On Wednesday this week, I hosted an intimate dinner with founders in the windy backdrop of San Francisco. And I’m writing this piece, I can’t help but recall one founder from that evening asking us all to play a little game she built. A mini mobile test to see if we could tell the difference between real headshot portraits and AI-generated ones based on the former. There were 15 picture. Each where we had to pick one of two choices: real or AI.
10/15. 6/15. 9/15. 11/15. 8/15… By the time it was my turn, having seen the looks of confusion of my predecessors, I wasn’t confident in my own ability to spot the difference. Then again, I was neither the best nor the worst when it came to games of Where’s Waldo? 90 quick seconds later, a score popped up. 10/15. Something slightly better than chance.
Naturally, we asked the person who got 11/15 if he knew something we didn’t. To which, he shared his hypothesis. A seemingly sound and quite intellectual conjecture. So, we asked him to try again to see if his odds would improve. 90 seconds later, 6/15.
Despite the variance in scores, none were the wiser.
Michael Mauboussin shared a great line recently. “Intuition is a situation where you’ve trained your system one in a particular domain to be very effective. For that to work, I would argue that you need to have a system, so this is the system level, that it’s fairly linear and stable. So linear in that sense, I mean really the cause and effect are pretty clear. And stable means the basic rules of the game don’t change all that much.”
For our real-or-AI game, we lacked that clear cause and effect. If we received individual question scores of right or wrong, we’d probably have ended up building intuition more quickly.
Venture is unfortunately an industry that is stable, but not very linear. In many ways, you can do everything right and still not have things work out. That same premise led to another interesting thread I saw on Twitter this week by Harry Stebbings.
Today I got asked a fantastic question:
Have you ever been involved with a startup that achieved true product-market fit and still failed?
In a bull market, and I was guilty of this myself, the most predictable trait came in two parts: (a) mark-ups (and graduation rates to the next round), and (b) unicorn status. In 2020 and 2021, growth equity moved upstream to win allocation when they needed it with their core check and stage. But that also meant they were less price-sensitive and disciplined in the stages preceding their core check.
The velocity of rounds coming together due to a combination of FOMO and cheap cash empowered founders to raise quickly and often. Sometimes, in half the funding window during a disciplined market. In other words, from 18 months to 9 months. Subsequently, investors found themselves with 70+% IRR and deploying capital twice or thrice as fast as they had promised their LPs. In attempts to keep up and not get priced out of deals. Many of whom believed that to be the new norm.
While the true determinant of success as an investor is how much money you actually return to your investors, or as Chris Douvos calls it moolah in da coolah, the truth is all startup investors play the long game. Games that last at least a decade. Games that are stable, but not linear. The nonlinearity, in large part, due to the sheer number of confounding variables and the weight distribution changing in different economic environments. A single fund often goes through at least one bull run and one bear run. So, because of the insanely long feedback loops and venture’s J-curve, it’s often hard to tell.
In fact, in recent news, Business Insider reported half of Sequoia’s funds since 2018 posted “losses” for the University of California endowment. We’re in the beginning of 2023. In other words, we’re at most five years out. While I don’t have any insider information, time will tell how much capital Sequoia will return. For now, it’s too early to pass any judgment.
The truth is most venture funds have yet to return one times their capital to their investors within five years. Funds with early exits and have a need to prove themselves to LPs to raise a subsequent fund are likely to see early DPI, but many established funds hold and/or recycle carry. Sequoia being one of the latter. After all, typical recycling periods are 3-4 years. In other words, a fund can reinvest their early moolah in da coolah in the first 3-4 years back into the fund to make new investments. There is a dark side to recycling, but a story for another time. Or a read of Chris Neumann’s piece will satiate any current surplus of curiosity.
But I digress.
In the insane bull run of 2020 and 2021, the startup world became a competition of who could best sell their company’s future as a function of their — the founders’ — past. It became a world where people chased signal and logos. A charismatic way to weave a strong narrative behind logos on a resume seemed to be the primary predictors of founder “success.” And in a market with a surplus of deployable capital and heightened expectations (i.e. 50x or higher valuation multiples on revenue), unicorn status had never been easier to reach.
As of January of this year — 2023, if you’re a time traveler from the future, there are over 1,200 unicorns in the world. 200 more than the beginning of 2022. Many who have yet to go back to market for cash, and will likely need a haircut. Yet for so many funds, the unicorn rate is one of the risks they underwrite.
I was talking with an LP recently where he pointed out the potential fallacy of a fund strategy predicated on unicorn exits. There have only been 118 companies that have historically acquired unicorns. And only four of the 118 have acquired more than four venture-backed unicorns. Microsoft sitting at 12. Google at 8. And Meta and Amazon at 5 each. Given that a meaningful percentage of the 1200 unicorns will need a haircut in their next fundraise, like Stripe and Instacart, we’re likely going to see a slowdown of unicorns in the foreseeable future. And for those on the cusp to slip below the unicorn threshold. Some investors have preemptively marked down their assets by 25-30%. Others waiting to see the ball drop.
The impending future is one not on multiples but one of business quality, namely revenue and revenue growth. All that to say, unless you’re growing the business, exit opportunities are slim if you’re just betting on having unicorn acquisitions in your portfolio.
So while many investors will claim unicorn rate as their metric for success, it’s two degrees of freedom off of the true North.
In the bear market we are in today, the world is now a competition of the quality of business, rather than the quality of words. At the pre-seed stage, companies who are generating revenue have no trouble raising, but companies who don’t are struggling more.
As Andy Rachleff recently pointed out, “Valuations are not the way you judge a venture capitalist, or multiples of their fund. […] The way that I judge a venture capitalist is by how many companies did they back that grew into $100M revenue businesses.” If you bring in good money, whether an exit to the public market or to a partner, you’re a business worth acquiring. A brand and hardly any revenue, if acquired, is hardly going to fetch a good price. And I’ve heard from many LPs and longtime GPs that we’re in for a mass extinction if businesses don’t pivot back to fundamentals quickly. What are fundamentals? Non-dilutive cash in the bank. In other words, paying customers.
Bull markets welcome an age of chasing revenue multiples (expectation and sentiment). Bear markets welcome an age of chasing revenue.
The latter are a lot more linear and predictable than the former.
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!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
One of my favorite frameworks of thinking about building and breaking habits comes in the words of Elliot Berkman, whom I’ve cited before. He notes that there are three factors to breaking a habit.
The availability of an alternative habit
Strength of motivation to change
Mental and physical ability to break the habit
Of particular note is the second one. The strength of motivation to change. Change is inevitable. But real change is always compelling. There must be a strong enough desire to relieve yourself of the status quo. John C. Maxwell once said, “People change in four different seasons… People change when they hurt enough they have to, when they see enough they’re inspired to, when they learn enough that they want to, and when they receive enough that they’re able to.”
In each of those seasons, the person is compelled to do something outside of their ordinary flow of time. But there’s another interesting way to think about change. One where you have no choice but to.
CIA veteran Richards Heueronce wrote, “When faced with a major paradigm shift, analysts who know the most about a subject have the most to unlearn.” If there’s anything we can gather from historical records, major paradigm shifts are happening every decade (and less) whether we want to or not. On a macro scale, new technologies, like generative AI, the smartphone, and the internet, as well as political and financial eras, like the GFC, the dot com burst, and wars that affect the increasingly interconnected world. On a micro scale, when we go to college, get our first job, start our first company, raise a family, or buy your first house.
At each stage, the more entrenched you are in the behavioral patterns of the status quo, the harder it is to adjust with the next shift. For instance, as a founder, anchoring yourself on 2020-2021 multiples and valuations won’t help you in the world forward. As an investor, anchoring on the past 3-4 years of markups without fully accounting for the current climate won’t help you with your next raise. Anecdotally, I’ve heard great multi-fund managers mark their portfolio down by 25% already before the market verdict comes in. Moreover, jobs are going to look very different in an age of AGI (artificial general intelligence). Just like with the industrial revolution, new jobs will be created. And I can go on on and on. But I digress.
There’s a hero’s arc in each inflection point. Every time the second derivative goes from negative to positive. The way Viola Davis puts it that that at the end of every hero’s journey, you come face-to-face with not a god, but yourself. And that is when the magic happens.
“Somewhere along the line is a voice deep within you that tells you exactly who you are; you just have to have the courage to do that. That’s what the journey of the hero is all about. You’re born into a world where you don’t fit in. You answer the call to adventure. And you deny the call. Then at some point you then set out on your path. You slay dragons, and you do all of that. At some point, you come face-to-face with not a god, but yourself. Somewhere along the line, you get it — your A-ha moment. Your elixir. And you go back to your ordinary world and share it with others. I think that’s the journey. I think that’s the privilege of being absolutely who you are — belonging to yourself and being brave.”
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Before we dive into this blogpost, I’ve been asked by my legal friends to include the below disclaimer. I have a version of this at the bottom of every blogpost, but nevertheless, it doesn’t hurt to reiterate it again.
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
One of my favorite scenes as a kid was in Harry Potter and the Sorcerer’s Stone when Harry visits Diagon Alley for the first time. As the stone wall parted like the Red Sea, we saw a world unlike any we’ve seen before. With that, the audience along with Harry (Kudos for Director Chris Columbus‘ artistic direction) watched in wonder, excitement, and mystery. And Harry and I alike (Admittedly, I didn’t start reading the books till after the first movie) was hit with an overwhelming load of new information to absorb.
Raising your first fund is very much like that. While there are still some elements of familiarity, like investing in great people and winning great deals, you are taking other people’s money (OPM) for the first time. As such, it begs the questions: Who do you take money from? And how do you manage those relationships?
And like the stone wall in Diagon Alley, there’s more than meets the eye.
I have to thank Shiva for first bringing this topic to my attention, one that deserves a more nuanced breakdown than what is currently out there. And when Rebekah brought the below notion up for the Emerging LP Playbook, I knew I had to dedicate a blogpost to just this topic.
“GPs often have some flexibility on their minimum check size. I’m a pretty small check (particularly since I’ve been living on a founder salary!), but I can bring other things to the table to help the GPs I invest in (e.g. I highlighted Janine Sickmeyer from Overlooked Ventures in my Forbes column, I’m an advisor to Zecca Lehn from Responsibly Ventures, I send them deal flow from my AuthenTech community of founders). I’ve had luck with reaching out and saying ‘I really believe in what you’re doing. Please let me know if you get enough large checks and have room for some smaller LP investments.’ They’ll usually need to get enough big investments first since there are SEC limits on how many LPs they can have, and then they can let in some smaller, value-add LPs.”
The LP landscape is rapidly changing. What we knew in the last decade won’t get us to the next. The opacity in the LP world is getting undone by new, emerging LPs hungry to get involved and to learn. Folks, like Nichole at Wischoff Ventures have also shared publicly what her LP base looks like, with a level of transparency that’s foreign, yet refreshing for this industry.
Regulation has moved the needle, allowing for greater allocations to equity crowdfunding, as well as introducing more retail and high net-worth individual investors, to join the foray. Platforms, like AngelList, Republic, Twitter, Allocate, and Revere, just to name a few, are creating engines for better GP discoverability. There have been conversations on raising the ceiling on the number of accredited investors in a fund to 600. Which, if passed, will allow for smaller checks into funds, whereas the previous decades only allowed for family offices and institutions, as well as close friends. Anecdotally, I’ve also seen a lot of angel investors starting to allocate to funds rather than just purely startups.
And at this inflection point, as a GP, you need to be ready for this market shift that’s still early now, but starting to move. And hopefully, the below insights from 11 amazing GPs will serve as your wand, potions, owl and broom as you embark into the magical world of being a fund manager.
My methodology
To be fair, LP construction is more of an art than a science. So, I asked GPs who were on Funds I, II, or III. Why? Emerging GPs would best be able to relate a lot more to the hustle of finding and persuading different kinds of LP personas than someone who was on a Fund X or XV, who already have a long track record that speaks for itself.
I’m also a firm believer in tactical mentorship — mentors who are just 2-3 years ahead of you. People who have just been through the trenches you’re in and can share the lessons they learned. At the same time, not too far ahead where they are no longer the best people to check your blind side. After all, the lessons they picked up are still fresh in their mind. As a function, every one of these amazing GPs started their current fund in the past decade. The only caveat is that this may be the first recession they’re investing other people’s money (OPM) into, although they may have invested their own in the previous decade. And while that may be true, their lessons are timeless.
In the world of baseball, there’s the idea of breaking the catcher’s mitt. In other words, a new glove must be worn and used several times before it can achieve its full potential. Pitching to LPs and LP construction as a whole is no different. Just like a founder needs to pitch to several friends, colleagues, and investors, before they can hit their full stride during fundraising, raising from LPs requires many conversations and many iterations. Even Felicis’ brilliant Aydin Senkut got his first yes from an LP in Felicis after 107 iterations of his pitch.
So, in embarking on this topic and to get the best insight I could, it came down to two core pillars: the people I asked and the questions. I’ll start with the people.
Don’t get me wrong, there are a lot. And the folks included here are by no means all-inclusive. Many who had gone on to raise a Fund IV or higher. In effect, a few years or more out of the emerging manager game. Quite a few I didn’t know well enough. That’s on me. And some who, for all their goodwill and insight, unfortunately, were busy in the weeks prior to this blogpost coming out.
The questions
Building a firm with multiple funds is, in many ways, like driving a car through fog. Not my best analogy, but gets the point across. You see the rough outlines of the road just a few meters ahead, but you won’t see the sinkholes and the cracked concrete until you’re right in front of it, nor do you see any part of the road further than a few meters away. Or as Warren Buffett says, “The rearview mirror is always clearer than the windshield.”
Things are often painfully obvious in hindsight, but are scary, mysterious and unknown in foresight. Sometimes, you just don’t know what you don’t know. And as such, I write and I ask, in hopes to help the ones starting off, to develop foresight from the below cast’s hindsight. And to each, I had five overarching questions, coupled with follow-ups for more depth:
As you embark on your fundraise, note that different LPs resonate with different pitches. Additionally, when you choose out to reach out to each persona, be aware of what each of these LP personas’ incentives are. As a seasoned LP once told me:
High net-worth individuals seek to learn and rarely have a financial incentive.
