Tag: idea market fit

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The Puzzle Pieces

In the first decade of my life, my parents used to buy me different kinds of puzzles – from the Rubik’s cube to beautifully intricate LEGO sets to Luban locks. One of my favorites has always been these thousand-piece puzzles. Every time I poured those pieces out of the box, they scattered across our carpet like tiny ants scrambling to find meaning. I loved putting the puzzle together having only seen the completed image once – when I opened the box. That probably, at most, left a three-second impression in my mind. How awesome would photographic memory be. But alas, it wasn’t something I’d been blessed with. I only found out years later from friends that it wasn’t normal. That said, I imagine I took much longer than most people to piece together the whole puzzle.

Fresh out of the box, I start off knolling the various incongruous shapes. Like most others, I’m looking for similar designs, colors, lines, images – anything. Trying to make sense of disparate pieces. Frankly, I was drawing parallels wherever and whenever I found them. A more mature me would call it – pattern recognition.

As I progress, I spy colonies of color form in different areas on the living room floor. And therefore, try to see if any colonies, together, would tell a more robust, vibrant story. Sometimes I was right. Sometimes I was wrong.

As I near the end of the puzzle, I see everything come together. I’m not gonna lie. It’s extremely gratifying to see the rough picture in my head come to life. Often times, the final image has minor deviations from the loosely-defined vision I had when I started.

You probably caught on

You’re smart, and you probably guessed what I was trying to get at before you even finished reading my anecdote. And you’re right. In many ways, this puzzle journey is very similar to building a company. You start off with an idea, constructed upon anecdotal patterns you’ve seen in the world you know. And as you build the idea and talk to customers – other nearby pattern aggregations – you start to piece together a larger and more concrete goal. By the time you reach scale, you’re filling in the little details – the extra puzzle pieces – you missed when focusing on the more holistic vision. The little details of debugging, solving edge cases, and improving the user experience.

Listen to the silence

The initial idea comes from recognizing the patterns around you. Both what is being said, and what isn’t. Both what is there and what could be there.

One of my favorite stories on pattern recognition is about Abraham Wald, a Hungarian-Jewish mathematician and statistician, who’s credited with saving the lives of numerous pilots and airmen during WWII. Tasked with aircraft armor repair, Wald, then a faculty at Columbia University, was given a number of data points on bullet holes in the fighter planes that returned to base. Most were around the fuselage and a few around the motors.

As one would expect, the military anticipated to double down armor around areas with the most damage – the fuselage. But Wald took a different angle. Reinforce the plate metal around the motors, rather than the fuselage. Because the planes that didn’t make it back most likely had bullet holes where the planes that did make it back didn’t.

Listen to the sound

Sometimes you’re right. Sometimes you’re wrong. And if you’re wrong, follow the breadcrumbs of your market. Notice what their use cases are and how they’re spending their time. Even better if they’re developing hacks to circumvent the early inefficiencies of your product. What features or problems are getting a lot of attention?

For instance, Stewart Butterfield didn’t start off with the idea for Slack. After selling Flickr to Yahoo! and working at Yahoo! for three years after, he started with Tiny Speck, a gaming startup that raised $17M in venture funding to build Glitch. Unfortunately, it didn’t take off, outside of its cult following. But what did stick was the tool Stewart and his team had been using to chat in real-time with each other. Less than a year after it officially launched, it hit a $1B in valuation. Six years later, it became Salesforce’s biggest acquisitions at over $27B. And history is still being written.

Similarly, Kevin Systrom didn’t start off with Instagram. But rather Burbn – a location-based check-in app. Users would check-in, plan future meetups with friends, share pictures of their meetups, and earn points in the process. Unfortunately, the app was too complicated for the average user to use. After bringing on Mike Kreiger and analyzing how their users were using the app, they realized most of their traffic happened around posting and sharing photos. Scrapping everything else, they focused on their biggest use case – photo-sharing. And well, they were right on the pivot. In 2012, right before Facebook’s IPO, Facebook acquired Instagram for $1B. It was big then, but as we all know now, it’s even bigger now.

Back in 2012, Kevin once said, “It’s about going through false starts… Brbn was a false start. The best companies in the world have all had predecessors. YouTube was a dating site. You always have to evolve into something else.”

