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Another 99 Pieces of Unsolicited, (Possibly) Un-googleable Startup Advice

diving, deep end

Voila, the fourth installation of 99 soundbites I’ve been fortunate enough to collect over the past year. The first four of what I imagine of many more to come. Each of which fall under one of the ten categories below, along with how many pieces of advice for each category:

  1. Fundraising (30)
  2. Cash flow levers (23)
  3. Culture (11)
  4. Hiring (9)
  5. Governance (7)
  6. Product (5)
  7. Competition (5)
  8. Brand/Marketing/GTM (4)
  9. Legal (1)
  10. The hard questions (4)

You can also find the first three installments of 99 pieces of advice for both founders and investors here. Totaling us to a total of 396 pieces of advice.

But without further ado…

Fundraising

1/ If you’re an early stage startup, expect fundraising to take at least 3-4 months to raise <$1M. If you’re on the fast side, it may take only 2 weeks. – Elizabeth Yin *timestamped April 2022

2/ If you’re going to raise a round over 6-12 months, it often doesn’t seem fair that your first commits have the same terms as those who commit 6 months later, since you’ve grown and most likely have more traction at the time. As such, reward your early investors with preferred terms. Say you’re raising a $1M round. Break the round up to $300K and $700K. Offer a lower cap on SAFEs for the $300K. “Tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs. And that the cap will most likely go up after that.” Why? It lets you test demand and the pricing on the cap – to see if you’re cap is too high or too low on the first tranche. – Elizabeth Yin

3/ As a startup in recessionary times, you have to grow your revenue faster than valuations are falling to make sure you raise your next round on a mark up. Inspired by David Sacks and Garry Tan. *timestamped April/May 2022

4/ There’s only going to be 1/3 the amount of capital in the markets than in 2020 and 2021. So plan accordingly. If you’re not a top 0.1% startup, plan for longer runways. Fund deployments have been 1-1.3 years over the past 1.5 years, and it’s highly likely we’re going to see funds return back to the 3-year deployment period as markets tighten. *timestamped May 2022

5/ B2B startups that have the below disqualifiers will find it hard to raise funding in a correcting venture market:

  1. No to little growth. Good growth is at least doubling year-over-year.
  2. Negative or low gross margins. Good margins start at 50%.
  3. CAC payback periods are longer than one year.
  4. Burn multiples greater than 2 (i.e. You’re burning $2 for every dollar you bring in). A good burn multiple is 1 or less.
    – David Sacks

6/ Beware of “dirty term sheets.” Even though you’re able to get the valuation multiple you want, read the fine print for PIK dividends, simple “blocks” on IPO/M&A, and 2-3x liquidation preferences. Inspired by Bill Gurley.

7/ “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.” – Sabeer Bhatia in Founders at Work

8/ In a bear market, public market multiples are the reference points, not outlier private market multiples. Why? Public market multiples are their exit prices – how they return the fund. It matters less so in bull markets. – David Sacks

9/ Don’t trust the “why”, trust the “no.” Investors don’t always give the most honest responses when they turn down a company.

10/ If you inflate your projections, the only investors you’ll attract are dumb investors. They’ll be with you when things are going well and make your life a living nightmare when things aren’t, will offer little to no sound advice, and may distract you from building what the market needs. By inflating your projections, you will only be optimizing for the battle, and may lose the war if you can’t meet or beat your projections.

11/ VCs will always want you to do more than you are pitching. So if you’re overpromising, they’re raising their expectations even more down the road.

12/ Five questions you should answer in a pitch deck:

  1. If you had billboard, what 10 words describe what you do?
  2. What insight development have you had that others have not?
  3. How you acquire customers in a way others can’t?
  4. Why you?
  5. What you need to prove/disprove to raise next round?
    – Harry Stebbings

13/ The longer you’re on the market, the greater the differential between expectations and reality, and the harder it is over time to close your round. Debug early on in the fundraising process (or even before the fundraising process) by setting and defining expectations through:

  1. Preempting FAQs, by defusing them early on.
  2. Leveraging market comparables. You don’t have to be good at everything, but you have be really really amazing at one thing your competitors aren’t. It’s okay if they’re better than you in other parts.

14/ You should reserve 10% of your round to allocate to your most helpful existing investors. Reward investors for their help. – Zach Coelius

15/ If your next round’s investor is willing to screw over your earlier investors out of pro rata or otherwise. After they leave, the only one left to screw over is you. – Jason Calacanis

16/ “Nobody’s funding anything that needs another round after them.” – Ben Narasin quoting Scott Sandell

17/ “When a VC turns you down for market size, what they are really saying is: I don’t believe you as the founder has what it takes to move into adjacent and ancillary markets well.” – Harry Stebbings

18/ When raising from corporates, be mindful of corporate incentives, which may limit your business and exit opportunities. “I’ve often seen the structure just simply be a SAFE with no information rights. No Board seats. Check sizes that are worth < 5% ownership. No access to trade secrets.” – Elizabeth Yin

19/ LOIs mean little to many investors, unless there’s a deposit attached to it. A customer must want the product so much they’re willing to take the risk of putting money down before they get it. 1-5% deposit would be interesting, but if they pay the product in full, you would turn investor heads. – Jason Calacanis

20/ “The most popular software for writing fiction isn’t Word. It’s Excel.” – Brian Alvey

21/ “Ask [prospective investors] about a recent investment loss, where the company picked someone else. See how they describe those founders, the process, and what they learned. This tells you what that investor is like when things don’t go their way.” – Nikhil Basu Trivedi

22/ “Founders, please hang onto at least 60% of the company’s equity through your seed raise. Series A or B is the first time founder equity should dip below 50%. I’ve seen cap tables recently where investors took too much equity early on, creating financing risk down the road.” – Gale Wilkinson

23/ “One of the worst things you can say to a VC is ‘we’re not growing because we’re fundraising.’ There are no excuses in fundraising.” – Jason Lemkin. Fundraising is a full-time job, but when you’re competing in a saturated market of attention, it’s you who’s fundraising, but not growing, versus another founder who’s also fundraising and is growing.