Small and medium-sized family offices seek to learn and access top decile deal flow.
Larger LPs, like institutions and fund-of-funds, seek financial return.
From my conversations, it seems most GPs raising a Fund I start with individuals, then target larger check sizes as their fundraise matures. For Fund IIs, many seem to start with finding an anchor LP first, before reaching out to individuals and family offices.
The truth is there’s no silver bullet. And you’ll see exactly why below. So what might be more useful to you, an emerging GP, are anecdotes of what worked for different funds. As I call it, tools for your toolkit.
I will note that the one LP persona I won’t touch on as much since I have a lack of data here are corporates who usually seek technology, as well as information access, largely for acquisition opportunities.
Individuals
Start with people close to you.
“You should always target friendlies first. Welcome your references and first believers who might be founders, individuals, former coworkers, classmates.”
— Sarah Smith, Sarah Smith Fund
“It all depends on which Fund you are raising, how much you are raising, track record, team, and many more variables. If you are an emerging manager that is not spinning out of a brand named fund with a significant track record, you are going to have to be scrappy and start with people who know and trust you. “
— Steven Rosenblatt, Oceans Ventures
“You should always start off with your network – from the closest circle and outwards through the various concentric circles. At the beginning, you want to focus on finding your first believers. Those are your first-degree and maybe second-degree connections. So it’s less of the archetype of LP, but more so the depth of relevant relationship that matters. After the first close, that’s when you explore emerging manager programs or talk to more traditional asset managers — still largely within your first- and second-degree networks and/or those of your close early LPs and advisors.”
— Arjun Dev Arora, Format One
“The first $5 million is the hardest. Go to your friends and family. Build some momentum. After you get the initial momentum, it builds off of that. Everyone back channels everyone.”
— Vijen Patel, The 81 Collection
“For the beginning of a fundraise, I’d recommend asking for advice (before money) from people you’ve worked with for an extended amount of time. Your earliest checks may often be smaller but meaningful amounts from colleagues, co-investors, and GPs at other firms.”
— Paige Finn Doherty, Behind Genius Ventures
“The thing is my fund wasn’t oversubscribed from the beginning since I found it hard to raise. It’s a game of momentum, and in the beginning, I didn’t have any. In the beginning, it was about reaching out to the folks that you know. So, I mostly reached out to GPs and fund managers I knew and getting them through.”
— Shiva Singh Sangwan, 1947 Rise
“At the beginning, always start with people you have relationships with — people who’ve known you for a very long time. They not only want to invest in the fund, but invest in you. My first LPs would have likely invested in anything I created, but they knew I wanted to build a track record in venture. I’ve known one of my LPs since we were kids. Another was one of my best friends in university. Another was a friend of his.”
— “Mr. Huxley”, GP with two funds
Beware of relying too much on publicly available data to find LPs.
“The challenge with a purely data-driven approach (i.e. on LinkedIn or Pitchbook) is that you don’t understand the full rationale for why certain LPs invested in a fund. On paper, it may look like a family office is an LP in venture funds, but the principal at that family office could just be the brother- or sister-in-law of the GP. Most LPs also don’t explicitly say they’re LPs on LinkedIn. They could be an asset manager or a CEO of a Fortune 500 company. They almost always don’t want to be inundated with asks. Only after understanding why the industry is opaque, can you then understand LPs and find them.”
— Arjun Dev Arora, Format One
For potential MVP LPs, check size doesn’t matter.
“At the beginning of the fundraise, anyone that knows you and trusts you already AND can easily part with some money. Our first close was $20 million, and it was almost all people who knew us already – either directly or through our brand. We only had one new investor. In that group, we were lucky to have some fairly common names, which helped build the momentum for the rest of the fundraise.
“We did think about check sizes a little bit. There were some people we wanted to have involved for sure, and for them, the check size didn’t really matter. In our first close, we thought of people who could write a $250K check. And if there was someone we really wanted, we’d reduce it to $100K. I’m also an LP, and I do the same. If I plan to invest, I always negotiate down as well. The GP tells me X and I say I’ll invest X, divided by three.”
— Sheel Mohnot, Better Tomorrow Ventures
Persistence also speaks for itself.
“There are two types of investors: those who will commit to your fund now, and those who will invest after building trust. A lot of investors don’t like to invest in a Fund I. To keep them engaged, you either take a tiny check they’re comfortable with or you share regular LP updates that showcase your proof of work.
“In addition, you have to be clear with expectations. I bucketed potential LPs into four buckets:
High net-worth individuals
Founders and operators
Family offices
And GPs
“With each meeting, my pitch evolved and did a lot of follow ups. I had to show I was getting access to good deals and how I was getting access to those deals. You have to share the story behind that. That’s how you attract other investors. For instance, I remember sending my proof of work and an additional ten follow-ups to an LP. And each time I followed up, there has to be some new substance, value, and proof of work. It was a long process, but he ended up becoming one of my largest checks.
“Investors who were or are hustlers tended to gravitate towards my pitch. They became high-functioning people because of their hustle and respect me for my follow-ups and my persistence. They saw themselves in me. Similarly, founders are most likely going to get a reply from me who follow-up at least 2-3 times.
“The lesson here is that being persistent shows that you care. 99.9% of people won’t follow up, and by doing so, you’re already standing out.”
— Shiva Singh Sangwan, 1947 Rise
There are different ways to get in front of LPs: events, Twitter, deal flow, etc.
“Throw events for your LPs — a nice dinner or a cool experience — and ask them to invite their friends. Host events in a thoughtful way.
“Share relevant SPVs. Even broader, it’s content. Having founders be big fans of yours is also helpful. It’s a positive signal and creates buzz.
“That said, having co-investors who like you is a more direct path. LPs often ask VCs: Who are you co-investing with? Which emerging managers are you excited about? These LPs are looking for names. Some GPs are more generous with intros; while others prefer not to share but that’s OK as long as some do.”
— Arjun Dev Arora, Format One
“Looking back at my experience, a majority of our LPs from both Fund I and II actually came from Twitter and warm intros. I’m on Twitter a lot, mostly because I raised Fund I during the pandemic, so Twitter was where I hung out with many of my friends. I love to tell stories and as an extension I help founders tell their stories. And I host events and have done so since elementary school when I was on the student government event planning board. People are interested in my story because I don’t come from a traditional background. They invested mainly because they realize ‘she’s putting so much into the ecosystem, so it’ll eventually come back to pay dividends.'”
— Paige Finn Doherty, Behind Genius Ventures
Some individual LPs are not financially motivated.
“I want to preface that we only have foreign LPs, not US LPs. So, sophistication is very different. With European investors, while running a fund investing in the US, you can play the access game. In other words, you can sell access to great US companies. It’s something I lean on quite a bit.
“My LPs are quite sophisticated outside of the world of tech. They’re finance-savvy wealth managers, founders, high net worth individuals with net worths greater than $50 million, where they invest out of leisure and pursuing a mission, rather than for financial returns. They don’t understand venture, but want exposure to venture.”
— “Mr. Huxley”, GP with two funds
Start with HNW individuals, and end on family offices.
“Let’s make a few assumptions here. Let’s assume this is a Fund I and an emerging manager who doesn’t come from an extreme pedigree. Not from Sequoia or the like. This person is a decent operator-turned-VC, investing with a cool thesis. I’m going to also assume they’re not going to raise a $50 million Fund I or greater. They’re staying small and only raising $10-20 million.
“So I break down LPs into four categories.
High net-worth individuals – These are your angels.
Family offices – They have a lot more assets, usually $100 million or greater.
Fund of funds – They have a mandate to invest in other funds.
Endowments – These are very large institutions, maybe even sovereign wealth. They tend to write big checks into big funds.
“The big mistake I see many GPs make is that most GPs try to target the big ones out of the gate. Rather, in the beginning, focus on the high net-worth individuals. This is similar to asking angels. Their conviction and speed is quick. Their typical check size is no greater than $100K.
“Once you get a few million in the bank, then focus on the family offices — the $1-5 million checks. They tend to operate a lot like angels, but have just accumulated a lot more wealth. Around Fund II or III, then you target larger institutions.
“So, my recommendation is that as an emerging manager, start with angels, end with family offices.”
— Eric Bahn, Hustle Fund
“When you get closer to a final close, and you have a small fund, you can always welcome 1-2 family offices who can write small checks as well as individual investors who can be really helpful.”
— Shiva Singh Sangwan, 1947 Rise
Family offices
Find LPs by optimizing your search with certain keywords.
“Ask your existing LPs if they know anyone. Search LinkedIn to make their life easier. To find LPs, I would recommend looking up the keywords: Venture capital, asset manager, family office, emerging manager, startup (or venture) ecosystem, allocation, active allocator. All the above implies someone is putting money to work.”
— Arjun Dev Arora, Format One
Ask each person for just one intro, nothing more.
“Hustle Fund today has hundreds of LPs in our pipeline. But when we started off, we didn’t know a single family office. So, at the risk of sounding unintentionally mean, here’s how I think about it. Finding a family office is kind of like finding a cockroach. It’s always hard to find the first one. But once you find one, you’ll find a whole nest.
“I’ll share a tactical networking tip of how we found family offices over time. So, let’s say we chat with David. He likes us and decides to invest in the fund. We then share our fundraising blurb and deck and ask, ‘Do you mind sending this to one person you think would be a good fit for our fund?’
“The mistake I see a lot of other fund managers make is they ask, ‘Do you mind sharing this to anyone you think would be a good fit?’ Don’t ask for too much. There’s just too much paradoxical choice. There’s too many in their network to choose from and that overwhelms them.
“So, we change the question to just ask for one. That’s it. Generally, they think of the richest person they know. With just one intro, you’re magically in the family office world. A rich person tends to be friends with a lot of other rich people. It is secretive, but they also talk amongst each other a lot. When they invest, they like to bring their own friends in too.”
— Eric Bahn, Hustle Fund
Ask for intros to LPs who backed GPs who look like you.
“Another big filter is to find LPs who have backed GPs that look like you or have a similar investment strategy. For me, it was finding LPs who have backed solo GPs. To be fair, it’s not easy to figure out, since it is a rather opaque industry. So, I had other solo GPs I knew well and have co-invested with help make intros to their LPs.
“For LPs that I’ve never talked to before, a question I always ask LPs is: ‘Have you ever backed a solo GP?’ If not, don’t waste your time as you’re extremely unlikely to be their first. They likely have strong philosophical reasons to not back solo GPs so your meeting time is better spent elsewhere.”
— Sarah Smith, Sarah Smith Fund
Institutional LPs
Don’t underestimate the power of an anchor LP.
“If possible, having a respected entity who could anchor 5-10% of the fund would be ideal. In my case, my former partnership Bain Capital Ventures anchored my fund which was ideal because it keeps us connected and they are well known in the industry. Just like for a founder, having a lead is important. Having an anchor early helps you build momentum to close the rest of the fund.”
— Sarah Smith, Sarah Smith Fund
“For Fund II, I wanted an anchor LP to provide stability and credibility in the fundraise. Cendana was my number one pick. As a function of fund size at the seed stage, they’re definitely the best. The Harvard of LPs. To become part of their community, for me, was really important.
“It was a hard process, but was doubly as difficult, since Josh and I went our separate ways for Fund II. We had to communicate that decision to our 120 LPs in Fund I before starting the fundraise.
“In Fund I, some LPs believed in me. Some believed in Josh separately. I remember fondly of our first $10K check of belief capital. BGV’s most expensive decisions were our investment decisions. We made all our decisions together in Fund I. We also tried doing a few SPVs via Assure. While it was a great start to our career in VC, it required more work than we thought made sense. But for Fund II, it was going to be different. It was just me. No more SPVs, just checks out of the fund. The story itself wasn’t hard to communicate, but when we got to our 70th call, it was hard to sell the same emotional story.
“So, once we did, I put in the work. I flew to Australia to get introductions and to meet his teammate. Whenever I chatted with other GPs that were backed by Michael [Kim], I’d ask them to say hi to him.
“Pitching to Cendana, and most importantly, Michael, was the longest sales process I’ve ever gone through. He passed on Fund I, but he finally said yes to BGV’s Fund II. Along with Michael, GREE also doubled down on Fund II, along with operator checks from folks at Dropbox and other companies.”
— Paige Finn Doherty, Behind Genius Ventures
Bigger LPs have the ability to write smaller get-to-know-you checks.
“At the end of Fund I, we ended up with Cendana, Greenspring, Industry, Vintage, and Invesco. All fund-of-funds, but they all wrote relatively smaller checks than they typically do. For all the afore-mentioned funds, they wrote $1-3 million checks. It was a get-to-know-you check. They would talk to other companies in our portfolio and other managers we co-invested with. And so the best way to get in front of them was to get intros from other managers these fund-of-funds invested in.”
— Sheel Mohnot, Better Tomorrow Ventures
Talk to LPs whose minimum check size is 20% or less of your fund.
“Some CIOs like being in Fund I’s; others don’t. There’s a lot of alpha in Fund I. At the same time, there are others that won’t consider you seriously until Fund III. The challenge is figuring that out as quickly as possible.
“The best filter for this is figuring out what their minimum check size is. And, is that greater than 20% of your fund size? If so, it won’t be a good fit.”
— Sarah Smith, Sarah Smith Fund
“Biggest thing is their own AUM and the amount they need to deploy. First barrier to entry is the size of the fund you are raising as the GP. If you are raising sub-$75M (give or take) it wouldn’t be big enough for their minimum check size. LPs don’t want to be even close to a majority of your fund, or likely more than 20%.”
— Nichole Wischoff, Wischoff Ventures
“Some institutional LPs also cannot write small checks since they are dealing with other variables around their asset allocation models.”
— Steven Rosenblatt, Oceans Ventures
Start conversations early with LPs who can invest in the ideal fund size you want to raise.
