In one of the recent All-In podcast episodes, Bill Gurley shared that both VCs and LPs aren’t marking down their portfolios. For GPs, inflated numbers helps you raise the next fund. For LPs, they’re given their “bonus on paper marks. So, they don’t have an incentive to dial around to their GPs and say, ‘Get their marks right.’ ‘Cause it’s actually going to reflect poorly on them if they were to roll those up.”
The last few years, enterprise value has been largely based on multiple expansion. The truth is we’re not going to see much of it in the incoming years. Even AI that’s exploding right now will see a contraction of their multiples in due time.
Companies that should not be in business today will see their ultimatum too in the next few years. Hunter Walk recently wrote “they’re 2017-2021’s normal failures clustered into current times.”
So, while some GPs do pre-emptively mark down their portfolio by 25-30% — we’re seeing this behavior more so in pre-seed and seed funds — the only people in this whole dance that are incented to mark down portfolios are new LPs trying to figure out if they want to commit to a new fund.
And while the advice applies to newer VCs, the same is true for experienced investors. Of course, most investors aim to be in the upper right-hand corner, but that’s really, really hard. In truth, most notable investors fall in two cohorts: marketers and tastemakers.
Marketers:
Share a high volume of deal flow,
Lower quality opportunities,
Have relatively low conviction on each deal compared to their counterparts, the tastemakers,
Have comparatively diversified portfolios,
And could have adverse effects on branding and positioning in the market.
Tastemakers, on the other hand:
Share a lower volume of deals,
Usually higher quality opportunities,
Higher conviction per deal,
Have comparatively more concentrated portfolios.
And the downside may simply be the fact that their volume may not warrant raising a fund around, and might be better off as an opportunistic investor.
And speaking of concentrated versus diversified, the interesting thing, as Samir Kaji shared on his recent podcast episode, is that “at 85 companies [in the portfolio], you had over 90% chance of getting a 2X. But a very low chance at getting anything above a 3X. And with smaller portfolio sizes [between 15-25 companies], there was much higher variance — both on the top and bottom. Higher chance that you perform worse than the median. But a much higher chance of being in the top quartile and even beyond that, in the top decile.”
It’s also so hard to tell what high quality companies look like before the liquidation event. Naturally, high quality funds are even harder to tell before the fund term. It’s ’cause of that that a few LPs and I wrote the post last week on early DPI. But I digress. At the end of the day, many, for better or worse, use valuation and markups as a proxy for quality.
But really, the last week’s valuation in this week’s market environment. Rather than chasing an arbitrary number, a lot more LPs when evaluating net new fund investments, and GPs making net new startup investments, care about the quality of the businesses they invest in. It’s not about the unicorns; it’s about the centaurs. The $100M annualized revenue businesses.
Samir Kaji’s words in 2022 ring true then as they do today. “Mark-downs of prior vintages are starting to occur but will take some time given valuation and reporting lags.” We’re still seeing many who have yet to go back to market. As many say, the flat round is the new up round. But until folks go back to market, there are many who won’t jump the gun in writing down their portfolio. But they are cautioning themselves, so that hopefully they won’t make the same mistakes again. The goalposts have changed.
I’m reminded of Henry McCance’s words channeled through Chris Douvos. “When an asset class works well, capital is expensive and time is cheap. What we saw in the bubble was that capital got cheap and time got expensive.”
We’re now back at a time when capital is expensive and time is cheap.
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.
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:
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:
No to little growth. Good growth is at least doubling year-over-year.
Negative or low gross margins. Good margins start at 50%.
CAC payback periods are longer than one year.
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:
If you had billboard, what 10 words describe what you do?
What insight development have you had that others have not?
How you acquire customers in a way others can’t?
Why you?
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:
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.
25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):
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)
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
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:
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?
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.
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
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
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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.
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 2016, I jumped into the VC world, knowing no better than what my forefathers and foremothers taught me. Outside of a handful few, many of the people I looked up to and sought for advice had been in the business for less than a decade. In effect, they started their investing career after the GFC (Global Financial Crisis) in 2008. While they still bore more scar tissue than I did, I learned quickly that the one question to ask founders early on was “What is your last round’s valuation?” or “What valuation are you seeking?” For the latter question, the implicit answer we sought out for was their 12-month revenue. And subsequently, their valuation multiple. In Mark Suster‘s words, we were “praying to the God of Valuation.” But really, their exit multiples matter more than the entry or current multiple.