24/ Extraordinarily difficult fundraise = extraordinary investment 7/10 times. – Geoff Lewis

25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):

  1. Pre-seed: $750K-1.5M round
    • Valuation: $5-10M post (*She would not go over $7M)
    • Traction:
      • A working MVP
      • Indications of customer demand = have interviewed hundreds of potential customers or users
      • 2-5 “Design Partners” (non-paying customers or users)
  2. Seed: $2-5M round
    • Valuation: $12-25M post (*She would not go over $15M)
    • Traction:
      • $10-15K MRR, growing 10% MoM
      • 6-12 customers who have been paying for ~6 months or more, a few that would serve as case studies and references
      • Hired first technical AE
  3. Series A: $8-15M round
    • Valuation: “anyone’s guess”
    • Traction:
      • $1.5M in ARR is good, more like $2M
      • 3x YoY growth minimum, but more like 3.5x • 12-20 customers, indications of ACV growth
      • Sales team in place to implement the repeatable sales playbook

26/ Don’t take on venture debt unless you have revenue AND an experienced CFO. – Jason Calacanis

27/ When you are choosing lead investor term sheets:

  1. For small VC teams (team <10ppl): Make sure your sponsoring partner is your champion. Why does investing in you align with their personal thesis? Their life thesis? Which other teams do they spend time with? How much time do they spend with them? When things don’t go according to plan, how do they react? How do they best relay expectations and feedback to their portfolio founders?
  2. For larger platform teams (team >10ppl): Ask to talk to the 3-5 best people at the firm. And when the investor asks you to define “best”, ask to talk to their team members who best represent the firm’s culture and thesis. Why? a/ This helps you best understand the firm’s culture and if there’s investor-founder fit. b/ You get to know the best people on the team. And will be easier to hit them up in the future.

28/ “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” – Abhiraj Bhal

29/ “[Venture] debt typically has a 48-54 month term, as follows: 12 months of a draw period (ballooned to 18 months over the last few years), to which you can decide to use it or not 36 months to amortize it after that 12 months. The lender at this stage is primarily underwriting to venture risk, meaning they are relying on the venture investor syndicate to continue to fund through a subsequent round of financing.” This debt is likely to be paired with language that allow the fund to default if investors say they won’t fund anymore and/or just not to fund when asked. “They typically are getting 10bps-50bps of equity ownership through warrants. Loss rates must be <3-4% for the model to work.” If there’s less than 6 months of runway or cash dips below outstanding debt, then as a founder, expect a lot of distracting calls. – Samir Kaji

30/ The best way to ask for intros to investors is not by asking for intros, but by hosting an event and having friends invite investors to the event. There’s less friction in an event invite ask than an investor intro ask. The reality is that the biggest investors are inundated with intro requests all the time, if not just by cold email too.

Cash flow levers

31/ The bigger your customers’ checks are (i.e. enterprise vs. SMB vs consumer), the longer the sales pipeline. The longer the sales pipeline, the longer you, the founder, has to stay the Head of Sales. For enterprise, the best founders stay VP of Sales until $10M ARR. For SMB, that’s about $1-2M ARR, before you hire a VP of Sales. Inspired by Jason Lemkin.

32/ “‘I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.'” The sales playbook of David Beirne of Benchmark Capital fame, cited in eBoys.

33/ “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” – Bill Gurley

34/ If you were to double or triple the price of your product, what percent of customers would churn? If the answer is anything south of 50%, why aren’t you doing it?

35/ Getting big customers and raising capital is often a chicken-and-egg game. Sometimes, you need brand name customers, before you can raise. And other times, you need capital before you can build at the scale for brand name customers. So, when I read about Vinod Khosla’s advice for Joe Kraus: “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, ‘How do we bid $3 million? We only have $1 million in the bank.’ And he said, ‘Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.'”

36/ “Your ability to raise money is your strategy. If you’re great at it, build any business with network effects. If you’re bad at fundraising, it’s strategically better to build a subscription business with no network effects.” – Elizabeth Yin

37/ Be willing to fire certain customers (when things get tough or in an economic downturn). If they aren’t critical strategic partners or are loss making, figure out how to make them profitable. If you can, renegotiate contracts, like cheaper contracts for longer durations. If not, let them go. Make it easy to offboard.

38/ An average SaaS business, that doesn’t have product-led growth, is spending about 50% of revenue on sales and marketing. Those that are in hyper growth are spending 60%. – Jason Lemkin

39/ “The only thing worse than selling nothing is selling a few. If you sell nothing, you stick a bullet in it and move on. When you sell a few, you get hope. People keep funding even though it’s really not viable.” – Frank Slootman

40/ If your customer wants to cancel their auto-renew subscription to your product, you should refund them a 100% of their cost. – Jason Lemkin

41/ “Your price isn’t too high. Your perceived value is too low.” – Codie Sanchez

42/ “15-20% of IT spend is in the cloud.” And it’s likely to go up. – Alex Kayyal

43/ If your customers are willing to pay you way ahead of when your service is executed, you have an unfair and unparalleled cashflow advantage. – Harry Stebbings

44/ If you’re in the CPG business, it’s better to negotiate down the contract. “You buy 75, and you sell 60, they’re going to go, ‘Ah, I got 15,000 in inventory, it’s not a success.’ If you give them 40, and then they have to buy another 20, and they sell 60, they go, ‘Wow, we ordered 50 [(I think he meant 20)] more than our original order.’ You’re still at 60, but one, they’re disappointed, and one, they’re not. You’re still playing some weird mind games a little bit so that they feel good about whatever number was there.” – Todd McFarlane

45/ “If you are under 100 customer/users, get 20 of them in a Whatsapp Group. You will:

  • Get much higher quality feedback, faster, on the current product.
  • They will be WAY more proactive in suggesting future product ideas and helping you shape the product roadmap.
  • It will create a closer relationship between you and them and they will become champions of the product and company. People like to feel they had a hand in the creation process.”
    – Harry Stebbings

46/ Create multiple bank accounts with different banks to keep your cash, to hedge against the risk of a bank run. The risk is very unlikely to occur, but non-zero, especially in a recessionary market. Inspired by SVB on March 10, 2023. More context here, and what happened after here. Breakdowns here, here and here.

47/ “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for “excess cash” to be invested in safe, liquid options to generate slightly more income.” – A bunch of firms

48/ “Maintain an emergency line of credit. Obtain a line of credit from one of  your core banks that can fund the company for 6 months. Do not touch it unless necessary.” – A bunch of firms

49/ In case of a bank run: “1/ Freeze outgoing payments, let vendors know you need 60 days, 2/ Figure out payroll & let your investors know exactly when cash out, 3/ Attempt emergency bridge with existing investors; hopefully reasonable terms or senior debt (but given valuation reset this is a HARD discussion for many), 4/ Figure out who can take deferred salary on management team, which will extend runway, 5/ Make sure you communicate reality to team honestly so they can make similar plan for their household, 6/ Make sure you talk to HR about legal issues around payroll shortfall — which hopefully this doesn’t come to, 7/ In future, keep cash in 3 different banks.” – Jason Calacanis

50/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff

51/ General reference points for ACV and time to close are: $1K in 1 week. $10K in 1 month. $100K in 3 months. $300K in 6 months. And $1M in 12 months. – Brian Murray

52/ A B2B salesperson’s script from Seth Godin. “Look, you’ve told me you have this big problem you need to solve. You have a five million assembly line that’s letting you down, blah blah. If we can solve this problem together, are you ready to install our system? Because if it’s not real, let’s not play. Don’t waste my time, I won’t waste yours. You’re not going to buy from me because I’m going to take you to the golf course. You’re not going to buy from me because our RFP is going to come in cheaper than somebody else’s. You want my valuable time? I’m going to engage with you, and tell you the truth and you’ll tell me the truth. You’re going to draw your org chart for me. You’re going to tell me other complicated products you’ve bought and why your company bought them. And I’m going to get you promoted by teaching you how to buy the thing that’s going to save your assembly line. Let’s get real or let’s not play.” – Seth Godin

53/ “The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.” – Charles Hudson

Culture

54/ Deliver (bad) news promptly. Keep to a schedule. The longer you delay, the more you lose your team’s confidence in you. For example, if your updates come out every other Friday, and you miss a few days, your team members notice. Your team is capable of taking the tough news. This is what they signed up for. Explain a stumble before it materially impacts your bottom line – revenue. Inspired by Jason Lemkin.