“It’s not just about what your fund size is today, but where you aspire to be. Say you have a $25 million fund today, but aspire to have a $150 million fund where you lead Series As by Fund III or IV, then you should still talk to LPs who are able to write checks that are 20% or less of that future fund. It’s important to know there may be incredible university endowments or foundations who really like you as a GP but in order to run their business efficiently, they have to be able to write minimum checks of $25M or even $50M+ which means they only seriously consider funds of $150M+.
“The question for you, the fund manager, is: Are you going to grow your fund size over time? Or are you going to stay consistent with your current fund size? If the former, then you need to spend a fair bit of time in your deck about how your strategy will shift over time and some views into those larger future funds.”
— Sarah Smith, Sarah Smith Fund
“I started having conversations with institutions while I was raising Fund II knowing they wouldn’t come in until Fund III at the earliest. You need a lot of touchpoints and time with these types of LPs before they invest. I am very focused on LPs that want to underwrite me/the fund for years. I want long lasting relationships and partners that can come in fund over fund.”
— Nichole Wischoff, Wischoff Ventures
“So, when I speak to institutions that are more data-driven — they think about the scalability of AUM — I knew many of those folks were not going to be the best fit. That’s why raising Fund I was so hard.”
— Paige Finn Doherty, Behind Genius Ventures
“We have been cultivating relationships with a large amount of institutional LP’s over the last few years. Investors invest based on trust and relationship and in our mind that doesn’t happen overnight.”
— Steven Rosenblatt, Oceans Ventures
LPs hate surprises.
“There are some institutional LPs who will give you transparent feedback and transparency about their process but most do not. The #1 thing that rules them all is track record and performance. Institutional LPs don’t want surprises; they want to see a multi-year established track record in what you are investing in.”
— Steven Rosenblatt, Oceans Ventures
And even if they disagree with you, LPs like consistent LP updates, even prior to their investment.
“We have a couple institutions that have invested in Hustle Fund. What I didn’t appreciate out of the gate is how long it took to build those relationships. They want to see at least one fund cycle, ideally two. That’s usually anywhere between two and four years. But we’ve nailed how we do it passively.
“We have a newsletter that goes out on the first day of each month at midnight — every month for the past 5.5 years. Each issue has two things: a state of the market and a deal memo on each deal we’ve invested in.
“Today we have 150 investors across three funds and an additional 450 investors who have not invested yet. Think of it like a monthly drip campaign for these prospective investors. Investors get to see what we execute against what we say we’re going to do.
“In some cases, these investors like what they see and choose to eventually invest. In other cases, they find themselves totally disagreeing with how we run our process so they don’t invest, and that’s okay, too. Drip campaigns are always a great marketing tool to close customers. That’s no less true for Hustle Fund. So, at some point, when we mention we’re going to raise a Fund IV, all the meetings will just line up.
“I’ll share a story. Our biggest LP, Foundry Group — Jaclyn and Lindel run their LP initiatives — initially didn’t like our thesis and approach. To them, our investment model was a little too spray and pray. But at the end of our Fund II, they told me, ‘Even if we’re a little uncomfortable with your thesis, you’ve been so consistent with sharing how you’re learning and developing, and we love it. So, we want to invest now.’ They invested because of our newsletter, and witnessing our exact fund thesis. You gotta put in the work. And if you do, the money will follow.”
— Eric Bahn, Hustle Fund
Give LPs a compelling reason not to back an established fund. Otherwise, they will.
“Every institution is different, but it’s also really important to realize that with most institutions, the decision maker is not making the decision based on their own capital. So, risk is a huge point. No one is going to get fired for backing Sequoia. They could potentially get fired for putting a huge check into a new emerging manager that isn’t proving anything and going backwards. It’s important to understand the incentives of who you’ll be working with. So institutions are a completely different beast than individuals. Anything they do there’s usually 5 to 10 back references. It’s a small world. For pushback, they want to see a track record, which is really hard for emerging managers. And they want to see some sort of pedigree.”
— Vijen Patel, The 81 Collection
“I’m the horrible anomaly of being able to raise from institutional LPs in my first fund. I’ll chalk up timing, privilege, and reputation as being the reason we were successful in doing so. While not all of this is relevant to emerging managers today, 100 Days of Fundraising was a blog post which detailed how Homebrew ran its process.”
— Hunter Walk, Homebrew
Author’s Note: Of particular note, in Hunter’s alluded blogpost, is when he writes:
“What we also had was a point of view as to where we’d be investing: the Bottom Up Economy. This set us apart from other funds with broader or non-descriptive investment principles. We also had given extensive thought to our portfolio construction strategy around playing lead roles in rounds, the number of deals we would do each year, how much capital we’d hold back for follow-on, etc. The combination of these two meant that a fund could see how we’d be differentiated in the marketplace and where we’d fit against their current exposure.”
Should your LPs be active?
The truth is, and you’ll read this below, most LPs are passive. But in a world where you take so many different types of risk as an emerging GP, it helps to have people you can lean on. So, it really comes down to two questions:
What can you ask of your LPs?
What is the upside and downside to having active LPs?
The bull case for active LPs
HNW individuals are just waiting for the ask.
“The LPs I love working with are the ones who are going to be actively involved. They share their expertise with the portfolio, answer our questions, and are willing to jump on random calls with me. A lot of our LPs are high net-worth individuals, and they’re just waiting for the ask. They’re waiting for the GPs who they invested in, to engage with them. Sometimes, all it takes is a 20-minute call to share deals or thoughts or questions.”
— Paige Finn Doherty, Behind Genius Ventures
Your LPs will make LP intros if you have a good story.
“I think you can do a good job of getting LPs to send intros. If you can build trust and tell a good story, your LPs will naturally tell others because it comes up at a cocktail party organically. A VC fund is more interesting than ‘Hey I invested in a new ETF.'”
— Vijen Patel, The 81 Collection
Incentivize your LPs with additional carry.
“With Fund II, my Fund I LPs opened the door to other LPs in their network. Additionally, I am quite generous with my 20% carry for running the fund. I share 5% of the carry pool with other founders and LPs who send me deals, help with diligence and introduce me to other LPs.”
— “Mr. Huxley”, GP with two funds
Leverage your LPs’ brand to win deals.
“In my case, I had smart and well-connected LPs, and I was able to win deals because of them by inviting them into deals I wanted to get into. Some of my LPs happened to be fund managers as well, and I have been able to learn a lot from them.”
— Shiva Singh Sangwan, 1947 Rise
Build communities alongside LPs.
“I do believe there is room for LPs to provide value on top of what we expect today – better ways to tap their networks on behalf of our portfolio companies for example. At Screendoor for example, a fund of funds that backs underrepresented emerging managers, we strive to create a community among these VCs to support each other, and also pair them with VCs (like me) who can be coaches along the way when they have questions about firm building.”
— Hunter Walk, Homebrew
If you’re doing something for the first time, ask institutional LPs how other managers they’ve backed have done so.
“Since their investment offices have decades of experience in the venture sector and exposure to top managers across all stages, we often turn to them to gut check our reality against their perspective of the market. And when we encounter a type of situation for the first time, understand how other managers have approached the solution.”
— Hunter Walk, Homebrew
Author’s Note: Paige’s anecdote on how she engages her LPAC below is a great +1 to this point.
Let your LPs choose the kind of LP they want to be.
“I have no preference here. Rather, I’m open to what my LPs want their experience to be like. I have LPs that want to be more passive, as well as operator LPs who want to learn more about investing, lend expertise during diligence, facilitate customer intros, and even help out portfolio companies with hiring.
“After my LPs wire their money, I send them an intake form where I ask the question: How would you describe yourself as an LP? I have a number of statements they can select to indicate whether they are a newer or more experienced LP, if they’d like to be more active with founders, how often they’d like to communicate with me, and if they are interested in co-investment opportunities and events. I have another question following that: If you want to be more active, what are ways you enjoy helping?”
— Sarah Smith, Sarah Smith Fund
“I leave it completely up to them, but they typically opt to be more active. I host monthly one-hour office hours, share quarterly updates and deal reviews. For office hours, while we mostly chat about interesting deals I’ve been seeing in the last 30 days, my LPs can ask me anything. I try to be as communicative as possible – valuations, deal memos, and diligence. Sometimes they ask me to set up an additional SPV if they’re interested in putting additional capital in. I have a separate Airtable for deals we’re diligencing at the moment which LPs have access to. If they’re interested in a deal, they can reach out and ask. If not, they don’t have to.”
— “Mr. Huxley”, GP with two funds
The bear case for active LPs
Having engaged LPs is a lot of work.
“Candidly, I don’t want LPs that want to be super engaged outside of maybe one or two. It’s enough work as it is with quarterly reporting, etc. I want LPs focused on returns. Cendana is the most active with me and in great ways because they have so many emerging managers. I can strategize on fund size, raise timing, first hires, etc.”
— Nichole Wischoff, Wischoff Ventures
Emerging LPs want to learn from you, but remember you’re an investor, not a professor.
“Emerging LPs want that education. For emerging LPs who write a $5 million check or greater, they might like for you to jump on a call every quarter to educate them and share your current portfolio and what else you are seeing out in the field.
“Also, be thoughtful about how you’re managing your time, so that you don’t turn into a full-time venture professor. You’re an investor, a GP. That’s what you’re getting paid to do.”
— Arjun Dev Arora, Format One
Then again, most LPs are just passive.
“Most LPs are pretty passive. Sometimes they are helpful by making intros to our portfolio companies. We also like getting a pulse on the market from them.”
— Sheel Mohnot, Better Tomorrow Ventures
“Mostly passive. Most of the time, when the deals are good, they require little involvement.”
— Shiva Singh Sangwan, 1947 Rise
GP-LP fit: Red flags and things to watch out for
Avoid LPs who ask for special terms.
“These are long-term marriages, really long term. If you are going to be partners for the next 10-20 years, you better like each other. We have a no-asshole rule. We want investors who believe in our approach and ethos. My mentors at some of the top VC funds of the last 20 years have also coached us to keep the terms clean and I think a lot of emerging managers feel pressure to give special terms and ownership of their management company or GP, and long term, that might be something you regret.”
— Steven Rosenblatt, Oceans Ventures
“While I haven’t said no yet, I have selectively not followed up. For example, after talking with other GPs, I’ve heard some LPs were tricky to manage – outside the norm. It’s okay to expect quarterly communications, but when people start pushing an agenda, that’s too much.
“Avoid LPs who ask you to give up economics as a GP or change your terms. LPs who want to negotiate lower management fees, a different carry structure, or they want to own 20% of the general partnership for the next three funds are best avoided if possible. They want to change the terms that everyone else has. I wouldn’t allow that. If other LPs find out (and they eventually do), it would cause my LPs to lose trust in me and rightfully be frustrated that they got worse terms.”
— Sarah Smith, Sarah Smith Fund
Do your LPs’ goals align with your fund goals?
“As we got into the process we realized there was, at the time (2013) some other attributes we needed to take into consideration. One for example was the LP’s definition of success.
“We wanted LPs who were investing in us solely because they thought we’d be good stewards of their capital and return above-benchmark results. If there was a second agenda that they made obvious we typically declined the opportunity to work together. Our mindset was that there’s so much risk in trying to build a new firm, let’s focus all of our energy on a single definition of success: cash on cash returns. That precluded taking capital from LPs who were emphasizing direct co-investment (some of our LPs have direct practices and we love to bring them in to portfolio company cap tables when there’s mutual interest but we didn’t want it to be an expectation) or strategic investors who had interests in our portfolio different than our own (e.g. corporates that wanted access to market information).”
— Hunter Walk, Homebrew
Do you have the bandwidth to teach?
“If someone wants to learn, that can take a lot of time. Time that, for you, might be better spent elsewhere. If you’d rather spend the time elsewhere, like with your portfolio or investing, be clear with expectations. And if they don’t budge, don’t take that money.”
— Arjun Dev Arora, Format One
Beware of round tripping.
“I actually couldn’t take any Indian capital due to regulations. There’s a thing called ’round tripping.’ If a fund in India invests in a fund that’s built in the US, then invests back into Indian startups, that’s round tripping. And unfortunately, not allowed.”
— Shiva Singh Sangwan, 1947 Rise
Check your CFIUS rules.
“Before you say yes to LPs, check the CFIUS rules. Under those guidelines, you may not be able to take money from certain countries and parties.”
— Arjun Dev Arora, Format One
Did you take the right capital from the right people?
“Even though we heard ‘no’ a lot during our first fundraise we also turned down some offers. We’d already done a good job of pre-screening out LPs who we didn’t think were values aligned with Homebrew (e.g. money came from sources/institutions we wouldn’t want to work on behalf of).”
— Hunter Walk, Homebrew
“If they’re asking for things that you’re not comfortable with, then you probably shouldn’t work with them. The key is that there should be zero second-guessing. You need to be in a relationship with partners you won’t regret, during bull and bear markets. Ask yourself, ‘Did I take the right capital from the right people? Sometimes, it’s about where that capital came from and if you feel good about that. If there’s any inkling of doubt, don’t take the money or it’ll come back to haunt you.”
— Steven Rosenblatt, Oceans Ventures
“You need to communicate your clear values as a fund and long-term platform. Any LPs not aligned on your mission and values would be people to say no to quickly.”
— Arjun Dev Arora, Format One
“So, I did say no. I turned down a million dollar check because I didn’t feel comfortable with him being in front of a founder. And we’re very geared on our community. Money’s nice, but it’s not everything.”
— Vijen Patel, The 81 Collection
“Another thing to be mindful of is if an LP has a history of making verbal commitments and then changing that number at closing. You want a reliable and trusted relationship. If you did a reference with another GP, and heard that an LP cut their commitment by 50% at the last minute, that capital’s just not worth the risk to me.”
— Sarah Smith, Sarah Smith Fund
Don’t tolerate disrespect.
“I said no to a few LPs in Fund II. This was largely because they were super disrespectful during the raise process. I had an LP fly in from the UK after already committing and was so insanely rude to me in front of his all-male team that I decided not to work with them. I also try to be very transparent for folks that might not be a great fit for the fund.”