For fund managers and partners, the question was “What is your IRR or TVPI?” or “What’s your AUM?”. Rather, the answer we should be seeking isn’t some function of their portfolio’s valuations, but the quality of the businesses they invest in.
To be fair, I failed to fully appreciate the latter answer until this year.
The odds aren’t bad, but that doesn’t mean they’re great
Jared Heyman wrote a great piece last year on the probability of success for YC startups. After parsing through the data, he found that after a couple years of survival, a startup is just as likely to go through an exit (i.e. acquisition or go public) as it is to fail (i.e. inactive). Additionally, ~88% of startups reach resolution (exit or inactive) around the 12-year mark.
It’s also interesting to note that the average time it takes for a YC company to exit (if they exit) is seven years. In fact, the time horizon has shortened in the past few years from an average timeline of nine years to five. Of course that’s pre-2022, so the time to exit is likely to increase once again to the mean or longer as:
Markets are less liquid. Valuations drop. Rounds are smaller. Buyers are less eager to buy. Founders have less access to liquidity and exit opportunities. As such, the markets will demand more proof from founders of market traction.
Investor sentiment is guarded, echoing Howard Marks. I haven’t seen the newest numbers but at best, I imagine we’ll see more capital go towards existing investments, maintaining overall investment volume. At worst, a decline of capital deployment, outside of ephemerally “hot” industries, like generative AI.
Investors’ key worry is investment losses. Investors up and downstream become more risk averse.
Interest rates are rising to curb inflation, leading to a debt investor’s market rather than an equity investor’s. Founders are likely to turn to expensive debt instruments (and many already have). Higher interest rates also mean greater return expectations from investors.
Jared does note in another piece that “while YC startups may cost 2-3 times as much as their non-YC peers to investors, they’re worth 6-7 times as much in terms of expected investor returns.” It’s great to be an LP in YC, but tough to be choosing YC startups. Of course, at the very end there’s a gentle reminder that VCs (and angels) are defined by the magnitude of their successes rather than the number of their failures (and successes). Just because a portco gets to an exit doesn’t mean it’ll be a fund returner. With shifting markets, this will be as true for YC under Garry’s leadership as for any other fund.
Of course, I don’t mean to pick on YC. They do a tremendous job of picking founders. And it’s true that they have set the golden standard for startup accelerators. It’s just that the above data was easily accessible.
Portfolio consistency
Interestingly enough, Oliver Jung, Airbnb’s former VP International, wrote half a month later that Adinvest’s Fund II made him $200 on every dollar he invested in the fund, largely because of a 1000x Adinvest II made into Adyen.
That’s a phenomenal outcome! To make investors back $200 on every dollar invested is definitely one for the books. The question becomes (and I have no inside scoop on this): How did the rest of the portfolio do? Was Adinvest’s Fund II purely based on luck or is there a consistent model that can be replicated in future funds?
For that question, it begs another. If we took out Adinvest’s investment in Adyen, what is the DPI (distributions to paid-in capital) of the rest of the fund? That will dictate Adinvest’s ability to raise a subsequent fund, at least from the larger, more sophisticated LPs. A great and consistent portfolio may look something a little like this.
Given that the average fund’s returns (with a large enough portfolio i.e. 100 portcos) normalizes to a 3x gross return — venture’s Mendoza line, 3-5x would put you in the ball park of good. High single digits would put you in the great category. And double digits would put you in epic.
And if Adyen really was the sole outlier success, did the GPs have the conviction to double down in subsequent rounds? If so, how did they earn their pro rata?
Sometimes all you need is one investment to push you from a nobody to a somebody, but if you’re intent on building a multi-decade-long career in the space, your founders should see you in the same or better light than those equipped with asymmetric information (i.e. those who read about you in the media).
While many Fund I’s and II’s may not have a reserve ratio, were the GPs and LPs able to continue to invest via SPVs? By doubling down, it’s the difference between a strategy to win and a strategy not to lose. How much of Adinvest’s AUM does their investment in Adyen account for? And being a fund manager means balancing oneself on the tightrope between the two strategies. In doubling down, that investment becomes a larger percent of the capital you manage (AUM). If you lose, you lose much more. If you win, you win a lot more.
