to 10s of 1000s of dollars;
    • Also worth looking into, but are representative of the VC model, are super angels and solo capitalists. Many of whom might be leading their own rolling funds (more context) now;
  • SBA Loans;
  • Friends/family – small sums of money, unless your dad is Chamath Palihapitiya;
  • ICO;
  • Government (public) and private grants – really small sums of money, but money nonetheless;
  • Accelerators/incubators – less upfront capital. But the partnerships they have with other startup services save you a lot of money (i.e. AWS, Adobe Suite, etc.);
  • Selling domain names (yes, I have a friend who initially funded his business by doing that, but other than that, I’m kidding);
  • And I’m sure I missed some others out there.

On the other hand, most founders who raise VC funding want something more than just monetary capital, including, but not limited to:

  • Mentorship/advisorship –
    • Ex-operators who can give you tactical advice,
    • Former founders who can empathize with you,
    • VCs who can check your blind side and had previous portfolio founders who have gone through what you’re going through now,
    • People who have access to resources that will aid you on the founding journey (ideally not distract you),
    • And frankly, people who’ll be there for you when you have to make the tough calls,
    • Highly recommend Harry Hurst’s tweet about the CS:H ratio (check size: helpfulness, which I elaborate on here) as a mental model to figure out which VCs depending on fund size/check size can help you the founder the most at the stage you’re at.
  • Network – downstream investors, sales pipeline, potential hires (eng, executives, growth, product, marketing, etc)
  • Brand/PR –
    • If you’re trying to fill up a round, a brand name investor can easily help you fill in the rest of the round with their network and their participation alone. They’ll also help you raise downstream capital – directly or indirectly.
    • It’ll be easier to find customers. With a brand name VC, you also get quite a bit of media attention from Forbes, TC, NY Times, and so on. Customers are more likely to trust you knowing that you’re backed by a recognizable brand, especially the folks on the other side of the chasm on the adoption curve.
    • It’ll be easier to hire world-class talent. Your business, in their mind, is less likely to go out of business tomorrow. And while you’re not looking for candidates who seek stability, it does give the candidates you do want to hire a peace of mind and confidence that you have external validation.

There’s a saying that the difference between a hallucination and a vision is that other people can see the latter. It’s really a chicken and egg problem. I’m not saying a VC’s brand will guarantee the success of your startup, but I do believe it will help, with the underlying assumption that you pick the right VC. Whereas it used to be a differentiator a decade ago, all VCs these days say they’re founder-first or founder-friendly. But unfortunately not all are. They might be if things are going well. But the true tells are what happens when things don’t go well. Here are some of my favorite questions to ask portfolio founders before you work with a VC. And how to find founder-investor fit.

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The Smoke Signals of a Great Startup From the Lens of the Pitch Deck

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Founders often ask me, what slides on my pitch deck do I have to make sure I get right? The short answer, all of them. Then again, if you’re focusing on all of them, you’re focusing on none of them. So I’ll break it down by fundraising stages:

  1. Pre-seed/seed (might as well include angels here too)
  2. Series A/B

Since I spend almost no time in the later stages, I’ll refrain from extrapolating from any anecdotes there.

If you’re using DocSend, you already have the numbers for your deck viewership in front of you. As DocSend’s CEO Russ Heddleston said in his interview with Jason Calacanis, VCs often spend ~3.5 minutes on your deck. Though I’ve never timed myself, it seems to be in the same ballpark for myself as well. After all, it’s the deck that gets the meeting, not the deck that determines if you get funding or not.

Nevertheless, I hope the below contextualizes the time spent beyond the numbers, and what goes on in an investor’s head when we’re skimming through.

Pre-seed/seed

Team

  1. What is the biggest risk this business is taking on?
  2. Is the person who can address the biggest risk of this business on this slide?
    • And does this person have decision-making power?

Let’s say your biggest risk is that you’re creating a market where there isn’t one. Do you have that marketing/positioning specialist – either yourself or on your team – to tackle this problem? As much as I love techies, three CS PhDs are going to give me doubts.

Similarly, the biggest risk for a hypothetical enterprise SaaS business is often a sales risk. Then I need proof either via your network/experience or LOIs (letters of intent) that you have corporations who will buy your product.

Or if it’s a tech risk, I’ll be hesitant if I see two MBAs pursuing this. Even if their first hire is an ML engineer, who owns 2% of the business. Because it doesn’t sound like the one person who can solve the biggest risk for the business has been given the trust to make the decisions that will move the needle.

This might be a bit controversial, but having talked with several VCs, I know I’m not alone here. I don’t care about quantity – number of years in the industry or at X company. Maybe a little more if you were a founding team member who helped scale a startup to $100M ARR. I do care for quality – your earned secret, which bleeds into the next slide.

Solution/product

The million-dollar question here is: What do you know that makes money that everyone else is overlooking, underestimating, or just totally missed? If you’re a frequent reader of this blog, you’ll be no stranger to this question. I’ve talked about it here and here, just to name a few.

Or in other words, having spent time in the idea maze, what is your earned secret? Here are two more ways of looking at it is:

  1. Is there an inflection point you found, as Mike Maples Jr. of Floodgate calls it, in the socio-economic/technological trends that makes the future you speak of more probable?
  2. Is it a process/mental model that you’ve built over X years in the industry that grafts extremely well to an adjacent or a broader industry?