— Nichole Wischoff, Wischoff Ventures
“Small things I look for include off-color jokes, like ‘Look at that hot chick,’ or asking stupid questions. Some LPs have said this to Elizabeth, ‘How do you balance being a mom and being a full-time investor?’ I dare people to ask me that question. I’m a dad and I’m still doing it, but no one does.”
— Eric Bahn, Hustle Fund
Author’s Note: Eric goes into much more detail on ten reasons why you shouldn’t take LP money here, which I highly recommend a read.
Are your LPs disengaged during the diligence process?
“There are people who are disengaged in the diligence process. Those are people who are usually a bad fit.”
— Paige Finn Doherty, Behind Genius Ventures
Look for complimentary experience and diversity of opinion and experiences.
“Like any cap table or LP base, what is important to us is to have partners who can grow with us for a long period of time and where we have diversity of thought, experience, and exceptions. It was really important to Oceans and our ethos to have amazing founders and tech execs as LPs early on who could be great to lean on for diligence and additional leverage to support our founders and entrepreneurial family offices. At the same time we have LPs who are extremely valuable on the finance side and who have a long history of investing in venture. Complimentary experience and diversity of capital is really important to us.”
— Steven Rosenblatt, Oceans Ventures
“I also want to put it out there that GPs should be intentional about their LPs. For me, I aim to have my LP base include at least 50% who identify as women or non-binary, 10% black or Latinx, and 10% LGBTQ. Be intentional and solicit a diverse group of people. People talk about the diversity of founders and venture investors, but not about LPs. I think a lot about wealth creation, and it starts from the very top. I think people should be thinking about that a lot more.”
— Sarah Smith, Sarah Smith Fund
Don’t discount vibe.
“For Fund I, we had a chance to close $30 million worth of LP capital, but we only chose to raise $11 million. That’s a lot of people we said no to.
“It comes down to say a single word: vibe. It’s kind of like a marriage. ‘You’re trusting me with your wealth for a decade, if not more. It’s not a relationship we take lightly.’ I also share all the reasons why it won’t work out. So our LPs know what they’re getting themselves into.
“If something feels off, I don’t have to explain it. No one on our team has to explain it. If your gut feels like this could be off, we should just always trust that. Those one or two LPs your gut tells you is off are likely going to be super annoying,
“People like to logos their way out of things, but you really have to go back to gut feel. It’s almost never worth it. I can’t explain what an asshole feels like. But when you meet one, you know it.”
— Eric Bahn, Hustle Fund
“If I have a gut feeling that something is weird, then I trust that.”
— Paige Finn Doherty, Behind Genius Ventures
Big checks prevent you from bringing in other LPs you want.
“We haven’t had to say no to that many LPs. In our case, we either told them, ‘It’s too late – we’re full now and don’t have room for you.’ Or we talked LPs down from how much they wanted to commit. We had an LP who initially committed $22 million. And we told them, ‘Hey, we want to add more investors to our fund, so we don’t want to have any investors who commit more than $15 million.’”
— Sheel Mohnot, Better Tomorrow Ventures
Sometimes, the check size is just too small.
“I’ve said no because people wanted to invest below the minimum. To which, I told them to wait until they could meet the minimum. I’m not in the business of putting people in financial distress. And if my minimum, which is modest by design, $100K, called over two years, puts people in a position where they are stressed out, they shouldn’t invest in me or perhaps venture as a whole.”
— Sarah Smith, Sarah Smith Fund
“As the fund grew, I would turn down certain individuals due to check size.”
— Paige Finn Doherty, Behind Genius Ventures
But check size can vary based on an LP’s value to you or the portfolio.
“I also only reached out to people I wanted to have on board. The minimum check size did vary from individual to individual, which I largely based it off of the value they could provide for the fund and my portfolio companies.”
— Shiva Singh Sangwan, 1947 Rise
Or don’t settle and aim high.
“I hate the word ‘oversubscribed.’ It’s something I was lucky to learn very early on. Early in my career I had a board member say to me that if you hit your goals every quarter, your goals aren’t high enough.”
— Steven Rosenblatt, Oceans Ventures
Author’s Note: As you might realize even more after the last three pieces of advice, there’s really no right answer.
How do GPs think about building an LPAC?
Your anchor and other major LPs will ask you to create one.
“On the LPAC, I think I can confidently say that no fund manager wants an LPAC and proactively creates one. It is usually the ask of an anchor LP as you scale fund size. For example, for my second fund, I was asked by an LP to create one, and I was told a good number of LPAC members is three. You want the anchor LP in the LPAC because they are your biggest investor, and the two others should be trusted partners who want to help you. It’s up to me who I ask assuming not many have asked to be a part of it.
“I’ve been told most managers will have a bi-annual quick check-in call just to talk about how things are going. TBD if I ever do this. On the other hand, a lot of managers try to wait until they have at least $100M in AUM to give into an LPAC. But I didn’t say no.”
— Nichole Wischoff, Wischoff Ventures
“I think it’s, in large part, who wants to be on it. A lot of your larger LPs, in exchange for 10% of your fund, want to be on your LPAC. There are some investors who committed 10% but don’t want to be on it. It’s not like a board. If people want to be on it, it’s okay.
“We have five on our LPAC, and it’s a good number. We give them an early look by sharing with them our plan and fund deck. So, they gave us early feedback, like on carry structure.”
— Sheel Mohnot, Better Tomorrow Ventures
If a smaller LP wants to be on the LPAC, push back by giving them options that fit what you’re looking for.
“There are no real rules about how you approach them. We typically like to have our largest investors in it, at least symbolically. They’re putting in the most risk, so they should have a say in the direction of the firm.
“If someone does ask for it, and if they aren’t a large enough check, we tell them, ‘We like to reserve this spot for our largest LPs because they have the largest exposure in our fund. We’re open to you being a member in our LPAC, if you increase your check size.” That way, you can leave the ball in their court. Either, they won’t push further or they’ll commit more capital to the fund.”
— Eric Bahn, Hustle Fund
Evaluate a potential LPAC member on five different dimensions.
“So I will preface that emerging funds — Funds I to III or IV — are different from established funds, which have a mostly institutional base. Those who tend to write large checks may also be more inclined to want a seat on the LPAC.
“We look at it from these different dimensions, which we categorize into:
Flexibility,
Complementary skills,
Ability to give honest feedback
Value, and
Capital
“So, flexibility is important because we’re not an institutional fund yet. The construction of the committee depends on the ebbs and flows of fundraising. Some investors don’t want to be on an LPAC — conflicting interests, not wanting to be actively involved, or just don’t want the time commitment. This’ll admittedly look very different for an institutional LPAC down the road for someone who has several hundred million in AUM. Institutional LPs will ask to have a seat on the LPAC, especially if they’re writing a check that accounts for 20% or more of the fund.”
— Steven Rosenblatt, Oceans Ventures
Go to them if you plan to go off-thesis.
“You go to them for things you might think are a conflict. For example, if I say I write $1M checks and I am considering going off-thesis and writing a $250K check, I might want to gut check and get a thumbs up that I’m not being an idiot. It would be a super simple email saying: ‘Hey team, here’s the scoop – please share thoughts.’ It’s very loose.”
— Nichole Wischoff, Wischoff Ventures
Ask your LPAC what they’re seeing in other managers they’ve backed.
“I didn’t expect to negotiate my LPA with Cendana. I have Michael [Kim] and Yougrok [from GREE Capital] on my LPAC. Youngrok is someone I meet with very often. And since GREE backed us since Fund I, he’s seen my growth as a fund manager. Our LPAC offers a great and critical lens into the industry.
Individually, I chat with both quite often. Together, as an LPAC, we meet quarterly. We’re also going to have our first general annual meeting on April 21st.
What’s great about Michael and Youngrok is that I’m not afraid to ask questions I think are dumb. If you’re in your Fund I or II, like I am, you’re still figuring shit out. You’re still testing what works and resonates and what doesn’t. I ask them, ‘what have you seen other managers do in this situation?’ They’ve worked with so many other managers, and in learning from their deep knowledge, I’m better off as a manager. It’s about building BGV as a long-term institution.”
— Paige Finn Doherty, Behind Genius Ventures
Your LPAC is your LP base’s chief influencer.
“One useful note about having an LPAC is that sometimes you want to make a minor change to the LPA. Say you originally planned to only invest in North American companies, but now you want to invest 5% of the fund in African startups. If you don’t have an LPAC, you have to go back to all your LPs each time you change the parameters of the agreement. If you have an LPAC, they can approve those minor changes for you on behalf of the rest of the LPs.”
— Sarah Smith, Sarah Smith Fund
“To be honest, I’m still confused about the purpose and concept of an LPAC. I like to think of the LPAC as the influencer of the LP base. They keep the investors’ interests in mind and help you communicate hard decisions to your investors.”
— Eric Bahn, Hustle Fund
Consult your LPAC for tough decisions.
“It definitely matters more at the end of the fund life. For instance, if we want to wait an additional year for Stripe to IPO. Then we consult with our LPAC to figure out the best way to message that to our LPs. Additionally, we can ask them what they think about a deal we’re about to do. It can also be useful in corporal situations. Hypothetically, if Elizabeth was beating me up, I can ask our LPAC to help me remove her.”
— Eric Bahn, Hustle Fund
“Since we’ve got a very small group of LPs that make up 95%+ of our funds, there isn’t much difference between our relationship with our LPAC and the other LPs. That said, we do have an LPAC and it’s composed of the largest investors in our funds. We meet with them once a year – typically a lunch before our annual meeting. And share the materials/discussion with the rest of the institutional LPs as well, so it’s less about anything confidential and more about a group of stakeholders we can get feedback from. Of course there are sometimes administrative aspects (approve us raising our recycling limits for a fund) but more often than not Satya and I are seeking feedback on questions we’re facing about how we want to manage the firm, tradeoffs between short and long-term thinking, and such.”
— Hunter Walk, Homebrew
“For us, when we constructed our LPAC, the questions we asked ourselves were:
Who do we think would be valuable in helping us balance short term decisions with long term thinking?
Who do we think will give us honest feedback and engage in honest conversations?
And who do we know has complementary DNA?”
— Steven Rosenblatt, Oceans Ventures
Find LPAC members who come from diverse experiences.
“I use it as a mini-board. I won’t go to it for big decisions, but I like the idea of surrounding myself with people who have different experiences than me, who have dissent, and make me a better investor.”
— Vijen Patel, The 81 Collection
Build an LPAC of different LP personas.
“If you have a great LPAC, they’re almost like a board of directors. You have some kind of cadence to get advice. If I did have one, I would like to do it with a group that represents my LP base – a few family offices, individuals, and people who could give really good advice.
“For first-time funds, you don’t want it to be any more than three to four people. And four to six for more established funds.”
— Sarah Smith, Sarah Smith Fund
“My advice to other VCs in building their LPAC would be to remember it’s about institutions, not individuals – your LPs representative might change over the course of the years. And, if applicable, to make sure you have a mix of LP types – for example, if your fund LPs are a mix of evergreen investment offices (such as most endowments) and folks who think of returns on a different cycle (fund of funds), include both.”
— Hunter Walk, Homebrew
The tech stack of engaging LPs
While I didn’t ask everyone this question, thought I’d share what notes I did have on some firms’ tech stack for engaging their LPs and managing their investor relations.
Wischoff Ventures — Airtable, Figma
“A spreadsheet/Airtable — I have everyone’s emails and copy-paste when I’m ready to send a quarterly update. I only talk to most once per quarter and it’s for my update. I built that in Figma (wouldn’t recommend it).”
Oceans Ventures — Affinity
“We use Affinity to manage our LP CRM. Our existing LPs get quarterly reports. And we try to write an LP update at least two times a year but will also often put out memos especially during key market moments. Also, since day one, we have a newsletter that keeps people up to date. It goes out every two to three weeks. And we have a personality. We’ve had other VCs tell us how excited they are to read it and we have LPs tell us they love our newsletter. We try to over-communicate and keep them heavily engaged.”
The 81 Collection — Streak, Airtable, Hubspot, Excel/Google Sheets
“We use Airtable, Hubspot, Excel and Google spreadsheets, but Streak is our main thing.”
“We’re pretty software-heavy — something I picked up from my time at WorkOS. We use:
Cloze — as our CRM, where we track what cities folks are in in, who’s in the pipeline and more
Airtable — for portfolio management
Google Drive
Webflow — for our website
Zapier — but there’s only so much you can automate
1Password — we’re pretty big on security
Calendly — but we’ve gone back and forth on that. I’m trying to spend more time with people who’ve invested in our fund, as well as the founders we invested in.
Twitter
Descript — for podcast transcriptions
Riverside — to record podcast episodes”
1947 Rise — Email, AngelList
“Regular LP updates, as well as my newsletter, have been my biggest engagement tool with LPs. I send the former out once a quarter, and the latter every few weeks. Luckily, I can also see all my LPs on my AngelList dashboard.”
“We used Carta, Affinity, Mailchimp, Aumni for analytics, and Anduin to bring LPs in. Fundraising is a bunch of chasing people down. Anduin’s a workflow tool. You can send people stuff and have people sign them all in one tool. Actually, several LPs told us that Anduin was the smoothest onboarding experience they’d ever had.”
“Mr. Huxley’s” Firm — Airtable, Notion, Whatsapp, Quickbooks, Google Drive
In closing
As I was writing this blogpost, a big part of me wanted a nice, easy linear narrative around LP construction. But I knew there wasn’t. In the many conversations that led to the above writing, it became quite evident there was no undisputed best way — no cure-all — to build an LP base.
Some believed in aiming high and never becoming oversubscribed. Others generated demand for their subsequent fund or was able to be judicious with their LPs by being oversubscribed.
Some built momentum by securing an anchor LP. Others started from individuals they knew the best.
Some didn’t budge on minimum check size. Others were flexible.
The list goes on and on. While there is no right answer, in knowing all of the above possibilities and strategies, I, and everyone who helped me make this blogpost a reality, hope you are armed with the knowledge to make the most informed decision for your fund. And to that, cheers!