Of course, this is true for any fund. I ended up overly picking on the case study of Adinvest to illustrate the point, but I have nothing against the great success Oliver, the other LPs and the team at Adinvest did have. On a broader spectrum, the purpose of having many shots on goal is theoretically so that you will have a few outliers. So your fund can grow based on a consistent strategy.
There are many times when all you have is that one outlier (often still in paper returns, not distributions yet). It happens. I’ve seen it happen. But if that one doesn’t work out, how forthcoming are you with your “disappearing TVPI?” I imagine a lot of investors who are planning to raise in 2023 will come face to face with these questions, having made big bets on hot startups in the last two years. Will you shrug it off? Or will you candidly share the lessons in which you learned?
The above is just something I’ve thought about a lot more as I see more emerging GP fundraising decks, as they boast about their angel portfolio (if they did have one).
In closing
There’s a proverb that goes: A broken clock is still right twice a day. You can be the worst investor out there, but with enough swings at bat, you’ll still be able to hit some outliers.
In the world of investing, you’re guaranteed to be wrong more often than you’re right. But I’ve seen many that do a lot of stuff ‘wrong’ and still have a winning fund. The big question… and the question, sophisticated and institutional LPs are asking is: Is it repeatable?
So, even if you did hit some home runs, is your success repeatable?
One last footnote. In talking with a number of investors who’ve been in the business for more than a decade, I’m starting to realize that selling (i.e. knowing when to sell and how much to sell) is just as important. An art and a science. I’ve written about it before (here and here), but I imagine I’ll revisit the topic again in long form soon. Especially as I see more discourse on the topic and funds close and liquidate in the near future. From great ones like Union Square Ventures to those who need to return some DPI to raise their next fund.
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.
I’m sure every founder has heard that line at least 50 times every time they’re in fundraising mode. Hell, even outside of it. Pshhh, I’m guilty of saying it myself, while I do try to catch myself when I do. You’d think being helpful is table stakes as an early-stage investor. Surprisingly, being helpful as an investor is actually a huge differentiator.
Most investors are only as helpful as their check size, despite pitching their value-adds a million and one times. Some investors are extremely helpful only within the funding window(s) they are participating in. For instance, a seed investor is largely helpful during the 12-18-month funding window between the seed and the Series A. Others are helpful when they are asked. And a small handful of investors are true champions by being proactively helpful.
One of my favorite stories when I was interviewing LPs for the emerging LP playbook was when Brent invested in a GP who had a track record for being proactively helpful. This GP “was one of [Brent’s] first investors. He would often come into our office, and without being prompted, proceed to write code against our APIs.” Unprompted. Unsolicited, but insanely helpful.
Earlier this week, I was also reading the October investor update from a founder I love, and in it, he was talking about how much he loved the team at Sequoia (who have yet to invest), and shared that he had learned more about product in the last “3 days than [he had] in the last 3 months.”
A big part of the reason I joined the On Deck Angels team last year was to be a part of a community bringing the world’s most helpful investors together. As such, I’ve been lucky enough to be a student to our community on how they’re helpful — whether they choose to invest or not. Some examples include:
Writing a 3-5 page bug report for every founder you take a meeting with. This teaches an investor two things: 1/ to be judicious of one’s time and only take meetings with founders that you are truly likely to invest in, since these take a while to research and write up, and 2/ to always think in a “give first” mentality.
Record a Loom breakdown of why you decided to pass and what would get you over the fence. I’ve shared this before, but one of my favorite VC quotes and has been since the day I learned of it is: “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
Being able to admit how you can’t be helpful. As an investor, you don’t have to be good at everything, just really, really good at one thing, or a small handful of things.
Sharing their memos publicly on why they’re excited about a startup. This helps build a startup’s reputation, and also your own brand as a thought leader.
Sharing your deal memos and founder asks with your LPs (if you run a fund or syndicate). For this, admittedly, it’s best to get the founders’ approval, given the confidential nature of certain details.
Make an intro for every pitch meeting you take. Intros are often extremely high leverage. It takes you 1-2 minutes to write something up and send a double-opt-in intro. And oftentimes, can save the founders from at least tens of thousands of dollars worth of decision-making mistakes or costs. Of course, that requires you to have either photographic memory (which I don’t have) or a really good CRM. For the latter I use Airtable, and I track small details like: ideal catch-up frequency, preferred medium of communication, chill factor (yes, some of my intro emails can get a bit wonky depending on the person), and what makes them the best dollar on a founder’s cap table.