55/ “Process saves us from the poverty of our intentions.” – Seth Godin quoting Elizabeth King

56/ “It’s easier, even fun, to do something hard when you believe you’re doing something that no one else can. It’s really hard to go to work every day to build the same thing, or an even worse version, of what others are already building. As a result, there was a huge talent drain from the company.” – Packy McCormick

57/ Lead your team with authenticity and transparency. “Employees have a ridiculously high bullshit detector, more so than anyone externally, because they know you better. They know the internal brand better.” So you have to be honest with them. “Here’s what we’re going to tell you. Here’s what we won’t, and here’s why.” Set clear expectations and leave nothing to doubt. – Nairi Hourdajian

58/ When someone ask Jeff Bezos, when does an internal experiment get killed? He says, “When the last person with good judgment gives up.” – Bill Gurley citing Jeff Bezos

59/ “Getting too high on a ‘yes’ can prepare you for an even bigger fall at the next ‘no.’ Maintaining your composure in the high moments can be just as important as not getting too down in the low moments.” – Amber Illig

60/ “Most have an unlimited policy paired with a results-driven culture. This means it’s up to the employee to manage their time appropriately. For example, no one bats an eye when the top performing sales person takes a 3 week vacation. But if someone is not pulling their weight and vacationing all the time, the perception is that they’re not cut out for a startup.” – Amber Illig

61/ “Whenever we’re dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we’re not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we’re taking, but it’s not going to be what we’re currently doing.” – Tobi Lutke

62/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan

63/ “Leadership is disappointing people at a rate they can absorb.” – Claire Hughes Johnson

64/ Page 19 Thinking: If you were to crowdsource the writing of a book, someone has to start inking the 19th page. And it’s gotta be good, but you can’t make it great on the first try. So you have to ask someone else to make it better, and they have to ask another to make their edits even better. And so on. Until page 19 looks like a real page 19. “Once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.” – Seth Godin

Hiring

65/ Hiring when your valuation is insanely high is really hard. Their options could very much be valueless, since they would depend on the next valuation being even higher, which either means you grow faster than valuations fall (market falls in a bear market) or you extend your runway before you need to fundraise again.

66/ It’s easier to retain great talent in a recession, but much harder to retain them during an expansionary market. Talent in a boom market have too many options. There’s more demand than there is supply of talent in a boom market.

67/ If you’re a company with low employee churn, you can afford to wait a while longer to find someone who is 20% better in the role. – Luis von Ahn

68/ “[Fractional CMOs and CROs often] want to be strategists.  Tell you where to focus, and what to do better. But the thing is, what you almost always just need is a great full-time leader to implement all the ideas.” – Jason Lemkin. The only time it works is when the fractional exec owns the KPI and the function, where they work at least 60% of the time OR they work part-time and help you hire a full-time VP.

69/ Hire your first full-time comms person after you hit product-market fit, when you are no longer finding your first customers, but looking to grow your customer base. – Nairi Hourdajian

70/ “Ask [a high-performing hire] if there’s someone senior in her career that’s been a great manager, and if so, bring them on as an equity-compensated advisor to your company. If there’s someone in industry she really admires but doesn’t yet know, reach out to them on her behalf.” Give her an advisor equity budget, so they can bring on a mentor or someone they really respect in the industry. As a founder, create a safe space for both of them. Monthly 1:1s and as-needed tactical advice, introductions, and so on. And don’t ask that mentor to give performance feedback “because if so it’s less likely they’ll have honest, open conversations.” – Hunter Walk

71/ Hire talent over experience for marketing and product. “In marketing and product I prefer people with less experience and a lot of talent so we can teach them how we do things. They don’t have to unlearn anything about how they already work. We teach them how we work. For developers it might be different because it takes a lot of time to be a really good developer, and it’s relatively easy moving from one environment to another.” – Avishai Abrahami

72/ If you’re going to use an executive search firm to hire an exec, ask the firm three questions: “1/ Walk me through your hardest search? 2/ Walk me through a failed search? 3/ Why did it fail? 4/ How do you assess whether an exec is a good fit?” You should be interviewing the firm as much as the candidate. Watch out for “a firm with a history of candidates leaving in a short timeframe. Avoid firms that recycle the same execs.” – Yin Wu

73/ Before signing with any recruiting agency, ask “What happens if the person hired is a bad fit? (Many firms will restart the search to align incentives.) Is there a time limit for the search? (Some firms cap the search at 6 months. We’ve worked with firms without caps.)” – Yin Wu

Governance

74/ “The higher the frequency and quality of a young startup’s investor update, the more likely they are to succeed in the long run.” – Niko Bonatsos

75/ Five metrics you should include in your monthly investor updates:

  • Monthly revenue and burn, in a chart, for the whole year
  • Cash in the bank, at a specific date, and runway based on that
  • Quarterly performance for the past 8 quarters, in a chart
  • Target for the quarter AND year and how you are trending toward it
  • Headcount
    – Jason Calacanis

76/ Another reason to send great, consistent investor updates is that when prospective investors backchannel, you want to set your earlier investors up for success on how they pitch you.

77/ If you don’t have a board yet, still have an “investor meeting.” “Create investor meetings where you invite all your investors to do an in-person + Google Hangout’ed review every 60 days.  They don’t have to come.  But they can.” – Jason Lemkin

78/ “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” – Bob Iger

79/ “Entrepreneurs have control when things work; VCs have control when they don’t.” – Fred Wilson

80/ If an investor really wants their money back (usually when VCs have buyer’s remorse), there are times when they force you to sell or shut down your companies. Instead, ask them, “What would it take to get you off my cap table?” – Chris Neumann

Product

81/ “The ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” – Bruce Dunlevie, cited in eBoys

82/ Once you launch, you’re going to be measured against how quickly you can ramp up to $1M ARR. One year is good. Nine months is great.