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
In the wonderful world of venture, an investor takes a different kind of bet with each stage as a function of industry. For instance, a pre-seed SaaS product, it’s a distribution risk. Can this founder sell this product to others? In general, the angel or pre-seed round is often a founder bet. Can this founder or founding team pull off their vision? And subsequently, if they’re able to achieve their milestones in the funding window, will those milestones excite downstream capital?
One of the greatest byproducts in starting my career in venture as a scout — sending seed and Series A deals to those respective investors — was that I learned what archetypes of deals interested them. And what didn’t. As I moved even earlier in the funnel, so, pre-seed and seed, I could help founders and their teams set themselves up for the subsequent round.
Admittedly, that became a bit harder to do in the hoorah of 2020 and 2021 — with insane multiples and raises coming together as a function of FOMO.
When looking at the present day, mid-February of 2023, one in three or four deals in my inbox is a company raising a bridge. The bet here is an execution bet. Now before I get into the questions I consider when a founder pitches a bridge fundraise, I think it’ll be helpful to consider bridge rounds as a function of good and bad markets. And why they make more sense in a bull market, for better or worse, than in a bear market.
Bridge and venture debt
In a bull market, bridge rounds — or preemptive rounds, pick your nomenclature — and pay-to-play rounds make sense. The promise of capital within six months is extremely likely. Interest rates are low enough, where equity instruments have greater return potential than debt instruments. In a similar way, the same can be said for the premise behind venture debt. Venture debt (I am but an armchair expert at best, but have been lucky to query some of the best) is debt that is issued with the expectation of another round. At the same time, the warning label here is in a few-fold:
Many VCs prefer not to have investors higher than them on preference stack.
Subsequent equity raises are used to pay back venture debt first.
You have a 36-month repayment period usually, after if you decide to use the capital within the first 12 months or not.
There are usually warrants that ask for additional ownership in the company on top of the loan.
But I digress. In a bear market, bridge markets make less sense for an investor. Bridge rounds usually occur when teams miss expectations. They’ve missed milestones. Their burn rate was higher than expected. And their runway is naught but less than a year. It’s way the most common recommendation VCs gave their portfolio companies in 2022 was have at least a 24-month runway. You have more wiggle room to prove assumptions and get to an inflection point.
In a bull market, missing expectations is almost impossible. Sky high valuation multiples and funding rounds made capital cheap. When capital’s cheap, founders are more likely to spend with less discipline than otherwise. Moreover, consumers felt richer. Their net worth appreciated in a good economy. Interest rates lag inflationary signs. And the money is out of the pocket before it has time to warm up. Consumers also not only spend more, but they invest more. Companies saw greater revenue numbers and market cap growth, leading to more liberal spending habits. Greater market budgets to acquire customers. That spending led to high burn multiples.
This all led to a virtuous flywheel, that though growth and revenue numbers hit, the cost to get there also exponentially grew. The quality of businesses declined, as consumers and companies got used to the spending habits of the good times. Those same habits, unfortunately, don’t work in a recessionary market. And when founders are unable to part with their multiple in a boom market, and for many, the spend during that same market, they go to raise a bridge round instead of offering new equity, hoping they’ll, in some way, “make it work.” And yes, that’s the exact wording some founders used.
If investors have the chance to place new shots on goal, a lot of investors today are willing to bear the opportunity cost of passing on a bridge round.
Inflection points and lack thereof
Each new round is raised on the assumption your company is at an inflection point. Right as your second derivative shifts from negative to positive. To some businesses, that’s a market inflection. A (lucky) black swan event. A technological release. Or a regulatory easing. To others, it’s a traction inflection. Users just love your product. And to another cohort, not mutually exclusive to the afore-two inflections, is an insight inflection. You’ve learned something that’s going to catapult you so much further. For Duolingo in 2012, it’s the realization of going mobile. For Zynga, in 2010, it was its partnership with a rising class of platform usage, social media, namely Facebook.
On the other hand, for Airbnb, in 2011, its major competitor abroad, Wimdu raised $90 million to focus on its European expansion. That meant if Airbnb didn’t expand outside of the US, they would lose access to a whole market of Europeans but also Americans whose vacation destinations were one of the seven continents. To the Airbnb team, in the words of Jonathan Golden, their first PM, it was the realization that “marketplaces are normally winner-take-all markets” and “when competition comes after you, move ridiculously fast.” And they did.
Bridge rounds often don’t carry that same drive or momentum. It’s not raised at an inflection point, but rather in efforts to get to one. Usually it’s not proving a new assumption but last round’s assumptions. As I mentioned at the top, it’s an execution bet. And as such, it begs the question: How much conviction do I have that a founder is going to be a great steward of capital?
Fortunately or unfortunately, unlike most other early-stage round constructions, there are multiple data points. Have they used capital to date efficiently and effectively? If so, do I believe this founder will 10x their KPIs within this funding window?
Usually the funding window I allude to is 12 to 18 months. In the scenario of a bridge, that timeline becomes six months. The expectations are less forgiving and more aggressive. What are you building to in half a year? Do you have the discipline to execute on that goal? Does your track record corroborate? Do you have a detailed plan to get there?
In closing
IVP’s Tom Loverrorecently shared, “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.”
A bridge round, more often than not, is a half measure.
He goes on to say, “If it’s a good company, give them a lot of capital. If not, zero.”
This past week, I chatted with three institutional LPs, and three more venture investors about this topic. In five out of six conversations, one phrase made its appearance. “Don’t put good money after bad.” And while anecdotal, all six — every single one having participated in bridge rounds at some point in their investing career — concluded money was better spent in new investments than in bridge rounds. The caveat from these conversations was that it may work if you are either leading the round or setting the terms. Then again, that’s favorable for an investor, and may not be as much for the founders.
That said, I’m sure there’ll still be great companies raising bridges. But who knows… I await the day, not just in outliers, that we see bridge rounds trend otherwise. For that to happen, I agree with many of my colleagues that we need to see a lot more discipline from the average founder.
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
“Magic is just spending more time on a trick that anyone would ever expect to be worth it.” —Penn & Teller
Five years ago, back in 2018, I would have never guessed. But I fell in love with the soles of another person’s feet. And I knew this was going to be one of the most tenacious people I’d ever meet.
I was introduced to “Ben” by a dear friend with one line, “No one can outhustle him.” “Ben” grew up with an insatiable appetite to learn, in a village located on the outskirts of Cairo. He would spend many days and nights in conversation with village experts and the village library, until one day he noticed he learned all he could have.
It just so happens that there’s a two-hour bus to Cairo that comes once a week. And that was how he found the libraries in Cairo, where he realized his interest in AI. But due to the bus’ odd schedules, instead of riding it, Ben chose to instead walk ten hours to Cairo every week. He’d then download, read, and print (to bring back to his village) as many Stanford PhD research papers on AI as possible. Sleep overnight at the bus stop. Then the next day, walk ten hours back to his village, where he’d continue with his reading for the week with all the loose leaf papers he had.
Needless to say, he had the feet to show for it.
I shared that story with a friend two days ago at the perennially-packed Superhot. We were chatting about the traits we look for in founders we back and the questions we ask to get there. The latter of which I’ve written about before. And at the early stages, the chief thing we look for is grit. There’s a tweet I stumbled on this week summarizes that rather nicely:
The problem is it’s so hard to see if a founder has the qualities of a “white belt who never quit” in just one meeting, even a few meetings. So, instead of sharing what questions we ask founders — most of which I know are designed to be reveal tells of grit, and are at least to my friend and his team, proprietary to some degree — I’ll share why grit matters, not just as a founder trait, but as a variable in the fundraising process, and a story that I hope will inspire you.
Candy versus the meal
One of the frameworks I love thinking about is the difference between how people think and what people talk about. This is by no means original. I actually stumbled across this when watching Malcolm Gladwell on Masterclass. For instance, when people watched the most recent Avatar movie, they didn’t say “Here’s the plot of the movie.” They talk about their favorite scenes or how great the performance capture was for underwater sequences. Neither is all-encompassing of the movie, but it gets people excited. That’s what word of mouth is.
Malcolm Gladwell calls it the meal and the candy, respectively. The meal is how people think — what people take home. They sit down with it and take time to process. The candy is what people talk about. The parts of the narrative that are easiest to share and remember.
From a go-to-market presentation I did earlier this year
Candy without the meal is clickbait. A meal without the candy means no one will talk about the good work you do. So you need both.
Similarly, in the world of venture, when I, like most other investors get excited about a deal, assuming it’s a good one, don’t talk about the whole pitch deck. Neither do I get super excited about sharing the one-liner unless it’s actually something unique. Like when a bike-sharing company pitched their one-liner as “We make walking fun.”
What I talk about is what’s cool and what stands out. That’s the investor’s word of mouth. And that’s how you fill a round. Or get people excited to help you find investors who will. Things I shared before include:
“That startup that hit 130% net retention.”
“Customers literally write love letters to the founders.”
“That founder cold emailed a Disney exec for 300 days straight to inevitably close their first enterprise deal.”
“This founder started a podcast as a growth engine to 1/ secure his first 10 customers, 2/ bring on one of the best advisory board I’ve seen to date.”
As you might notice, it’s almost impossible to guess what each company does above with just what I shared. And it sure as hell doesn’t get investors to conviction with just that. But they’re powerful enough for investors to take a second look at and talk about. Among the above, the absolute favorite thing investors love to talk about with each other is a founder’s ability to hustle. And subsequently, their Herculean efforts that demonstrate grit.
Years later, my friend on Wednesday was still talking about a founder he backed who waited in the cold outside an exec’s office until he got a meeting. Then found unique ways to turn 20 minutes into 30 minutes into hours into their first enterprise client.
The thing is it’s rare to see this. Most people promise that they will, but the best founders have demonstrated this grit time and time again before, against seemingly impossible odds. And they’re only “impossible” if you’ve set lofty goals in the past and you did nothing short of your best to try and achieve it. I’ll give another example. One that I knew if he was to start another business, you knew he was going to make it happen.
Spoiler alert: He did.
From losing everything to acquisition
I first met Anthony at 1517 Fund’s quincentennial “anniversary” summit back in 2017, designed to bring together the world’s most divergent thinkers.
The first thing you notice about Anthony is that he had a small frame. A demeanor that belied his life experiences and the courage it took for him to share them. Yet, he has a way to command the attention of his audience.
He started his business back in freshman year of college delivering food to his fellow classmates at USC. It started off as a side hustle to earn some spare change. Something he didn’t expect would become something greater, until one day Mark Cuban came to USC to give a talk.
As the fireside chat ended sooner than expected, Mark polled the audience, “What if we did a live Shark Tank?” Anthony explained that while unsure if it’ll work, but not wanting to let a once-in-a-lifetime opportunity go, he decided to pitch this idea he’d been working on — which at that point, was not even an app, but just a series of text messages between friends who ordered food and friends who were willing to deliver them.
To his surprise, Mark loved it. Soon that snowballed into Anthony dropping out of school to focus on the business full-time. They got into 500, and he became a Thiel fellow. But one spring later, amidst the hype of a party in Vegas, he miscalculated a dive into the pool. Fractured his spine. And became paralyzed from the neck down.
In the ensuing months, his top priority was not to grow what became EnvoyNow, but to breathe, to drink water — to survive. His co-founders had promised him they would look after the business and that he should focus on recovery. So he did. Months passed. And while Anthony still sat in the occasional company meeting, he was focused on mobility and feeding himself.
A few more months passed by, and one day, his co-founders decided to visit him while he was still focused on recovering. And they broke the news. The business was stalling. Investors had lost faith. Moreover, both his co-founders had already lined up new opportunities and wanted to close the business down.
As I sat listening, I couldn’t help but wonder what I’d do in that situation. Anthony instead decided to go back full-time to the business and win back his remaining team and investors. He said, “I went back to our investors. I shared where we were at, which wasn’t good. And asked them to believe in me once more. They did once before, and as long as I showed I was still passionate about the business, I was banking on the hope that some will still continue to support us.” Luckily, a small handful did.
With renewed drive and determination, and a tough situation to get out of, within the year, they expanded to 16 schools and employed 1500 students around the nation. The rest is history. They sold to JoyRun. And Anthony went on to found more companies, including his current one, Vinovest, which he started 2019 and raised an A in 2021.
If you’re curious about the additional details to the story, there’s also a great 2017 Fortune piece cataloging his journey. I love the line Blake Masters, President of the Thiel Foundation, shared in that piece, “Good luck finding something that will hold [Anthony] back.”
In closing
There’s a fun little thought exercise a couple investors I know used to do (maybe still do). They first posed the question to me when I first jumped into venture, which is:
If you had two young founders… One went to MIT, graduated with a 4.0 GPA in computer science, and was summa cum laude. The other is a high school graduate, and instead of paying over $200,000 over 4 years, took every single MIT computer science course on Coursera in one year. All else held equal, who would you invest in?
Naturally, the answer biases towards the latter. Yet, in the past few years, or at least since I’ve been in the world of VC, there’s been a bunch of logo shopping and chasing the idea of “signal.” While no one says is explicitly, logos have become more important than the hustle.
Today, we’re in a tough market. One where we haven’t seen the light at the end of the tunnel. Hell, we don’t even know when we’re at the trough yet. Or at least, the lagging indicator that we are is a massive slowdown or lack of layoffs. Yet, we recently saw Google, as well as Microsoft and Amazon, go through cuts.
And so, it no longer matters who you’re backed by or where you’ve come from. As Engineering Capital’s Ashmeet Sidana said, “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.”
What matters is that you can make it out the other side. What matters is that you’re inventive and creative, that you can tighten your belt and put the pedal to the metal, and do what looks in retrospect as superhuman.
And that requires perseverance and the ability to learn. That requires spending more time on something than anyone would ever expect to be worth it. As you do so, you embark on what VCs call — insight development.