Many of the above aren’t necessarily hard to do, but just requires a consistent commitment to do them well. And of all the many ways one can help, they all fall into three buckets:
Introductions
Strategy, decision-making, and tactical advice
Downstream and co-investment capital
The last is the most obvious. The second is easy to understand, but often the hardest to execute on, and often comes from being an active or former operator yourself. Hunter Walk of Homebrew has this line, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.” Advice is just as helpful as it is dangerous. Something I’ll likely dive into in a future blogpost.
But for the purpose of this one, I’ll focus on introductions.
Network liquidity
I was recently reading Shawn’s chronicled reflections from his time as a Partner at On Deck — someone I am deeply fortunate to have worked alongside. In it, one line immediately grabbed my attention:
“Network liquidity is table stakes. […] This refers to how successful we are at connecting founders to people that are relevant to their needs and asks. The most important dimensions to consider are accuracy (how relevant was an introduction) and speed (how fast did you deliver).”
In 2022, and I imagine even more so, in the next few decades, it’s not about who you know — ’cause frankly, everyone will know everyone else. Social media, the metaverse, web3, the Zoom-ification of everything, and the rush back to IRL will only make this easier. I don’t believe any investor — or in fact, anyone, period — will have a “proprietary network.” So instead of who you know, it’s about how well you know them, and your ability to leverage that relationship.
We see this especially in the venture markets. In my recent blogpost, Sapphire’s Beezer shared: “We have felt for a number of years now (including pre-COVID) that the concept of ‘proprietary deal flow’ is not really a thing. Proprietary access however is something we think is true, powerful and not simple to achieve (hence why powerful ).”
I wrote quite a relevant essay a few months ago about how to write email forwardables. In order to tap into someone else’s network liquidity, there are two things you must establish:
Your rapport with the person you’re asking it from
Their rapport with the person you want to get to know
Requester and matchmaker rapport
I can’t speak for everyone, but my willingness to make intros depends strongly on both of the above, especially the former. Selfishly speaking, even if I don’t know the person who will receive the intro nearly as well, to put it bluntly, if I know I can look good to that person when I make it, that’s a strong motivator to do so. For that to happen, I need to fall in love with something about you — the person who would like to be introed. It could be you (usually the greatest motivating factor) and your passion. Even better if your passion is contagious. It could be your product. Or your insight. Usually, it’s some permutation of the afore-mentioned.
I meet with 10-15 net new founders per week. 25-30, if it’s accelerator season. Given my job description, almost every single founder asks me for intros. Sometimes, even without context.
Matchmaker and intro recipient rapport
The other side of the equation is the rapport I have with the person you want to get to know. The truth is the world of intros is like any other asymmetric game. The most well-known, busiest, and often hardest-to-reach people are the ones bombarded with the most intro requests. But like any other human being on this planet, they only have 24 hours in a day.
As a matchmaker myself, I have to cognizant not to overwhelm incredibly busy individuals with a flood of intro requests. And it is my job to triage requests. Sometimes, it’s also helping, in the case of fundraising, founders recognize not what they say they want, but to help them figure out what they really need.
In making requests to famous friends
There are times when the busiest people I know are the only people are capable of fulfilling the ask. So, it also comes down to your accumulation of social capital with the intro recipient. I have two columns in my Airtable CRM, labelled:
Why I am useful to them
Is my usefulness a priority to them? (on a scale of 1-5)
With the former, have I given before I have taken? Have I helped them before? Additionally, is the intro request more of a give or a take? A great startup with a strong team and traction for an investor is more of a ‘give.’ It’s deal flow from them. On the flip side, a founder asking for free advice is more of a ‘take.’ In general, ‘takes’ require more social capital than ‘gives.’
With the latter, priorities change. You may be useful in one phase in their life, but no longer so, in another. For example, when an emerging manager is fundraising for their Fund I, I am someone who is extremely top of mind for them, but when they’re not, I slip in importance. But regardless of the phase in their life, if someone is kind and thoughtful AND you’ve helped with a major decision or inflection point in their life, they’ll always be around. That said, I never try to abuse that goodwill. Personally, I hate being in debt and having others be in my debt.
You can also be “useful” in many different ways. For instance, doing interesting things is one way. One of the most famous people I know with millions of followers across his socials is willing to entertain any ask I ask of him under the condition I invite him to every social experiment I host in LA.