83/ The more layers of friction in the onboarding process (i.e. SSN, email address, phone number, survey questions), the better you know your user, but the higher the dropoff rate. For PayPal, for every step a user had to take to sign up, there was a dropoff rate of 30%. – Max Levchin in Founders at Work

84/ “Product-market fit can be thought of as progressively eliminating all Herbies until there are no more Herbies. Then, you’re in a mode where you can invest in growth because it’s frictionless.” – Mike Maples Jr. (In the book, The Goal, the trek is often delayed by a large kid called Herbie. As you can imagine, the group only moves as quickly as their weakest link.)

85/ “There’s a ruthlessness in the way Dylan finds sources, uses them and moves on.” – No Direction Home. Be ruthless about how knowledgeable you can be about your customers, about your problem space, and about your product. The knowledge compounds.

Competition

86/ “If you patent [software], you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.” – Max Levchin in Founders at Work

87/ If you know you’re building in a hot space, and your competitors are being bought by private equity firms, share that with your (prospective) investors. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks

88/ “As a startup, you always want to compete against someone who has ‘managed dissatisfaction at the heart of their business model.” – Marc Randolph

89/ “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” – Ayrton Senna. It’s easier to overtake your competitors in tough markets than great markets.

90/ “Having a real, large competitor is better than having none at all!” – Anna Khan

Brand/Marketing/GTM

91/ If you’re a consumer product, your goal should be to become next year’s hottest Halloween costume. Your goal shouldn’t be fit into a social trend, but to define one.

92/ Don’t be married to the name of your company. 40% of NFX‘s early stage investments change their names after they invest in the seed.

93/ The viral factor doesn’t take into account the time factor of virality. In other words, how long it takes for users to bring on non-users. Might be better instead to use an exponential formula. “Think of a basic exponential equation: X to the Y power. X is the branching factor, in each cycle how many new people do you spread to. Y is the number of cycles you can execute in a given time period. The path to success is typically the combination of a high branching factor combined with a fast cycle time.” – Adam Nash

94/ In a down market, you may not need as big of a marketing budget as you thought. Your competitors are likely not spending as much, if at all, to win the same keywords as before.

Legal

95/ “Nothing is more expensive than a cheap lawyer.” – Nolan Church

The hard questions

96/ “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.” – Andy Rachleff, cited in eBoys

97/ “Inexperienced founders are usually too slow to fire bad people. Here’s a trick that may help. Have all the cofounders separately think of someone who should probably be fired, then compare notes. If they all thought of the same person…” – Paul Graham

98/ When you’re in crisis, find your OAR. Overcorrect, action, retreat. Overcorrect, do more than you think you need to. For instance, lay off more than you think you need to. Actions can’t only be with words. Words are cheap after all. And retreat, know when it’s time to take a step back. “Sometimes you just have to do your time in the barrel. When you’re in the barrel, you stay in the barrel. And then you slowly come out of it.” – Nairi Hourdajian

99/ “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.” – Tom Loverro

Photo by NEOM on Unsplash

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What It Means to be Antifragile

boxing, antifragile, resilient

The thing is this is the first real recession I’m working in. I entered the workforce something in the midst of one of the longest bull markets in modern history. So, naturally, I had a lot of questions. One of which I asked one of my mentors in VC who’s been through a few cycles late last year. “Are there any leading indicators that foretell when we’re going to get out of a recession? Or when we truly hit rock bottom in a recession?”

And he said something that made complete sense. “When the frequency of mass layoffs, especially from some of America’s largest employers, slows to a halt.”

Since then, every month or so, I check in the number of WARN notices that come in which require companies doing a mass layoff to publicly report a layoff 60 days in advance. For instance, you can find California’s here.

As Chamath Palihapitiya puts it in his 2022 annual letter, “while we believe that most of the multiple contractions in these markets have largely worked their way through the system, we suspect there is still some more room to fall — particularly if the U.S. enters a recession in the coming year.” Since it seems layoff season is yet to pass, it seems wise to buckle in for the longer run.

While friends have asked me when the recession will end, I responded with a simple “I don’t know.” No one does. And while many may make conjectures on the timing, the one thing we can use this free fall for is to build a heat shield.

I really like this one line in Chris Neumann‘s recent blogpost on antifragility. “As great as it sounds for a startup to get stronger when unexpected events occur, I don’t actually think that’s a realistic goal for most companies (it certainly isn’t the case for VC firms). Rather, I think the goal in making antifragile startups should be to minimize the risk and distraction when unexpected events occur, such that the company can continue to make progress while its competitors are panicking and reacting.” One thing’s for sure. The world is host to a plethora of distractions. Something we won’t be in shortage of. With each black swan event, we will only be left with a surplus of attention stealers.

And I’d be presumptuous to say that the best do not get distracted. Rather the best realize when they are and have ways to get back to a focused flow state. Simply put, it’s helpful to play a game of What if? What if this unexpected shock happens? How will I react when my servers get hacked? How do I react when my cash flow is constrained due to an unpredictable event? And in each broad category of What if’s, do you have a way to hedge the risk?

Sometimes, it’s preparing for the unexpected black swan event.

That’s why code is redundant to prevent the fragility of storing it only on one server.

It’s why companies like HackerOne exists.

It’s why you should have your cash in multiple bank accounts, with at least one of them being a big 4. A few top firms, including General Catalyst, Greylock, and Redpoint, have also said, “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for ‘excess cash’ to be invested in safe, liquid options to generate slightly more income.” All to protect against the downside risk of losing all your money when you put your eggs in one basket.

But when the black swan does hit, prioritization matters even more. When the pandemic hit and Airbnb was between a rock and a hard place, Brian Chesky described it, “We realized not everything mattered. And it was like if you have to go into a house — your house is burning — and if you could only take half the things in your house, what would you take?”

Chamath went on to write in the same letter. “The most alarming consequence in startup-land has been the divide it has created between the management teams who have ‘found religion’ (i.e. made the tough decisions and managed their businesses smartly) and the rest who are trying their best to avoid reality.” And those tough decisions include, “cutting non-core projects, lowering costs, and vastly reducing G&A while getting to profitability [which] is now mandatory — otherwise you will have to face the consequences.” Those same tough decisions set teams up for success in bad times and bear markets.

In closing

Recently on the Tim Ferriss Show, David Deutsch said, “wealth is not a number. […] It is the set of all transformations that you are capable of bringing about.” Similarly, a company’s revenue is not just another number. It is a product of all the miracles that the company willed into existence. Crossing the chasm. Leaping over hurdles.

To take a line out of Nassim Taleb‘s book, “Crucially, if antifragility is the property of all those natural (and complex) systems that have survived, depriving these systems of volatility, randomness, and stressors will harm them. They will weaken, die, or blow up.” We need black swan events to create miracles. And we need miracles to create stronger, more resilient companies.

Trauma strengthens us. You need to bleed to grow scars. You need to feel pain before you grow calluses. The product of each makes one more resilient to pain and injury in the future.