I believe that’s what’ll greatly increase the chances of your startup winning. Or at least hold your incumbents at bay until you reach product-market fit. If you’re able to find the first insight, then you’ll be able to find the second. And by pattern recognition, you’ll be able to find the third, fourth, and fifth in extreme velocity. It’s what we, on the VC side, call insight development. And your product/solution is the culmination of everything you and your team has learned faster and better than your competitors.

Of course, your product still has to address your customers’ greatest pain points. You don’t have to be the best at everything, but you have to be the best (or the only) one who can solve your customers’ greatest frustration. So VCs, in studying how you plot out the user journey, look for: do you actually solve what you claim this massive problem in the market is?

Series A/B

Traction

  • What are your unit economics? I’m looking for something along the lines of LTV:CAC ~3-5x.
  • Who’s paying?
    • For enterprise, which big logo is your customer? And who are your 5-7 referenceable customers?
    • For consumer:
      • If it’s freemium, what percent of premium users do you have? I’m looking for at least a 3-5% here.
      • If your platform is free, how are people paying with their time? DAU/MAU>25-30%? Is your virality coefficient k>1? 30- and 90-day retention cohorts > 20%, ideally 40%.
  • What does your conversion funnel look like? What part of the funnel are you really winning? Subsequently, what might you need more work on?

The competition

95 out of every 100 decks, I see two kinds of competitor slides:

  • 2×2 matrix/Cartesian graph, where the respective startup is on the upper right hand corner
  • The checklist, where the respective startup has all the boxes checked and their competitors have some percentage of the boxes checked

Neither are inherently wrong in nature, but they give rise to two different sets of questions.

The former, the graph, often leads to the trap of including vanity competitors. For the sake of populating the graph, founders include the logos of companies who hypothetically could be their competitors, but when it comes down to reality, they never or rarely compete on a deal with their target user/customer. April Dunford, author of Obviously Awesome, calls these “theoretical competitors.”

A simple heuristic is if you jumped on a call with a customer right now and ask: “What would you use currently if our solution did not exist?”, would the names of the competitors you listed actually pop up during the call? Or with a potential customer, what did they use before you arrived? For enterprise software, Dunford says that startups usually lose 25% of their customers when the answer to the above question is “nothing”. When your greatest incumbent is a habitual cycle deeply engrained in your user’s behavior, you need to either reposition your solution, or find ways to educate the market and greatly reduce the friction it takes to go from 0 to 60.

The latter, the checklist, usually sponsors a second kind of trap – vanity features. Founders often list a whole table’s worth of “awesome features” that their competitors don’t have, but many of which may not resolve a customer’s frustration. And on the one that does, their competitors have already taken significant market share. The key question here: Do all features listed resolve a fundamental problem your customers/users have? Which are necessary, which are nice-to-have’s? Are you winning on the features that solve fundamental problems?

The question I ask, as it pertains to competition, in the first or second meeting is: What are your competitors doing right? If you were to put yourself in your competitor’s shoes, what did they ace and what can you learn from the success of their experiment?

Financial projections

  1. What are you basing the numbers off of?
  2. What are your underlying assumptions?

How fast do you claim you can double the business growth? Is it reasonable? If we’re calculating bottom-up, can you actually sell the number of units/subscriptions you claim to? What partnerships/distribution channels are you already in advanced talks with? Anything further than 2 years out, for the most part, VCs dismiss. The future is highly unpredictable. And the further out it is, the less likely you’re able to predict that.

I also say financial projections for Series A/B decks is because only with traction can you reasonably predict what the 12-month forward revenue is going to look like. Maybe 18 months, depending on your pending contracts as well. In the pre-seed/seed, when you’re still testing out the product with small set of beta users, it’s hard to predict. And pre-seed/seed decks that have projections without much traction are often heavily scrutinized than their counterparts that don’t have that slide.

In closing

Of course, that doesn’t mean you should neglect any slide on your deck. Rather, the above is just a lens for you to see which slides an investor might allocate special attention to. If you can answer the above questions well in your pitch deck, then you’re one step closer to a winning strategy not only in fundraising, but in building a company that will change the world.

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Rolling Funds and the Emerging Fund Manager

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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?

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The Four Traits of World-Class Startup Founders

Proportionally speaking, I rarely make referrals and intros. Numerically speaking, I set up more intros than the average person. Frankly, if I made every intro that people have asked of me, I’d be out of social capital. It’s not to say I’m never willing to spend or risk my social capital. And I do so more frequently than most people might find comfortable. In fact, the baseline requirement for my job is to be able to put my neck on the line for the startups I’m recommending. The other side of the coin is that I’ve made more than a few poor calls in my career so far. That is to say, I’m not perfect.

I only set up intros if I can see a win-win scenario. A win for the person who wants to get introduced. And a win for the person they will be introduced to. The clearer I can see it, the easier the intro is to make. The less I can, the more I look for proxies of what could be one.

This largely has been my framework for introducing founders to investors, as well as potential hires, partners, and clients. Over the years, I realized that I’ve also been using the same for people who would like an intro to someone above their weight class.

Below I’ll share the 4 traits – not mutually exclusive – of what I look for in world-class founders.

  1. Insatiable curiosity
  2. Bias to action
  3. Empathy
  4. Promise fulfillment
Continue reading “The Four Traits of World-Class Startup Founders”
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