In closing
The more relevant an ‘ask’ is to the recipient, the more likely they’ll respond positively. The more top of mind you are and the more social capital you have with someone, the faster they’re likely to respond. We live in a saturated market of attention. Everything in the world is asking for ours — social media, kids, friends, work, portfolio companies, chores, Netflix, and sleep. And by no means all encompassing.
As you scale yourself as an investor, it’s important to think critically about who is in your network and how well you know them. If you’re a syndicate lead with 500 LPs, how many of them are passive capital? How many of them want to actively help your portfolio?
If you’re an investor who’s a Xoogler and wants to leverage the Google network, who do you know will go out of their way to help you? How many of them have you on speed dial? Which vintage were you a part of?
The great Richard Feynman once said, “You must not fool yourself, and you are the easiest person to fool.” One of the greatest fallacies an investor or even a founder can make is to assume they have a larger leverageable network than they actually do. Only to realize that when you do need to draw on these connections, you’re unable to.
So, if you have the time this weekend or the next, sit down with a critical eye and ask yourself: How liquid is your network?
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.
Over the week, I was revisiting some of the Instagram posts that I had saved over the years, and I re-discovered one of my favorites by Christoph Niemann sharing his kudos to the late Kurt Vonnegut.
Most of all, Vonnegut’s advice on writing applies just as much to other forms of storytelling. And if you know me, I was immediately reminded of pitching.
Teach your investor something they didn’t know before.
A lot of investors claim to be experts, and even more are seen as experts. Too often, founders blindly listen to what their investors tell them to do. As Hunter Walk of Homebrew once said, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
YouTuber Derek Muller just came out with a great video on the ideal variables that manifest expertise. Two of such variables are:
Valid environments – environments that are predictable and have minimal attribution to luck
Quick feedback loops
The problem with venture is that our feedback loops are incredibly long and drawn out. Oftentimes, it takes 7+ years to fully realize any kind of financial outcome, although there are many red herrings of outcomes in between, like new funding, brand-name investors, users (rather than customers, or people who actually pay for your product), mass hirings, and so on. Because our feedback loops are slow and luck plays a huge role in success, it’s hard to differentiate true experts in the field. All that to say, every investor is learning to be better, to have more data, to make better judgments than the next.
And if you can show that you know something worth our time again and again, it’ll be worth paying our tuition money to you.
That said, I don’t want to discount how some investors can be really helpful in particular areas that have valid environments and fast feedback loops. For instance, code, A/B testing distribution strategies, ability to help you raise your next round within a certain timeframe, or get you into Y Combinator. The determinant of success in the afore-mentioned has clear KPIs versus their own financial success in the fund.
Give the listener someone to root for.
Aka you. Why you?
Mike Maples Jr. once 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.”
There’s a category of founders that are going to win no matter if an investor chooses to invest or not. Most typically like riding this train. They have to do little to no work to be recognized as a great investor.
Then, there’s the cohort of founders that may or may not win on their current idea, but their investors really, really, really want these founders to win. These founders are the underdogs. They’re also the ones with often the craziest of ideas. Even more so, they’re the ones that if they win, these founders will redefine the world we live in today.
As a founder, you have two jobs when fundraising:
You need to find the partners who really, really want you to win. As the great Tom Landry says, “A coach is someone who tells you what you don’t want to hear, who has you see what you don’t want to see, so you can be who you have always known you could be.”
You need to give these partners the ‘why.’
And I promise you that ‘why’ is not because of straight facts, but because of a story. Why should people help you get what you deeply want?
Every character should want something, even if it’s a glass of water.
Speaking of what you deeply want, almost every founder I chat with pitches me their raison d’etre. A selfless reason to cure the world of cancer. Metaphorically speaking, of course. That’s cool. You can tell that to the press. It’ll make great PR.
Rather I care about the exact opposite. What is your selfish motivation? This is a question I personally like asking founders. Your selfless motivation keeps you going during the day, during peace-time, when things are going just right. Your selfish motivation keeps you up at night, when s**t gets tough. When no one else believes in you except for yourself.
I want to know that you want that so badly, that you’re able to go the distance. And if that same thing is something that your investor can relate to, then you have a match made in heaven.
Every sentence must do one of two things — reveal character or advance the action.