One might call it antifragility.

Photo by Johann Walter Bantz on Unsplash

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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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How to Develop Intuition as a Rookie Startup Investor

intuition, how to develop intuition

In the month before I started this blog in 2019, I had written 20 odd blogposts as a safety net in case I ran out of ideas in my weekly cadence. Most of which never had the chance to stand in the limelight, including my first one on intuition. Particularly, my one on intuition. Over the years, I’ve honed my own “intuition” – if I may be bold enough to call it that – on vetting startups. My intuition today is very different beast from my intuition 2.5 years back. This essay is a product of such constantly evolving self-discovery.

The spark of my intuition

When I first started my career in VC at Berkeley’s SkyDeck, I reached out to about 70-80 investors for a coffee chat, in which I posed one of my now favorite questions. What is the difference between a good and a great VC? Unsurprisingly, but frustratingly enough, most of the answers came in the form of “intuition.” Or its cousin, “pattern recognition.”

To me, who was still so new to venture, that was the best and worst non-answer I could get. Yet despite knowing that there was truth in their answer, I was still directionless. It wasn’t until an afternoon walk through San Francisco’s South Park with a very generous, but curt gentleman who carried quite the luggage beneath both of his eyes that I got the answer I wasn’t looking for.

“See a shitload of startups. When you see 10, pick your top 2. Then see 100, pick your top 2. Then see 1000, and again, pick your top 2. You’re going to notice that your podium will look quite different the more founders you meet with and the more startups you see.”

Recently, Plexo‘s Lo Toney told our fellows at DECODE the exact same thing:

And so, in hopes to guide someone in my shoes when I first started, here’s how I think about building intuition. Of course, I am a human and will always be a work in progress. It’s likely that next year I will see things differently than I see them today. Nevertheless this essay is a record of my thoughts today in early 2022.

Where to find a “shitload” of startups

There are multiple avenues these days for deal flow, including, but not limited to:

When I first jumped into venture, I used to ask my friends who I knew were early adopters (a product of going to a school in the Bay Area, like Berkeley) of products to recommend me 3-5 startups/products every other week. When they did, I would treat them out to boba. And if they introduced me to the founders for those products that I’d be excited to talk to, I’d treat my friends out to a small meal – around $10-15. At the same time, at SkyDeck, I tried to sit in on as many meetings as I could, particularly the ones around deal evaluation at the beginning of every cohort.

While I do recommend all of the above, the best training grounds for developing intuition is when you talk to founders yourself.

The five senses

Google defines intuition as “the ability to understand something immediately, without the need for conscious reasoning.”

Source: Google

So, by definition, intuition is subconscious – built upon the brain’s natural ability to recognize patterns. An apt synonym, according to the trillion-plus dollar company… “sixth sense.” A sixth sense birthed from the intense neural processing of the five other senses. So, it was only logical for me to understand the sixth sense by first fully comprehending my five others. That said, I use the five-sense nomenclature loosely, but it nevertheless has become my guiding framework for venture decisions over the years.

Smell

“I invested based on my sense of smell.” These are the very words Softbank’s Masayoshi Son shared about his early investment in Alibaba. And he said the same about his investment into Yahoo! In fairness, his words make for good PR. And may just seem like smokes and mirrors. But for Son to have chosen Jack Ma out of the 20 prospective Chinese entrepreneurs he met with to invest in, he must be onto something.

There are two ways to develop an acute sense of smell as an investor, which you can develop in tandem.

  1. Spending a lot of time looking into the market
  2. Talking to many founders

On the former, we’ve been seeing a number of funds incubate their own startup ideas as a result of investors becoming deep subject-matter experts, but are discontent with the current ideas or teams on the market right now. Two examples include General Catalyst and Founders Fund. Draw market maps. Write research reports. Follow the experts on socials or on their blogs. Even better, talk to them as well. As a general warning, it’s hard being a generalist here. I would pick a few industries and/or functions you’re excited about or knowledgeable in already. Go deep before you go wide.

A few questions that have served me well include:

  1. What kind of inflection points are we at in the market? In what areas have headwinds become tailwinds?
  2. What are the technological, political, and/or socio-economic trends to be aware of right now? And where do these trends set up the world tomorrow to be?
    • I really encourage investors here to dream a little bit. To envision a world given these trends in which you’d be excited to have future generations live in.

On the latter, while Masayoshi talked to only 20, you can assume you he went through at least ten times that number of decks and business ideas. There’s no better practice than being in the field. Assuming you’ve taken step one (i.e. researching the market), one of the best litmus tests I’ve used to gauge a founder is their ability to riff on adjacent subjects to the business with me. Are they capable of going on tangents that really demonstrate domain expertise? Or are they caught up in the myopia of just their business?

Taste

There’s two kinds of tastes in which I look for, almost subconsciously, now.

  1. Have they tasted excellence?
  2. Have they tasted blood?

On excellence, many investors out there look for prior success in the field. For instance, previously founder of a unicorn exit, early employee or key executive at a now-successful company, or former big-time investor. Admittedly, there are only a small handful of these individuals out there. But I knew in my early days of scouting, I was at a massive disadvantage here for two major reasons.

  1. I didn’t have strong connections with most of this subset of the entrepreneurial market.
  2. This was also a founder persona I didn’t have unique insight to. In fact, it was general consensus to always take first meetings with these individuals in the venture industry. And as I learned early in my venture career, you make money either if you’re right on consensus or right on non-consensus. The latter of which is counted in multiples instead of percentages, which I’ve written about here and here.

In knowing so, I look for excellence, period. Have they tasted earned glory in any discipline? Do they know what it’s like to succeed in their field? And do they know what it takes to get there? On the flip side, do they know how hard it was to get there?

On the other hand, for blood, I want to know a founder’s propensity for conflict resolution. When was the last time they fundamentally disagreed with their co-founders? And how did they resolve it? Conflicts are inevitable. They’re bound to arise when you’re putting so much at stake for a common goal. I care less about the fact that they do come up, but more about that when they do, the team doesn’t just fall apart.

Every once in a while, I might disagree with the founder as well. And hear I look for the founder’s knee-jerk reaction and their ability to engage in thoughtful discussion. That does not mean they cannot disagree. Neither am I looking for another yes-person. But are they capable of helping me, and themselves, explore new horizons? Are they open-minded enough to entertain new possibilities, but still hold a remarkable level of focus to their 12-month horizon?

Touch

How high-touch or low-touch is this business? How much legwork does an investor need to do for this business to 10x its KPIs (within the next 12 months)?

For me, during my first meeting with the founder, ideally before, I try to answer two very simple questions:

  1. What is the biggest risk of this business?
  2. And is the person who can solve this risk on the team slide/in the room?