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“‘Mutation’ is simply the term for a version of a gene that fewer than 2 percent of the population has. […] Imagine enough letters to fill 13 complete sets of Encyclopaedia Britannica with a single-letter typo that changes the meaning of a crucial entry.” A fascinating line from David Epstein. One that makes you pause and think. I apologize that this is where my mind wanders to every time I read something that stops me cold in my tracks. The world of startups, at least in fundraising, is no different.
Let me elaborate.
While this is rather anecdotal, the average VC I know takes 10 or less first meetings in any given week. As an average of 500 emails land in their inbox every week, that’s a 2% chance of having your cold message land you a meeting. And that’s not even counting the heavy bias towards warm intros. In other words, to get noticed, you have to stray from the norm. A variant. A mutation.
The good news about being a mutated monkey with two left ears and an overbite hosting two dozen fangs is that unlike in nature, you can genetically modify and give birth to a mutated product of your choosing. While I probably could’ve used more floral language, I realize I’m also not writing a rom com, but a documentary capturing the cold realities of an investor’s virtual real estate. That has more eyes trying to peer into it than it has time, space, and most importantly, attention to open doors.
Your appearance on that stake of land is your debutante ball. The question is how will you grace the ballroom floor among a sea of people who have access to the same town tailors, dressmakers, and dance instructors as you do. A name. A subject line. And at most 50 characters to make a first impression.
The short answer is you don’t.
I also understand that in writing a piece on how to stand out in an investor’s inbox, I run the risk of sounding like every other Medium article who’s covered this topic before me. So, instead of sharing the five steps to get every investor to open your email, I’m going to share three examples, starting with some initial frameworks of how and some of my favorite thought leaders think about narratives.
As a compass for the below, I’ll share more about:
For the purpose of this essay, I’ll focus on cold emails, rather than warm intros. But many of the below lessons are transferrable.
The investor product
Blume’s Sajith Pai recently wrote a great piece detailing on what he calls the investor product. And how that is different from the content product — what customers see and hear — and the internal comms product — what your team members see and hear. Even in my own experience, I see founders often conflate at least two. They bucket it into the internal story… and the external story — bundling, ineffectively, the investor and content product.
In short, the investor product is the narrative that you tell your investors. A permutation of your personality and your vector in the market in a sequence you think investors find most compelling. That narrative, while not mutually exclusive, is different from the story you tell your customers. For customers, you are the Yoda to their Luke Skywalker. For investors, you’re the Anakin to the Jedi Order. The future.
Not all pitches are created equal
Just like expository writing differs from persuasive writing which differs from narrative writing, there are different flavors of fundraising pitches as well. Kevin Kwokboils it down to three.
Narrative pitches: What could be. What does the future look like?
Inflection pitches: New unveiled secrets. In Kevin’s words, for investors, “now is the ideal risk-adjusted time to invest.” Why is the present so radically different? Why is the second derivative zero?
Traction pitches: Results and metrics. How does the past paint you in glorious light? Admittedly, people rarely index on the past. So, traction pitches are on decline. It’s akin to, if someone were to ask, “What is your greatest accomplishment?” You say, “It has yet to happen.”
The truth is most early-stage founder pitches are narrative pitches, focused on team and vision. But the most compelling ones for VCs are inflection ones. One of my favorite investor frameworks, put into words by the an investor in the On Deck Angels community, is:
Do I believe this founder can 10x their KPIs within the funding window?
The funding window is defined as usually 12 to 18 months after the round closes. And usually the interim time before a venture-scale company goes out to raise another round. In order to 10x during the next 12 to 18 months, you have to be on either a rising market tide that raises all boats, or more importantly, the beginnings of the hockey stick curve in your product journey. Do you have evidence that your customers just love your product? For instance, for marketplaces, that could be early organic signs as demand converts to supply. In other cases, it could be the engagement rate post-reaching the activation milestone.
What channel does the pitch land in
While the message — the narrative — is important, the channel in which the pitch is received is just as, if not more important. As Reid Hoffmanonce wrote, “the cold and unromantic fact is that a good product with great distribution will almost always beat a great product with poor distribution.”
The truth is that email is a saturated channel.
While Figma’s Naira Hourdajian notes that this applies to any form of communications, not just politics, she put it best, “Essentially, when you’re working in politics, you have your earned channels, owned channels, and your paid channels.”
Owned — Anything you control on your own channels. Your website, blog, your own email, and in a way, your own social channels.
Paid — Anything you put out into the world using capital. For instance, ads.
Earned — Because others are not willing to give it to you and that it is their real estate, you have to earn it. Like press and in this case, others’ email inboxes.
On an adjacent point, the thing is most founders don’t spend enough time and effort on owned and earned channels when it comes to the content product. Both are extremely underleveraged. Many think, especially outside of the context of fundraising, and within go-to-market strategies, think paid is the only way to go. While powerful, it is the channel that carries the most weight post-product-market fit. Not pre-.
In the context of fundraising, I always tell founders I work with to always be fundraising, just like they should always be selling. There’s a saying that investors invest in lines, not dots. But the first time you pop up in someone’s inbox is, by definition, just a dot. Nothing more, nothing less. Rather, you should start your conversations with your future investors before you kickstart your fundraising. Ask for advice. Host events that you invite them to. Interview them on a podcast or a blogpost. Feature them in a TikTok reel. (Clearly, I spend the bulk of my time with consumer startups).
As you might have guessed, sometimes it has to be outside of the inbox. To get their attention, there are two ways you can pick your channel:
Target powerful channels in an innovative way,
Target powerful, but neglected channels,
And, target new and upcoming channels.
As such, I’ll share an example for each.
Powerful channel used in an innovative way: Email
In one of Tim Ferriss’ 5-Bullet Friday newsletters recently, I found out that Arnold Schwarzenegger handwrites all his emails.
Source: Tim Ferriss’ 5-Bullet Friday — Jan 13, 2023
It’s brilliant. Genius, I might say. I don’t know how much intentionality went into why Arnold does so, but here’s why I think it’s brilliant.
If you’re sending it to someone who owns a Gmail, you’ve just given yourself 100% more real estate (albeit ephemeral) in their inbox. If their inbox is set on Gmail’s default view. Additionally, via the attachment name, that’s 10-15 characters more of information you can share at just a glance. Or at the minimum, if they’re reading via the compact view, an extra moniker that most emails do not have. A paper clip. To a reader’s eyes, it draws the same amount of attention as a blue check mark on Twitter or Instagram.
Once they click open the email, instead of plain text, your reader, your investor, sees font that stands out from all the other email text. A textual mutation that leads to curiosity. Something that begs to be read.
Powerful, but neglected channel: Physical mail
When I started in venture, I didn’t have a network, but I knew I needed one. Particularly, with other investors. After all, I didn’t know smack. I quickly realized that email and LinkedIn were completely saturated. One investor I reached out to later told me that he doesn’t check his LinkedIn at all, since he got 200 connection requests a day. So, it begged the question: Where must investors spend time but aren’t oversaturated with information?
Well, the thing is they’re human. So I walked through every step of what a day in the life of an average human being would go through, then guesstimated if there were any similarities with an investor’s schedule. Meal time, time in the bathroom, when they were driving or in an Uber (but I don’t run a podcast they’d listen to). And, like every other human being, they check their physical mail. Or someone close to them, checks them.
I knew they had to check their mail for their bills (a surprising number of investors haven’t gone paperless). But it couldn’t seem sales-y because they or their spouse or assistant would immediately throw it out. That’s when I decided I would write handwritten letters to their offices.
The EA is the one who usually sorts through the stack, and is someone who also doesn’t get the attention he/she deserves. Nevertheless, I believed:
Handwritten letters are going to stand out among a sea of Arial and Times New Roman font.
The envelope had to be in a non-white color to stand out against the other white envelopes. So, I went to Michael’s to buy a bunch of blue and green envelopes. Truth be told, I thought red was too much for me, and often carried a negative connotation.
The EA or office manager has to deem it not spam or marketing, so including a name and return address is actually a huge bonus, AND a note that doesn’t seem market-y on the envelope (i.e. thank you and looking forward to catching up).
At the end of the letter, I’d write I’d love to drop by and meet up with them in the office. Then I’d show up at their office within the week, and say, “I’m here to see ‘Bob.'”
The EA would ask if I had an appointment, and I would say that he should’ve received a letter in earlier in the week that let him know I would be here. Then, the EA would go back and ask if ‘Bob’ was free. If not, I’d wait in the lobby until they were, without overstaying my welcome. If they weren’t in the office, I’d ask to “reschedule” and book a time with them via the EA. Which would then officially get me on their calendars.
New and upcoming channel: Instacart
In a blogpost I wrote in 2021, I recapped how Instacart got into YC:
Garry Tan and Apoorva Mehta have bothshared this story publicly. Apoorva, founder of Instacart, back in 2012, wanted to apply to Y Combinator. Unfortunately, he was applying two months late. So he reached out to all the YC alum he knew to get intros to the YC partners. He just needed one to be interested. But after every single one said no, Garry, then a partner at YC, wrote: “You could submit a late application, but it will be nearly impossible to get you in now.”
For Apoorva, that meant “it was possible.” He sent an application and a video in, but Garry responded with another “no” several days later. But instead of pushing with another email and another application, Apoorva decided to send Garry a 6-pack of beer delivered by Instacart. So that Garry could try out the product firsthand. 21st Amendment’s Back in Black, to be specific. In the end, without any precedent, Instacart was accepted. And the rest is history.
In the above case, Instacart in and of itself was the emerging platform of choice. The application portal and email here were both saturated and had failed to produce results. What I missed in the above story is that the 6-pack arrived cold, which meant that the product worked and could deliver in record time. A perfect example of a product demo, in a way the partners were least expecting it.
In closing
Siddhartha Mukherjeeonce wrote: “We seek constancy in heredity — and find its opposite: variation. Mutants are necessary to maintain the essence of ourselves.”
Variation — being different — is necessary for the survival of our species. That’s what evolution is. That said, what worked yesterday isn’t guaranteed to work tomorrow. ‘Cause that same mutation that enabled the survival of a species has become commonplace. The human race, just like any other species, replicates what works to ensure greater survival.
The same is true for great ideas. A great idea today — even the above three — will be table stakes at some point in the future. Thus, requiring the need for even newer, even more innovative ideas. Hell, if it’s not via my blog, it’ll come from somewhere else. With the rise of generative AI — ChatGPT, Midjourney, Dall-E, you name it, if you’re average, you’ll be replaced. If you don’t have a unique voice, you’ll be replaced. Some algorithm will do a better and faster job than you will. As soon as more people start using the afore-mentioned tactics, the above will no longer be original. As such, I don’t imagine the case studies will age well, but the frameworks will. That said, the only unsaturated market is the market of great. To be great, you must be atypical. You must go where no one has gone before.
For those interested in startup pitches that stand out, specifically how to think about compelling storytelling, I highly recommend two places that inspire much of my thinking on the topic:
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.
“A true friend is one who stabs you in the front.”— Oscar Wilde
Many years ago, in what seemed like another lifetime, I made a girl cry. Nothing to boast about. In fact, even today, I’m quite embarrassed that I did so. In a negotiation where I prioritized one small committee in a club’s priorities above the priorities of other committees, I felt that I was right in every way. I conceived a million reasons why rationally I was right — cost, our future members’ preferences, down to the stable marriage algorithm. I fell prey to pride and ego. And she broke down. Instead of apologizing, I walked away, asserting that the data supported my case.
The next day, I found solace among classmates and friends. They told me I didn’t do anything wrong. That they would’ve done the same thing. That the facts proved I was right. Until that evening, a good friend and someone I’d known since middle school, said, “You’re fucking stupid.”
He told me to drop everything and to go apologize in person right that instant. To hell with data and facts. He said that I forgot the very first principle of any negotiation… that there was a human being on the other side. And I didn’t treat her as one. He was the one person who opened my eyes up to the ego I was blinded by. So I did. In my realization, I felt terrible and even worse for needing someone else to tell me that I had to. But that’s the friend I needed. That’s what I needed to hear.
Something you might have realized if you’re a frequent visitor to this small piece of virtual real estate is that I’m not perfect. Nor do I pretend to be. The above example is evidence of that.
I was reminded of that when I was listening to Jonathan Abramson Venture Unlocked earlier this week. Where they brought up the topic of being founder friendly — a term that indubitably carries a lot of baggage. From the VC side, it’s jargon that’s been thrown around so much over the past decade, it’s lost its luster and meaning. From the founder side, many founders frankly just don’t get what it means. Why? Because no one actually defines it.
Over the years, I’ve seen and heard explicit and implicit definitions, including:
Not firing the CEO (even when they don’t do a good job)
Helping the founder grow as the company and CEO job description grows
Having answers to every question the founders ask
Asking (good) questions
Telling the founders what to do
The thing is, all the above are right and wrong at the same time. It’s situationally dependent. Ok, maybe except the last one. That one’s wrong all the time. Something you realize pretty quickly is that the investor is not in the driver’s seat. At best, we sit shotgun.
So, what does “founder friendly” mean?
Jonathan Abrams and the 8-Bit team says, “Do no harm.”
Fred Wilson says, “Saving your company from yourself may well be founder friendly.”
To YC, it’s being honest, transparent, responsive, and acting in the best interests of the company, shareholders, employees, and founders.
The truth is everyone has a different, but similar definition. Like product-market fit, it’s hard to measure and an amorphous term. It’s obvious in hindsight. But mysterious in foresight. Yet, as a founder, there are still many telltale signs on how helpful an investor actually will be.
Leading indicators to helpfulness
One of the reasons I love working with smaller checkwriters — be it angels or emerging fund managers — is that they often punch above their weight class. They’re insanely responsive. And are often more helpful than their check size. They may not be able to single-handedly fill the round, nor can their check get you to profitability, but they’re there when you need them. In other words, they hit high on the check size-to-helpfulness ratio, which I’ve written about before.
The first meeting
Interestingly enough, the first meeting is quite telling of how helpful investors are — regardless of the decision outcome. It could be in the form of investor intros, strategic advice, hard questions to consider, or key hires to make. In fact, they’ll make you feel like you got back days if not weeks, out of a 30-minute meeting. If you, as the founder, get nothing out of the first meeting, then you likely won’t get much when they are on your cap table. The most helpful investors don’t waste time. Not theirs. But more importantly, not yours either. They know that each time you meet with them is time away from building. And they’ll make that time worthwhile.