Let me revise the above. Every slide must do one of two things — reveal character or advance the action. Anything else is superfluous. That means, outside of your core slides — problem, solution, action plan/financial projections, rising conflict (aka competition, blockers and risks), and your team slide, everything else is superfluous. Or at least, save it for your data room.
I’m sure some investors would debate me on this, but every investor has a slightly different framework. The above is my own perspective. That said, every slide should give an investor 10% more conviction towards investing in your business — capping out at 70%. ‘Cause after 70, any additional information (in the first meeting) has diminishing returns.
Start as close to the end as possible.
No investor cares about which hospital you were born in, but they do care about when the fire first started. And they care about your inflection points, even if that’s still ahead of you.
Be a sadist. Show awful things that happened to the characters.
Grit is one of the hardest founder traits to measure over a 30-minute meeting. Even after prolonged and deliberate interaction, most of the time it’s still hard to grasp this amorphous quality. But if you ask most investors what is the number one trait of a great founder, it’s either grit or passion. The latter of which often serves as a proxy to grit.
If you’re regular here, you know one of my favorite quotes of late is Penn and Teller’s. “Magic is just spending more time on a trick than anyone would ever expect to be worth it.“
Past performance is not a predictor of future progress. But it really does help. A lot. In a startup’s lifespan to becoming a leading business, there are 10-15 trials by fire. And for each one of those, the founders are required to pull off nothing short of a miracle. In fact, this next year will be exactly one of those tribulations for 99.9% of companies.
So, show moments in your life where you were able to pull off a miracle. And a miracle, by definition, is when the odds are heavily stacked against you.
Show excellence. Walk your listeners — your investors — through the journey of how you tasted glory. How you were able to achieve the seemingly impossible. Personally, this is why I love backing professional athletes, veterans, and chefs. Three fields (of, I’m sure, many more) that you really need to eat s**t to be one of the greats.
Write to please just one person. Don’t get pneumonia.
Every pitch should be tailored. Why would this investor be the best dollar for your cap table?
No investor (even if it’s true) wants to be just another investor. They want to be THE investor. Make them feel special. When you propose to your partner for marriage, you tell them why they’re the one for you, not why you’re the one for them. You get down on one knee and tell them why they are amazing. Not the other way around.
Give your readers as much information as possible as soon as possible.
The one-liner matters. It is the first point of interaction with your startup, and oftentimes, may be the last. Don’t shroud it in mystery and jargon. If you’re ever stuck here, remember Brandon Sanderson‘s First Law of Magic:
“Your ability to solve problems with magic in a satisfying way is directly proportional to how well the reader understands said magic.“
Equally so, the subject line of a cold outreach email serves the same purpose. This is especially true, when you’re reaching out to someone who you can reasonably assume has hundreds of emails in their inbox per week. For reference, and for the most part I’m a nobody compared to the partners at a16z of Lightspeed or Benchmark, and I get about 50 cold inbounds per week.
So, in my opinion, your subject line should have no buzzwords (well, because everyone’s using them). Think of it this way. Say you’re an author selling your new self-help book. And say your greatest distribution channel are likely bookstores in airports. If everyone in the self-help section has an orange cover with bold blue words, you want to be the one black and white cover book. And if everyone has black and white sleeves, you bring out the neons.
In the context of email subject lines, instead, you should include numbers. What is the one metric that you are killing it at? Just like what I recommend folks write in their email forwardables. Instead of “Invest in the Leading BNPL Solution in Latam”, use “BNPL startup growing 50% MoM”. Give the exact reason why your investor should be excited to invest in your company. Don’t save it behind eight clicks — Email, Docsend link, and another six clicks to get to the slide of importance.
People can only tell different, not better, unless it’s 10x. Mediocrity is a crowded market, so don’t waste your time there. Taking a quote out of Pat Riley‘s book, “You don’t wanna be the best at what you do; you wanna be the only one who does what you do.”
In closing
Storytelling is an emotional discovery. The facts don’t change, but a great pitch or story weaves seemingly disparate facts into a compelling narrative. One that inspires action and draws curiosity. In a saturated world of attention, you are fighting for minutes if not seconds of someone’s time. Make it valuable.
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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.
“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”
“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”
“I don’t think we’ll make it, David. How do we break it to our team?”
It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.
Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.
Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.
I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:
Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.
Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!