99% of the time, the person who can solve the biggest risk of the business has to be in the room. For instance, if it’s a machine-learning (ML) product, it’s a technical risk. So at least one of the co-founders must be a technical genius, not three MBAs. If it’s a B2B SaaS product, it’s a distribution risk. Meaning someone on the team must have deep connections to key decision makers to their target customers. In the early days, that’s really just at least one to two big-name customers. And ten other referenceable businesses. The second biggest risk is sales, and that I count on the founders’ ability to hustle.

1% of the time, and this is probably an exaggeration, you just have to really believe in the founder AND the product or market.

Hearing

Do founders spend more time talking, or more importantly, listening to their customers than they do in Rapunzel’s tower?

While I don’t ask all of them (since we’re guaranteed to run out of time before we run out of topics), here are the questions I consider when assessing how boots-on-the-ground a founder is:

What are customers saying about their product? The good? And the bad?

How did they acquire their first users/customers outside of their existing first degree network? Where from? What messaging do they use?

What is their customer win rate? In knowing so, what worked and what didn’t? At what point in the onboarding process do customers churn? What are their assumptions for why churn happens?

Do they know the numbers of their business (and ideally the market) like the back of their hand? For numbers of the market, are they able to recall the sources of most important numbers? For product metrics, how well do they know the main ones, like engagement, churn, monthly growth rates (over the past 3 months), net retention, and so on? Every so often, there’s a number or two, the founders are not aware of. And it’s fine. The test is once they realize their blind spot, how quickly do they move to patch it up? Subsequently, report back to me about their updated data measurements.

Of course, my job is not to distract founders. And I really try my best not to, so I don’t ask they measure superfluous metrics, unless I really do believe they’re crucial to the business.

Because I usually talk with founders who are pre-product-market fit, I usually lead with the question, “what does product-market fit look like to you?” Are they able to arrive at an actionable and measurable metric to optimize for? And can they back up why that metric is a good proxy for product-market fit?

(In)Sight

Can this founder teach me something new? Something that I never thought of or heard before, but makes complete sense. Is it a preposterous idea but backed by logic? Or does the founder have an original (and money-making) angle to what is already unoriginal? As an investor, especially as you see more startup ideas, the latter question is likely to surface more than the former.

Once the original insight is uncovered, it is then up to me to figure out the potential energy of the insight. How far can this insight take this team? Is it likely that this insight will uncover more insights down the road?

As an investor, you want to be right on the insight and team, not one or the other. Mike Maples Jr. articulates it best when he said, “We realize, oh no, this team doesn’t have the stuff to bend the arc of the present to that different future. Because I like to say, it’s not enough. […] I’d say that’s the first mistake we’ve made is we were right about the insight, but we were wrong about the team.”

“I’d say the reverse mistake we’ve made is the team just seems awesome, and we just can’t look past the fact that they didn’t articulate good inflections, and they can’t articulate a radically different future. They end up executing to a local maximum, and we have an okay, but not great outcome.”

In closing

Seedscout’s Mat Sherman wrote a great Twitter thread last month to help founders who are outsiders raise venture funding.

The fact of the matter is that despite the venture industry being a rather well-connected circle of individuals and firms, most entrepreneurs – both currently and aspiring – are outsiders. If you can’t hit up a close friend to write you a couple million dollars, you’re an outsider. This essay, while written for new investors, hopefully, is equally useful as a guide for founders looking for some insight as to how investors think. Or at the very minimum, how I think.

Photo by Liam Shaw on Unsplash

Any thoughts here are mine and mine alone. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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Speed As A Competitive Advantage

race car

Last week, I had an incredible fireside chat with GC’s Niko Bonatsos, who has played a key role in some incredible investments, from Livongo Health to Snap to Wag! and most recently, Saturn. In all honesty, I took much of that experience to scratch my own itch. As always, we ran out of time before we ran out of topics. But I was lucky enough to ask one of which I happened to be losing sleep over. “How do you balance speed and diligence in the increasingly competitive market of venture?”

COVID changed us

In the midst of the pandemic, COVID became a forcing function for investors to deploy capital without ever meeting founders in-person. Frankly, they couldn’t meet anyone in-person. Even if they wanted to, investors, like everyone else, was subject to a series of lockdowns, curfews, and eventually the vaccine.

Yet, as life returns to a sense of normality, many investors have gotten comfortable investing virtually. And for a handful, only virtually. At the same time, in today’s increasingly competitive venture market, capital’s become more of a commodity. And I’ve heard a number of LPs find speed to be a competitive advantage. As a product of speed, investors compete on shortened timelines. It’s a given for angels and super angels out there who have to have conviction on a fairly limited set of data. But how do top-tier funds compete in that same market yet maintain the same discipline as before?

I got my answer from Niko.

“We try to pre-empt the stuff we really care about. It basically translates to us being prepared, having frontloaded a lot of the diligence for the companies and opportunities we care about. We have a more educated conversation with the founders, and are the first ones to get to a term sheet than anyone else. That’s something we do a lot more often. And we’ve leaned into seed, which is the new series A.”

Moreover, with all the diligence they do prior to sourcing, funds, like General Catalyst and Founders Fund, have started to incubate startups where they couldn’t find solutions to problems they found.

Slowing things down

Earlier this week, over a lunch, I posed the same question to Fort Ross‘ Ratan Singh, from whom I got a slightly different variation. “VCs are doing their homework before every meeting and going in with a thesis so that they can deploy fast. VCs used to play catcher and do all their homework after the meeting. But now it’s changed, so they can say yes faster.

“While speed is a differentiator, things are moving too fast today. I met every founder I’ve invested in in-person. Even during the pandemic, I invested in seven founders, and every single one I’ve met in-person.”

To which, I had to ask, “What do you find out from meeting a founder in-person that a virtual meeting lacks in?”

Without missing a beat, Ratan said, “It’s in the small things. The way they interact with their teammates. The way they treat each other. As we finish our chat and walk back to the car, are they still an intelligent being outside of the script? A Zoom call is a 30-minute scripted call. There’s a deck. There’s the presentation they prepared. An in-person interaction is more than that.”

Ratan’s comment reminded me of something Sequoia’s Doug Leone said in his interview with Harry Stebbings recently. “It takes about thirty minutes for someone to relax, which is why I refuse to interview someone for thirty minutes.” Similarly, while a 30-minute coffee chat may just be 30 minutes, the time it takes to shake hands, order your cup of coffee, have the conversation, finish it, and walk back to your car or wait for your Uber helps anyone, not just a VC, understand so much more depth to your character.

In closing

In the words of my friend Ruben:

As if he didn’t drop enough mics in our lunch, Ratan left me with one last hot take, “In VC, you’re either asked to stay, or you’re asked to leave.” In today’s ever-changing climate, having deep domain expertise and pre-empting diligence keeps you if not ahead, at least on the curve of evolution. And for many investors, it’s one of their best bets to be asked to stay – either by the firm’s senior partners or your LPs.