As an investor, the golden standard should be to be helpful in every meeting. And I don’t mean ending the conversation with “Let me know how I can be helpful.” That’s reactive.
For one of my good friends, that means that if he takes a meeting with you — whether he chooses to invest or not, he will write a 3-5 page bug report on your product. For some of my other friends, it’s that if they take a meeting, they’ll nine out of ten times set up an intro. Instead of asking “How can I be helpful?”, one should ask “What do you need help on?” or “What are the biggest obstacles that prevent you from reaching your 6-12 month goals?” Then, proactively trying to find some way to help.
That said, the afore-mentioned investors’ bar for taking a meeting is rather high.
Response rate
Another proxy for helpfulness is how fast they reply to your emails. Many of the investors who I know are insanely helpful have a system to respond to founders quickly. Moreover, if the decision is a ‘No’, they don’t shy away from sharing that and why they decided to pass. Of course, the latter is not possible for every inbound pitch. But at the very minimum, are table stakes if you’ve already jumped on an initial live conversation with them.
Here, within 24 hours is epic. 48-72 hours is great. And anything longer becomes a dime a dozen.
Inactive founders sing them high praise
It’s always important to do your homework on your investor. One of such ways is talking to other founders they backed, especially the ones who are no longer founders or no longer pursuing the original idea they were backed on. Active portfolio companies are likely to still give lip service to their investors, especially when they are a large portion of their cap table. So, when you ask, “Was this investor helpful?”, you’re likely to get an overly politically correct answer. Rather, the question I recommend asking is:
“If you were to start a new company, who are the three investors — big or small — on your current cap table that you would kill to have back on?”
Conversely, if you talk to former portfolio founders, they’re likely to be a lot more honest as they don’t have a currently active relationship with the investor. Or if they still do, the investor must have done something right.
Lagging indicators to helpfulness
While not the intended purpose of this blogpost, I can’t help but shed some additional context for investors out there. In my recent conversations with GPs and LPs, I noticed a common thread among the GPs who are capable of raising a fund even in a down market. It’s that the founders they back who went on to raise A, B rounds, or greater, come back to invest in their early believers. The people who made a difference in these founders’ lives.
So, whenever I meet an emerging GP asking for fundraising advice, one of the first questions I ask, outside of these five questions which determine if they’re ready to start a fund, is:
Have any of the founders you backed before committed to your fund?
Goodwill and helpfulness builds flywheels. When your founders go on to win, if you’ve been helpful, they’ll want to pay it back.
Tangentially, it’s why the team at Ludlow Ventures says, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.” So, getting deal flow from founders you pass on means, either:
They still want something from you; or
You were really helpful that they want to send all their best founder friends to you.
Hopefully, it’s the latter.
In closing
At the end of the day, no one’s perfect. Not the founders. Not the investors. No one. And it’s okay.
In the current world of chaotic down markets, high interest rates, and more, this is the time to build goodwill. This is the time to be truly founder friendly. If you have less liquidity, you can always help in many ways outside of pure capital. After all, capital for founders is a means to an end, not an end in and of itself. Sometimes it’s just being honest, candid, and transparent with the founder.
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.
This year I learned a lot. From the fact that most of my readers love to read my blogposts on Wednesday 2PM Pacific to how I could get general partners — some of the smartest people in VC — to be vulnerable and candid to how to set up an SPV from scratch (without the help of any platform). It’s been a rollercoaster. And I loved every second of it.
My blog grew modestly. No hockey-stick curve. And that’s okay. I enjoyed inking each word. To me, that’s what makes this blog worth it.
I’ve written 87,000 words, with over a third fewer posts than last year. I want to say I was busy. And I was. But another equally true reason was that I was scared to disappoint. I wasn’t content publishing half-baked ideas. And it sucks when I know I wanted to write more. How? Because as of today, I have 53 drafts just sitting in my WordPress folder. With 245 total published essays, that’s a sixth of my thoughts I withheld or postponed because I thought: “They’re not good enough.”
Comfort is powerful. And earlier this year I found myself resigning to habitual cycles I had developed in the year prior. A fear manifested into reality. So I made a promise to myself to escape the clutches of complacency.
But while I hesitated on the writing front, I chose to take risk elsewhere. I took big bets. For one-way door decisions, bets I didn’t wait for a 100% conviction on. And just jumped when I got to 70%. As a function, I had many firsts.
It’s the first economic downturn I’m living and working through (2008 and the dot com era don’t really count as I was still in grade school).
For the first-time I broke my streak of writing weekly since the inception of this blog. While I can blame servers and bugs, the reason was simple. I just wasn’t prepared enough.
I set up my first SPV (special purpose vehicle) from scratch. With a s**tload of help, but yes, from incorporating to legal docs to setting up bank accounts, and so on.
I started interviewing LPs in fireside chats — something I never imagined I would end up love doing or be capable of doing.
I hosted my first social experiment-like event paid for and sponsored by investors for investors, rather than my usual audience of thrill seekers. Based on the feedback, I’d say it was a success. Many learnings and an indispensable village helping behind the scenes. A handful of things that could have been better. But a night of surprises. And I learned — something I hope to share more in the future (as I have larger sample sizes) — events, just like books, movies, shows, podcasts, and so on, are stories. And stories have settings, character developments, plots, a climax, and an end where the audience can imagine no other (to steal a line from Robert McKee).
Additionally, I…
Took my first vacation, not touching any work at all, in six years;
Went to my first traditional Vietnamese wedding; hell, travelled to Southeast Asia for the first time;
Successfully made fruit chips en masse;
Realized my favorite photo mode is portrait mode;
Built my first PC;
Put together my first career manifesto — my professional raison d’être.
And it’s still not enough.
But I digress. While I wrote far fewer posts, 2022 was the year I wanted to make things count. As Muhammad Ali once said, “Don’t count the days; make the days count.” The below, while I wish I had a longer list, are the blogposts that counted.
2022’s Most Popular
The below are the essays that I published during 2022, and generated the most views, ranked from most to 5th most:
The Emerging LP Playbook – I never expected this one to take the top spot this year. Borne out of a personal curiosity and an attempt to better understand the black box industry of LP investing, ever since Andrew Gluck put “emerging” and “LP” back-to-back on a Zoom call, I had to learn more about it. The truth is I only knew a handful of known LPs at the time, but I’m happy this piece has expanded the horizon for not only myself, but everyone else out there who’s read this curious piece. It answers just one nexus question: For a first-time LP, where do you start?
99 Pieces of Unsolicited, (Possibly) Ungoogleable Startup Advice – I’m a collector. And have been so for a while. Specifically, a collector of quotes. I have journals dedicated to them. When the pandemic hit, I had a thought, what if I collected 99 soundbites (some albeit my own) about being a founder? All tactical. And each will share an actionable lesson. And I shared them. I didn’t know how long it’d take, but I knew that 99 sounded like a good number.
What Does Signal Mean For An Early-Stage Investor? – The word ‘signal’ has been thrown around quite a bit in the last two years — 2020 and 2021, if you’re a time traveler and reading this in the future. For instance, an investor would look for ‘signal’ before investing in a deal. In the above blogpost, I break down exactly what ‘signal’ means. And I imagine, in whatever time period governed by FOMO (fear of missing out), ‘signal’ will rhyme.
99 Pieces of Unsolicited, (Possibly) Ungoogleable Advice For Investors – Just like the one I wrote for founders, soon after, I thought I’d put a list of 99 soundbites for investors. And as I jumped at the opportunity to work with the brilliant team at On Deck Angels, I was living and breathing everything about investors — from angel investing to fund investing. Of course, you can sense my heavy bias towards to latter.
All-Time Most Popular
The funny, yet in hindsight, unsurprising, thing, is that the below are perfect examples of the power law, collectively generating 90% of the views ever on my blog. The below ranked in view count popularity:
The Emerging LP Playbook – I wrote this piece for myself and other investors looking to be LPs. Unsuspectingly so (at least in foresight), this piece generated a huge amount of excitement not only with my initial intended audience — who, I thought, was a niche audience — but also among many VCs and angels out there. I rarely write in hopes to change people’s minds. I’m not much of a persuasive writer, but rather I hope my words offer oases for people searching for answers in a desolate desert. But of the feedback I’ve gotten, it has surprisingly changed a number of people’s minds about LPs, as well as about different asset classes to invest in.
10 Letters of Thanks to 10 People who Changed my Life – To this day, it still baffles me how this is the most perennially popular essay I’ve written. The SEO keywords I’ve optimized for here are all related to Thanksgiving, yet the fact that search engines bring me new readers every single week without fail is an enigma I’m still unravelling. That said, I am thankful to everyone who’s given me and the 10 people I am deeply thankful for that year the attention and time out of your busy schedule.
How to Pitch VCs Without Ever Having to Send the Pitch Deck – Teach them something new. Many founders who’ve worked with me can attest that that’s been my favorite line to lead with when they ask for fundraising advice. This blogpost and the person behind it (who’ll stay anonymous for now) is the reason for that.
#unfiltered #30 Inspiration and Frustration – The Honest Answers From Some of the Most Resilient People Going through a World of Uncertainty – (Part two of which you can find here.) Interestingly enough, I knew this one would stand the test of time. Something we learn in Econ 101 is that business cycles come in booms and busts. And they oscillate between great times and bad times. The human emotion, our daily lives, and our careers are no exception. Collectively, I queried 42 world-class professionals about their greatest motivators. What keeps them going? I ask them two questions, but the catch is they’re only allowed to answer one of them. These pieces are a gentle reminder that bad times, like good times, never last.
Most Memorable Pieces in 2022
In writing each of the below, I felt the needle move forward. Not for the world or for the people immediately around me. But for me. That I myself took one small essay forward, but a disproportionately giant leap in the way I thought about the world around me. Each is the culmination of not just a few hours of writing, but of many things more. Provocative conversations. Research deep dives. And generous people.
In no particular order, if I were to hide pieces of my 2022 soul and mind in Horcruxes, they would be in the below:
The Emerging LP Playbook – You’ll realize that this blogpost appears in all three lists. The first two are outside of my control. But the reason it appears here is this piece catalyzed a spark that’ll come more into fruition in 2023. A spark that emerged from realizing the massive information asymmetry between LPs and GPs. Hell, even between LPs.
How to Develop Intuition as a Rookie Startup Investor – This dates as far back as 2017, when I first inked the thought in my notebook. The thesis was simple. Intuition — one’s sixth sense was a subconscious function of the mastery of the other five senses. But then, I felt ill-equipped to explicitly describe what other investors were feeling, and over time, what I was feeling as a function of what I was thinking. In it, I share each of the questions I consider and their respective answers that inform each of my senses (sight, hearing, taste, etc.).
How do You Know if You Should Professionalize as an Investor? – I love asking questions. To the point, and I don’t mean this in a tongue-in-cheek way, that often the best way to answer a question is with another question. I’ve gotten the above question many a time this past year, and this piece is a permutation of what helps me get to first-principles thinking when it comes to: Should you raise a fund… or stay an angel?
Five Tactical Lessons After Hosting 100+ Fireside Chats – I love hosting interviews. I really do. Part of it is due to the fact I love asking questions. The other half is… well… the average coffee chat is 30 minutes long. Half of it disappears after exchanging pleasantries. So, the big question is: How do you get more time with people you respect? One answer among many is by giving them a stage. That said, as I was doing my homework to be a better MC, the information out there is either paltry or too generic. So I made a promise to myself that as I do more myself I’ll share all the non-obvious lessons I learn. So that others can do better than me. And I hopefully, get to learn from them as they get better.
When Should You Sell Your Shares As An Investor? – Selling is really an art more than science. Like investing, often obvious in hindsight, but painfully scary in foresight. And to be a great investor, you have to distribute your earnings. And in order to earn, you have to turn something illiquid into something liquid. This piece was one of my first explorations behind what makes selling hard and how some of the best do it.
Quirks That Just Make Sense – Maybe there’s a bit of recency bias here, but this is something a few of my friends have known about me for a while. I just never had a good excuse to talk about it publicly. (Weird that I thought I ever needed an excuse to). But my good buddy Matt brought me out of my shell a few weeks back. And together we put together a piece about the quirks we carry and the origin story of each. Coincidentally enough, just watched Garry Tan’s video yesterday about a similar topic.
In closing
Cheers to a year of life lessons, friendships, skills and experiences acquired that were well worth the ride! And many more to come! If there’s ever any topic you would like me to write about in the future, don’t hesitate to let me know. I have two nominations already.
To peruse one of Kurt Vonnegut‘s lessons, I hope to continue to use your time in a way that you feel is not wasted.
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.
It’s not often I get to work with someone I deeply respect on the content front. In fact, in the history of this blog, I’ve never done so before. But there are a rarified few in the world that if I was ever given the chance to work with them, I’d do so in a heartbeat. Tom White is one of them. As someone who I had the chance to work briefly with when our time at On Deck overlapped, he is someone I’ve been continually enamored with — both in how he commands the English language and in how intentional and thoughtful he is as an investor.
So when Tom reached out to collaborate on a blogpost for the Stonks blog, it was a no-brainer. And, the below is that product on how founders can own their fundraising process.
David’s note: Tom never ceases to amaze me on his ability to meme anything.
It’s a tale as old as time.
After a good meeting and a great pitch, the VC across the table (or on your screen in this day and age) offers a forced smile and utters: “Thanks again for making the time. Let me circle back internally and we’ll get back to you if we’re interested.”
If you have ever fundraised as a founder — hell, if you’ve ever fundraised, period — you have heard those fatal few words many more times than you care to remember. Though frequently said, the pangs of disappointment and frustration that they impart seldom fade away.
Fear not fellow founders!
To ensure you never hear those dreaded words again, we turned to the one and only David Zhou. A “tenaciously and idiosyncratically curious” writer and investor per LinkedIn, David pens the inimitable, brilliantly-named Cup of Zhou, scouts for a number of VCs, and helps run the On Deck Angel Fellowship.