To preface, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
On fundraising…
1/ Some useful benchmarks and goals for stages of funding:
<$1M: pre-seed
Find what PMF looks like and how to measure it
$1-5M: seed
$2-4M – you found PMF already and you’re gearing up to scale
$5M – you’re ready for the A
$5-20: Series A *timestamped mid-2021, your mileage may vary in different fundraising climates
2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly. *timestamped mid-2021, your mileage may vary in different fundraising climates
3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.
4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.
5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.
6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys *Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.
7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?
Pitch deck + appendix slides
Current round investment docs
Use of funds
Current and proforma cap table
Pilot usage data, if any
References + links to everyone’s LinkedIn:
Key members of management
1-2 customers, if any
1-2 investors, if any
Financials: annual + YTD P&L + projections
Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
List of all FAQ investor questions throughout the fundraising process
Press, if any
Legal stuff: Patents, trademarks, IP assignments, articles of incorporation
8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.
9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.
10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.
11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.
12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“
13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.
Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.
It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.
14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.
15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitorslides.
16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.
17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.
18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”
19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.
20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.
21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.
22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.
23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.
24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.
25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.
26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky
27/ If you want money, ask for advice. If you want advice, ask for money.
28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.
29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.
30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.
31/ A good distribution of your company’s early angel investors include:
32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.
33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao
On managing team/culture…
34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)
35/ Please pay yourself as a founder. Some useful founder salary benchmarks:
Seed stage – lowest paid employee
Series A or when you find product-market fit (PMF) – lowest paid engineer
When you hit scale – mid-level engineer
When you’ve reached market dominance – market rate pay for CEOs
If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again
36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.
One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eaterinterview, time-stamped at the start of the pandemic.
37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.
38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libinbefore, when he said, “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.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.
39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.
40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.
41/ James Currier has a great list of ways to compensate your team and/or community.
Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
Cash (e.g. USD, EUR)
Equity shares (traditional)
Discounted fees
Premier placement and traffic/attention
Status symbols
Early access
Some voting and/or decision making, ability to edit/change
Premier software features
Membership to a valuable clique of other nodes
Real world perks like dinner/tickets to the ball game
Belief in the mission (right-brain, intrinsic)
Commitment to a set of human relationships (right-brain, intrinsic)
Tokens (fungible)
Non-Fungible Tokens
42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.
43/ “Outliers create bad mental models for founders.” – Founder Collective
44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.
45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.
46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.
47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.
48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.
49/ “The founder’s job is to make the receptionist rich.” – Doug Leone
50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.
52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.
53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.
54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.
55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.
56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.
57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.
58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.
59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.
On governance…
60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.
61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.
62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.
63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.
64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:
(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation) *based on what you believe their salary would be **typically 1-2 years
65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.
66/ Monthly/quarterly investor updates should include, and probably in the below order:
Your ask
Brief summary of what you do
Key metrics, cash flow, revenue
Key hires
New product features/offerings (if applicable)
67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.
69/ “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.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.
70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman
71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.
72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.
73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”
74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham
On building communities…
75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.
76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”
77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.
On pricing…
78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?
Customers will try to negotiate for earlier renewal, longer contract periods.
When you waive the price increases, customers feel like they’re winning.
You can upsell them more easily to more features.
79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.
80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.
On product/strategy…
81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:
Product discipline, through priorities, where company leaders have to think months in advance for, and
Expectations and motivates team members to help showcase a new product.
82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.
83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.
84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.
85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
86/ Good founders are great product builders. Great founders are great company builders.
87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.
88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani
89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.
90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.
91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”
92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.
93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.
For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.
94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.
On market insight and competitive analysis…
95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.
96/ Have a contrarian point of view. Traits of a top-tier contrarian view:
People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
It’s iterative. Be willing to change your mind when the facts change.
97/ Falling in love with the problem is more powerful than falling in love with the solution.
98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.
99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
A few Fridays ago, I had the fortune of reconnecting with a founder, backed by some of the most recognizable names in the Valley and exited his business last year to a juggernaut in the data space. Now working on his second startup. And he brought something extremely curious to my attention. “Investors shouldn’t be too founder-friendly.”
I’ve talked to hundreds of founders and seen thousands of pitch decks in my short 4 years in venture capital. Yet, that Friday was the first time I’d ever heard that. And it was too bizarre for me not to double-click on. The fact that the sentence also came out of a founder’s mouth and not an investor’s bewildered me even more.