Photo by toine G on Unsplash

Thank you Niko and Ratan for looking over earlier drafts.

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Bigger Funds, Larger Spotlight, Bigger Mistakes

spotlight, bigger mistakes

I was doomscrolling through Twitter when I stumbled on Samir Kaji‘s recent tweet:

I’ve written before that the difference between an emerged fund manager and an emerging manager is one’s raised a Fund III and the other hasn’t.

In Fund I, you’re selling a promise – a dream – to your LPs. That promise is often for angels, founders, and other GPs who write smaller checks. You’re split testing among various investments, trying to see what works and what doesn’t. More likely than not, you’re taking low to no management fees, and only carry. No reserve ratio either. And any follow-on checks you do via an SPV, with preference to your existing LPs. You’re focused on refining your thesis.

In Fund II, you’re pitching a strategy – the beginnings of pattern recognition of what works and what doesn’t. You’re thesis-driven.

Fund III, as Braughm Ricke says, “you’re selling the returns on Fund I.” On Fund III and up, many fund managers start deviating from their initial thesis – minimally at first. Each subsequent fundraise, which often scales in zeros, is a lagging indicator of your thesis and strategy. And across funds, the thesis becomes more of a guiding principle than the end all, be all of a fund. There are only a few firms out there that continue to exercise extreme fundraising discipline in. Which, to their credit, is often hard to do. ‘Cause if it’s working, your LPs want to put more money into you. And as your fund size scales, so does your strategy.

Subsequently, it becomes a race between the scalability of a fund’s strategy and fund size.

Softbank’s mistake

In 2017, Softbank’s Vision Fund I (SVF I) of $100B was by far the largest in the venture market. In fact, 50 times larger than the largest venture funds at the time. Yet, every time they made a bad bet, the media swarmed on them, calling them out. The reality is that, proportionally speaking, Softbank made as many successful versus unsuccessful bets as the average venture fund out there. To date, SVF I’s portfolio is valued at $146.5 billion, which doesn’t put it in the top quartile, but still performs better than half of the venture funds out there. But bigger numbers warrant more attention. Softbank has since course-corrected, opting to raise a smaller $40B Fund II (which is still massive by venture standards), with smaller checks.

While there are many interpretations of Softbank’s apparent failure with SVF I (while it could be still too early to tell), my take is it was too early for its time. Just like investors ask founders the “why now” question to determine the timing of the market, Softbank missed its “why now” moment.

Bigger funds make sense

I wrote a little over a month ago that we’re in a hype market right now. Startups are getting funded at greater valuations than ever before. Investors seem to have lost pricing discipline. $5 million rounds pre-product honestly scare me. But as Dell Technologies Capital‘s Frank told me, “VCs have been mispricing companies. We anchor ourselves on historical valuations. But these anchors could be wrong.” Most are vastly overvalued, yet future successes are grossly undervalued.

Allocating $152 billion into VC funds, LPs are excited about the market activity and that the timeline on returns are shorter. Namely:

  • Exits via SPAC,
  • Accelerated timelines because of the pandemic (i.e. healthcare, fintech, delivery, cloud computing, etc.)
  • And secondary markets providing liquidity.

We’ve also seen institutional LPs, like pension funds, foundations, and endowments, invest directly into startups.

Direct Investments by Pension Funds Foundations Endowments
Source: FactSet

Moreover, we’re seeing growth and private equity funds investing directly into early-stage startups. To be specific over 50 of them invested in over $1B into private companies in 2021 so far.

As a result of the market motions, the Q2 2021 hit a quarterly record in the number of unicorns minted. According to CB Insights, 136 unicorns just in Q2. And a 491% YoY increase. As Techcrunch’s Alex Wilhelm and Anna Heim puts it, “Global startups raised either as much, or very nearly as much, in the first two quarters of 2021 as they did in all of 2020.”

Hence, we see top-tier venture funds matching the market’s stride, (a) providing opportunity for their LPs to access their deal flow and (b) meeting the startup market’s needs for greater financing rounds. Andreessen recently raised their $400M seed fund. Greylock with their $500M. And most recently, NFX with their $450M pre-seed and seed Fund III.

In his analysis of a16z, writer Dror Poleg shares that “you are guaranteed to lose purchasing power if you keep your money in so-called safe assets, and a handful of extremely successful investments capture most of the available returns. Investors who try to stay safe or even take risks but miss out on the biggest winners end up far behind.” The a16z’s, the Greylocks and the NFXs are betting on that risk.

Fund returners are increasingly harder to come by

As more money is put into the private markets, with startups on higher and higher valuations, unicorns are no longer the sexiest things on the market. A unicorn exit only warrants Greylock with a 2x fund returner. With the best funds all performing at 5x multiples and up, you need a few more unicorn exits. In due course, the 2021 sexiest exits will be decacorns rather than unicorns. Whereas before the standard for a top performing fund was a 2.5%+ unicorn rate, now it’s a 2.5% decacorn rate.

The truth is that in the ever-evolving game of venture capital, there are really only a small handful of companies that really matter. A top-tier investor once told me last year that number was 20. And the goal is an investor is to get in one or some of those 20 companies. ‘Cause those are the fund returners. Take for example, Garry Tan at Initialized Capital, earlier this year. He invested $300K into Coinbase back in 2012. And when they went public, he returned $2B to the fund. That’s 6000x. For a $7M fund, that’s an incredible return! LPs are popping bottles with you. For a half-billion dollar fund, that’s only a 4x. Still good. But as a GP, you’ll need a few more of such wins to make your LPs really happy.

I also know I’m making a lot of assumptions here. Fees and expenses still to be paid back, which lowers overall return. And the fact that for a half-billion dollar seed fund, check sizes are in the millions rather than hundreds of thousands. But I digress.

There is more capital than ever in the markets, but less startups are getting funded. The second quarter of this year has been the biggest for seed stage activity ever, measured by dollars invested. Yet total deal volume went down.

Source: Crunchbase

Each of these startups will take a larger percentage of the public attention pie. Yet, most startups will still churn out of the market in the longer run. Some will break even. And some will make back 2-5x of investor’s money. Subsequently, there will still be the same distribution of fund returners for the funds that make it out of the hype market.

In closing

As funds scale as a lagging indicator of today’s market, the discipline to balance strategy and scale becomes ever the more prescient. We will see bigger flops. “Startup raises XX million dollars closes down.” They might get more attention in the near future from media. Similarly, venture capitalists who empirically took supporting cast roles will be “celebretized” in the same way.

The world is moving faster and faster. As Balaji Srinivasan tweeted yesterday:

But as the market itself scales over time, the wider public will get desensitized to dollars raised at the early stages. And possibly to the flops as well. Softbank’s investment in Zume Pizza and Brandless turned heads yesterday, but probably won’t five years from now. It’s still early to tell whether a16z, Greylock, NFX, among a few others’ decisions will generate significant alphas. I imagine these funds will have similar portfolio distributions as their smaller counterparts. The only difference, due to their magnitudes, is that they’re subject to greater scrutiny under the magnifying glass. And will continue to stay that way in the foreseeable future.