Your ability to raise capital is directly proportional to your ability to inspire confidence in potential investors.
I’ll get into that, however, first a brief aside.
One of my favorite lines in literature comes from the seventh book of the Harry Potter franchise: Harry Potter and the Deathly Hallows. Inscribed on the golden snitch is a simple, but profound phrase: “I open at the close.”
In many ways, that line alone echoes much of the world of entrepreneurship. Whether backcasting from the future as Mike Maples Jr. puts it (i.e. great founders are simply visitors from the future) or breaking down your TAM to your SAM then SOM, the greatest founders — no, storytellers — start from the end. They share the future that they wish to see and distort today’s reality to fit into that predestined mold. Without further ado, my five tips on willing the future you want to see via successful fundraising.
1. Measure Founder-Investor Fit
Before you dive into talking with every investor under the sun, you must first understand there are more investors out there than you possibly have time for. You will never pitch every single one, nor should you. You need to be judicious with your time.
As you raise your first institutional round, you’re seeking out early believers. Julian Weisser — an investor with whom I’m lucky enough to work — calls this belief capital. You’re selling a promise, a vision.
And let’s be honest, at pre-seed there is no amount of traction that will convince any investor with numbers alone.
You see, it’s all about narrative building.
More on that below, but for early investors, it’s about whether they not only believe, but are also willing to fight for the future you collectively desire.
2. Close the First Meeting
I recommend that many founders with whom I work ask a two-part question heavily inspired by my conversation with Hustle Fund’s Eric Bahn for my emerging LP playbook: “Critical feedback is important to me in my journey to grow as a founder and a leader. So I hope you don’t mind if I ask, given what you know about my startup and myself: On a scale of one to ten, how fundable am I?”
To be honest, the number they give is inconsequential. That said, if they give you a ten, get a term sheet on the spot.
The more important question is the following one: “Whether I didn’t share it yet or don’t have it, what would get me to a ten? What would make this startup a no-brainer investment?”
Collect that feedback.
Put it in your FAQs.
Incorporate it into your next pitch.
Test and iterate.
I was listening to Felicis Ventures’ Aydin Senkut on Venture Unlocked recently and he mentioned that he iterated on his fund pitch deck every single time he got a no. And by the time he received his first yes from an investor, he was on the 107th version of the pitch deck.
As such, the answer to the second question should help you preempt and address concerns—explicit or implicit—in future pitches.
I discovered the below courtesy of the amazing Siqi Chen. Per a 2015 Harvard study, most people believe that people make decisions by:
Observing reality
Collecting facts
Forming opinions based on the facts collected
Then, making a rational decision.
But the reality is, people do not. People aren’t rational and investors are no exception.
Like everyone else, investors:
Are presented with facts.
Fit facts into existing opinions.
Make a decision that feels good.
Most of these opinions are not explicit. It’s neither on the website nor laid out in the firm’s thesis.
The good news is that most investors will share the same reservations. If one investor hesitates about something, another will likely do so. The best thing a founder can do is to address it before it comes up.
For example, if an investor tells you that if you have a better pulse on the competitive landscape, you would then be a ten. In the next version of the pitch, you might say “You might be thinking that this space is highly competitive, and you’re right. At a cursory glance, we all look like we tackle the same problem and fight over the same users. But that’s when this space deserves a double take. Company A is best in class for X. Company B is second to none in Y. But we are world-class in Z. And no one is offering a better solution for Z. Not only that, customers are begging for solutions for Z. One in every five posts on Z’s subreddit asks for a solution like ours. But if you look at the responses, no one has a perfect solution for it. In fact, people are duct taping their way across this problem. Not only that, in the past three months, since we shared our product on the subreddit, we’ve had 10k signups to the waitlist with 500 of them paying a deposit to get early access to our product.”
On that note, I don’t think it’s worth trying to change the original investor’s opinion after they share such feedback. Most of the time, you’ve unfortunately lost your window of opportunity. If it takes X amount of information for an investor to form an opinion about you, it takes 2-3X the amount of effort and time — if not more — for him/her to change said opinion and form a new one.
Lastly, per Homebrew’s Hunter Walk: “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
3. Schedule the Second Meeting during the First
Say the vibes are right and you get the impression that the investor really loves your product and/or your problem space and/or you as a person. When you’re raising your first institutional round, it’s either a “Hell yes” or a “No.”
Open up your calendar at the end of the first meeting and schedule your next meeting there and then, but be sure to give the VC enough time to talk with his/her team and also suggest where their firm might want to dive deeper. Give three options for topics to dive into the next meeting. For instance:
The team and future hiring plans
The vision and financial projections
The product, demo, and team’s current focus
From there, have the investor pick one of the above before your next meeting. If they don’t, say something along the lines of: “During this conversation, you seemed to love to hear about the product, so we’d love to dive deeper into the product the next time around unless you prefer one of the other two options.”
Also, start tracking which paths seem to convert investors faster. For example, if 30% of the investors you talk to jump into diligence after hearing the vision, but only 15% convert after the product path, lead with the vision one first next time. “Most of our investors fall in love with us after hearing about the vision, and would love to share more on that at the next meeting.”
The moral of the story is simple: make it easy for your investor to say yes to the next meeting.
4. Realize that ‘No’ is merely a ‘Yes’ in Disguise
If you get the feeling that it may be a no, ask the investor, “What firm/investor do you think I should talk to who might be a better fit for what I’m working on?”
Do not ask for introductions. An introduction will come naturally if an investor is really excited about you. Additionally, even if the investor who passed does introduce you, a natural question will be: “Why didn’t you invest?”
This sets you up for failure because the other investor’s first impression of you will be negative. The only exceptions are if the reason is outside of your control. For instance, they’re raising their next fund since they don’t have any more to deploy out of the current fund, or they’ve recently changed their investment thesis away from what you’re building.
But I digress. What you should do instead is collect a Rolodex of names.
Never ever run out of leads. You never want to be in the position to beg someone who turned you down for money.
When a certain investor gets mentioned more than once — ideally at least three to four times — that’s your cue to reach out to them. “Hey Tom, we haven’t met before, but I’m currently fundraising for David’s Lemonade Stand. And four investors highly recommended I chat with you on the product, given your experience in food-tech and how you helped Sally’s Lemonade Bar grow from 10 to 500 customers.”
5. Use Investor Updates
Send interested investors weekly investor updates during your fundraise and monthly ones after its conclusion. Share important learnings, key metrics, and your fundraise’s progress.
Be sure to induce FOMO in your updates. Not in the sense that your round is closing soon, rather, that you’re at an inflection point right now in both your product and the market. Two example prompts:
Why are you within the next 12-18 months “guaranteed” (I also use this word hesitantly) to 10x against your KPIs?
Is the blocker right now a market risk (which leaves a lot for debate, and most investors will choose to wait for a future round) or an execution risk?
How have you de-risked your biggest risks?
Taking this a step further, you need the courage to “fire” an investor. If an investor doesn’t get back to you after two emails, it could just be that they’re busy. If they don’t get back to you after eight or nine emails, they’re just not interested. My rule of thumb is always three emails each a week apart for each investor. I have seen founders who have done more, but I would not recommend any fewer.
Regardless, whatever number you decide on, the last email ought to try to convert them. For examples:
“Since you haven’t gotten back to me yet about your interest, I assume you’re not interested in investing. As such, this will be our last investor update to you. If we are wrong, please do let us know.”
Interestingly enough I’ve seen more investors start conversations by this last email than by the very first. Remember to treat your fundraise like a sales pipeline; A/B test different copy and see which lands the best.
Concluding Thoughts
Remember, fundraising is a lot like life: it’s simple, but far from easy. It requires grit, determination, and a healthy dose of elbow grease. Despite current market conditions, forge ahead! Follow Jim Valvano’s lead and “Don’t give up. Don’t ever give up!”
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.
“If you look at all big human achievements, like flying to the moon, for instance, it’s all based on large scale cooperation. How did humans get to the moon? It wasn’t Neil Armstrong flying there by himself. There were millions of people cooperating to build the spaceship, to do the math, to provide the food, to provide the special clothing, and the funding.
“The big question becomes: why are we capable of cooperating on such a large scale when chimpanzees or elephants or pigs can’t?
“It’s the ability to invent and believe fictional stories.”
For any big achievement, and I’m specifically reminded of the recent news with FTX — for FTX to get as large as it did at its peak — it was a monumental achievement. It was the work of many, rather than a single individual. It was the result of many buying into this narrative that Sam Bankman-Fried shared. That includes his team. His customers. His investors, from Sequoia to Tiger to Softbank to Coinbase. Many of whom are smart people who gave into the velocity of the market the last two years.
Source: Sequoia article on FTX While I’m not sure how I feel about founders playing games during the meeting, I can’t deny the vision isn’t compelling.
To be fair, and this is not to condone the wrongdoings of the FTX team, every founder’s job is to distort reality. To put the human race on a fast track towards a future that is non-fiction to the founder, but fiction to everyone else. A world that isn’t false, but has yet to come. As author William Gibson once said, “The future is already here — it’s just not evenly distributed.”
I also love the thesis of Alexia‘s fund, Dream Machine. We make science fiction non-fiction.
Founders pitch their answer to: What will the world look like? Investors, customers, and talent then make bets with their time and money on which future they would like to see happen and the likelihood of it happening.
FTX is no exception. The fine line is when a founder does get creative, it is imperative for them to have a moral compass, which seems like SBF didn’t have. And of the million and one things they’ve done wrong (no board, giving loans using customer money, fraud, etc. and some more that are more questionable in nature, like political donations, etc. — none of which from what little I know are things I would ever endorse), I have to say they nailed their marketing and messaging. They got a lot of people excited about it fast. It’s easier to get people excited about the future of money than the future of fintech or the future of crypto.
The past week has been an insane week for crypto, namely when FTX filed for bankruptcy. And while there are many different angles to it, I took it upon myself to revisit a podcast episode from two months back where Nathaniel Whittemore, FTX’s former Head of Marketing, shared his marketing insights. Namely, around their 2021 Super Bowl ad.
A Super Bowl ad two years since its founding date. If nothing else, that’s impressive. Moreover, they got Larry David who has been known to never appear on ads to do it for them.
But what I found to be very powerful is Nathaniel breaks down why they chose to do a Super Bowl ad in the first place:
“People always focus on how much [an ad] costs. ‘This ad costs X.’ Which in a vacuum seems so high. […] What I think that analysis doesn’t take into consideration:
“The number of people actually watching those ads. If you’re gonna get X people with an ad that costs a $100,000, but then, 50x that with an ad that costs $5 million, that’s the same ratio.
“But the more important piece is that at least in America, the Super Bowl is the literal one moment each year that people not only are not annoyed with ads, but it is an active part of the experience that they’re having and they’re excited.”
He also does caveat that it doesn’t mean a Super Bowl is good for every kind of marketing campaign. But more so for brand-building, as opposed to product marketing or lead gen.
To echo that, David Sacks wrote a great piece on the importance of having an operating philosophy which I’ve referenced on this blog before. In it, he finds it incredibly powerful for companies to aggregate product updates and marketing campaigns in four big “lightning strikes” (each quarter) rather than have tidbits of information floating around every week.
Of course, companies like Twitch, Salesforce, Apple, and Google have taken it a step further by having a large launch event once a year. As Sacks mentions, “It’s not just about the external marketing value. There’s a huge internal benefit from setting dates and deadlines in order to hit a public launch.” It drives excitement and a narrative that both customers and future customers, as well as team members can get behind. The world is waiting. Your team is shooting to meet and beat expectations. And that’s incredibly motivating.
What does this mean for the crypto narrative?
A friend who took a hit from the recent series of events asked me at dinner last night, “What does this mean for crypto?”
Of which I think Yuval does a better job explaining it than I could. In the same podcast episode, he explains, “Not everybody believes in the same god or in any god. But everybody believes in money. And if you think about it, it’s strange because no other animal even knows that money exists. If you give a pig an apple in one hand and a pile of a million dollars in the other hand, the pig would obviously choose the apple. And the chimpanzee the same. And the elephant.
“Nobody, besides us, knows something like money exists in the world. The value of money doesn’t come from the paper. Most of the money in today’s world is not even paper; it’s just electronic data moving between computers. So where’s the value from? It’s from stories we believe.
“We are at risk of the whole thing collapsing. It happens from time to time in history. Inflation to some extent is that. The value of money is not what we were told it is. And inflation can sometimes hit thousands of persons and millions of persons. Eventually, the money becomes worthless.”
I don’t personally believe crypto will become worthless at any predictable point in the future. In fact, I think it has a great future ahead. Just a little early for its time from an infrastructure perspective. But, it is a non-zero possibility. That said, the more institutions, especially larger ones like FTX, that use crypto as the currency of faith, collapses, the more the faith behind the story of crypto will waver. And with repeated bad players, it is a race between mass adoption and the rate faith deteriorates.
For as long as the exchange currency is in dollars, crypto has still yet to be widely adopted. For instance, the value of crypto is pegged as a function of the dollar. As of the day I’m writing this on November 16th, 2022, if you type in bitcoin in Google search, the first search result is that Bitcoin is worth 16,768 US Dollars. In other words, as long as crypto is measured in dollars, the story of the dollar is stronger than that of crypto.
In closing
I’m not here to share my latest scoop or an update on the current situation about FTX. Twitter is filled with these already. Plenty of smart individuals have already covered all the ground I would ever even think about covering. I don’t keep my finger on the pulse of crypto and FTX nearly as much as my friends and colleagues.
Really, the purpose of this blogpost is really my curiosity that in order for FTX to get the notoriety that it has today, the team must have done something really well. And in my eyes, it’s not the product or the business, but the narrative in which they built. So, if someone at HBS or GSB isn’t writing a case study on this, they should.
P.S. Had to pass this to two friends at 6AM this morning to see if this blogpost was even worth publishing. Bless their hearts for their support so early in the morning.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
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.