Nevertheless, I’m thrilled to see speed and fund size as a forcing function for innovation in the market. There’s been fairly little innovation at the top of the funnel in the venture market since the 1970s. VCs meet with X number of founders per week, go through several meetings, diligence, then invest. But during the pandemic, we’ve seen the digitization of venture dollars, regulations, and new fund structures:

Quoting a good friend of mine, “It’s a good time to be alive.” We live in a world where the lines between risk and the status quo are blurring. Where signal and noise are as well. The only difference is an investor’s ability to maintain discipline at scale. A form of discipline never before required in venture.

Photo by Ahmed Hasan on Unsplash

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One of the Most Underestimated Responsibilities of a CEO

Earlier this month, I saw quite the thought-provoking tweet from Ashley Brasier.

Whether it’s a function of confirmation and availability bias or lesser-known leadership secret, I saw similar themes pop up everywhere from Phil Libin of Evernote and General Catalyst fame to Kelly Watkins at Abstract to Colleen McCreary at Credit Karma. And because of that, I thought it was a topic worth double-clicking on.

There’s the age-old saying: Leaders lead. Managers manage. And a CEO is frankly a marriage of both. While there are the canonical examples of Musk and Jobs, a CEO both leads with her/his vision but also manages expectations.

Phil Libin has this great line:

“I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company. It’ll shake it apart. In tech the hype cycles tend to be pretty intense. At mmhmm we are very much in the Venn diagram of two hype cycles. There’s a general hype cycle around video, which is going to be way up and down over the next few years. […]

“There is also a hype cycle around early and mid stage startup investment. It’s super volatile, now more than ever, because of potential changes in the tax laws, interest rates, and inflation. So you’ve got these two very volatile areas, video and startup investment, and we are sitting right in the bull’s eye of that. This means that my most important job is to isolate the team so that we don’t float based on the ups and downs of the current. Make sure we have enough mass and momentum to go through it, meaning we don’t change what we do based on the hype cycle.

“And that takes capital, which is why we have to raise some capital to do this. It also takes understanding of where you’re trying to go and knowing where you’re going is not based on the hype cycle. You have to have a long term conviction about that. You may be wrong. The conviction could turn out to be wrong, but you’re not going to know that based on day to day fluctuations of excitement or month to month. So have a clear direction of where you are going and then make sure the ship has enough momentum so it doesn’t matter what the waves are doing, you’re still going relatively straight.”

Kelly Watkins, CEO of Abstract, also said in an interview: “People might think the job of the CEO is to make a lot of decisions, but I see my job as setting the tone for the company. People look to leaders to gauge their own reactions in a situation. So if I’m running around like a headless chicken or my tone is on a really high frequency, people graft off of that.”

Similarly, I wrote an essay a year and a half ago. On Sun Tzu and how a leader’s job is setting the tone for her/his company. In short, your team follows you and is a direct function of:

  1. How much they trust you, and
  2. How well they understand a leader’s commands (the why, the how, and the what)
    • As a caveat, one might disagree with the what, and maybe the how, but a strong team believes in the same why.

In another interview, Colleen McCreary of Credit Karma once said: “Founders, in particular, are always looking to move onto the next thing, but people don’t come along the journey that quickly. So you have to slow down to be consistent, stay on message and tell employees how they’re going to define success. Because if you don’t focus on what really matters, people will hang their hat on an IPO or the stock price as being the determinant of success, and it’s just hard to unwind.”

And why does all this matter?

As Ben Horowitz wrote in his book What You Do Is Who You Are, “Culture is a strategic investment in the company doing things the right way when you are not looking.”

Photo by Antenna on Unsplash

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Why Career VCs Emerge at Fund III

fund administration fund management

Though I’ve spent a minute in venture capital, I’ve never raised a fund. So I’m not going to pretend I know everything. Because I don’t. Every single idea here is one I’ve borrowed from someone with more miles on their odometer in this industry.

When does an emerging fund manager turn into an emerged fund manager? I’ve always heard the general rule of thumb is by Fund III. But in all honesty, I took that for granted and never knew why.

I found out why this week. Samir Kaji has this great conversation on his podcast with Braughm Ricke of Aduro Advisors and former CFO at True Ventures. And Braughm says:

“The other [successful trait in fund managers] that we see a lot of is really having a defined strategy, and really sticking to it and executing on it. Straying away from your strategy is one of the best ways to create issues for you down the road. Yes, it might be successful and it might create returns for you today, but it will create difficulties down the road when you’re looking to raise that next fund. Because that’s what you’re selling to me at the end of the day.

“Fund I, basically what you’re selling is a promise. You’re selling a dream. You’re selling the concept around the strategy.

“Fund II, you’re selling the execution on that strategy. Depending at what stage you’re investing at, for the most part, you’re not going to have returns to be pointing to. You’re going to be selling your ability to execute on that strategy.

“Fund III, you’re selling the returns on Fund I.”

Samir then follows up: “Fund III’s are the hardest [to raise] because by then, it’s four, five, six years in and you have to show something. It is return-based.”

Phil Libin, co-founder and CEO of All Turtles, mmhmm, and Evernote, and former Managing Director at General Catalyst, in his recent interview with Tyler Swartz, said: “We don’t need scale to make a good product, in fact, it’s a distraction if you focus on scale prematurely.” In venture, your fund is your product. And like an entrepreneur, an emerging manager shouldn’t worry about scaling the size of their fund in the Fund I and II days. Stay small. Focus on delivering on the strategy and promise you made to your LPs. After all, it’s much easier to return a $10M fund than it is to return a $100M fund. Especially since a 3-5x multiple means you’re just average these days. As Mike Maples Jr. of Floodgate says, “Your fund size is your strategy.”

By the time you get to Fund III, you now have a track record of financial return (or not). And by then, you and the market should have a good idea if you have a longer time horizon in venture or not.

And even if not, many former VCs go back to the operating side of the table, armed with the knowledge, skills, and relationships they gain on the VC side.

Photo by Markus Winkler on Unsplash

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How to Build a Culture that Ruthlessly Prioritizes w/ Yin Wu, Founder of Pulley

Last week, I was lucky enough to jump on a call with the founder of Pulley, Yin Wu. Backed some of the best investors out there including Stripe, General Catalyst, YC, Elad Gil, just to name a few, Pulley is the ultimate tool for cap table management. In addition, Yin is a 4-peat founder, one of which led to an acquisition by Microsoft, and three of which, including Pulley, went through YC.

In our conversation, we covered many things, but one particular theme stood out to me the most: how she built a culture of ruthless prioritization.

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