In closing

I love people who binge. It’s a sign that they capable of going all in and more on something they’re passionate about. I, myself, have binged time and time again on puzzles, shows, books, passion projects, and more. For Stewart, it was games. For Kevin, it was whiskey and bourbon. On the other hand, for Abraham, I can’t quite say. I have no idea if he was into plate armor or planes, but whether he liked it or not, he probably spent sleepless nights on it.

And in the process of binging, if you keep my mind and my senses open to inspiration, you may uncover some patterns in the mix. ‘Cause if you’re going to notice what’s being said and not said between the lines, you’re going to have to be in deep. Deep enough to take your breath away, but not deep enough to take your sight away.

Photo by Ross Sneddon on Unsplash

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Expert + Reasonable + Crazy Idea = Crazy Good

The amazing Paul “PG” Graham came out with an essay this month on crazy new ideas. And the thing I’ve learned over the years, being in Silicon Valley, is if PG writes, you read. In it, one section in particular stood out:

“Most implausible-sounding ideas are in fact bad and could be safely dismissed. But not when they’re proposed by reasonable domain experts. If the person proposing the idea is reasonable, then they know how implausible it sounds. And yet they’re proposing it anyway. That suggests they know something you don’t. And if they have deep domain expertise, that’s probably the source of it.

“Such ideas are not merely unsafe to dismiss, but disproportionately likely to be interesting.”

I’ve written a number of essays about crazy ideas. Here. Also here. The last of which you’ll need to Ctrl F “crazy”, if you don’t want to read through all of it. And also, most recently, here. But that’s besides the point. The common theme between all of these is that crazy ideas are not hard to come by. Crazy good ideas are. Good implies that you’re right when everyone else thinks you’re crazy. When you’re in the minority. And the smaller of the minority you are in, the greater the margin on the upside. Potential upside, to be fair.

As investors, we hear crazy pitches every so often. David Cowan at Bessemer even wrote a satire on it all. For the crazy pitches, go to episode five. The question is: How do we differentiate the crazy ideas from the crazy good ideas? But as PG says, if it’s coming from someone we know is a subject-matter expert (SME) and they’re usually grounded on logic and reasoning, then we spend time listening. Asking questions. And listening. ‘Cause they most likely know something we don’t.

That was true for Brian Armstrong, who recently brought his company, Coinbase, public. He worked on fraud detection for Airbnb in its early days prior. And he knew he was getting into the deep end with crypto back in 2012. But he realized how unscalable crypto transactions were and how frustrated he was. Garry Tan, then at YC and part-time at Initialized, saw exactly that in him. A reasonable SME with a crazy idea. Garry just released an amazing interview between him and Brian too, if you want to tune into the full story.

What if some of the variables in the equation are missing?

But most of the time the founders you’re talking to aren’t subject-matter experts with deep domain expertise. Or at least, they haven’t left an online breadcrumb trail of whether they’re a thought leader or if they’re reasonable human beings. So subsequently, in the little time I have with founders in a first or second meeting, I look for proxies.

For proxies on domain expertise, I go back to first principles. What are the underlying assumptions you are making? Why are they true? How did you arrive at them? What are the growing trends (i.e. market, economic, social, tech, etc.) that have primed your startup to succeed in the market? Does timing work out?

To see if they’re “reasonable” under PG’s definition, I seek creative conflict. How do you disagree with people? If I brought in a contrarian opinion you don’t agree with, how do you enlighten me? How do you disagree with your co-founders?

In closing

To be fair, we’re not always right. In fact, we’re rarely right. On average, in a hypothetical portfolio of 10 startups, five to six go to zero. One to two break even. Another one to two make a 2-3x on investment. That is to say, they return to the investor $2-3 for every $1 invested. And hopefully, one, just one, kills it, and becomes that fund returner. Fund returner – what we call an investment that returns the whole fund and maybe more. Of course, every time a VC invests, they’re aiming for the fences every time. As a VC once told me, “it’s not about the batting average but the magnitude of the home runs you hit.” And even in those 10 investments, it’s a stretch to say that all of them are “crazy” ideas.

But the hope is that even if we’re wrong on the idea, we’re right on the people.

Photo by Àlex Rodriguez on Unsplash

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The Fastest Way to Test a Startup Idea

Last week, I reconnected with Shuo, founding partner of IOVC, and one of the first people I reached out to when I began my career in venture. That day, I asked her a pretty stupid question, “Given the rise of solo capitalists, rolling funds, equity crowdfunding, and the democratization of capital, do you think now’s a good time to raise a fund?“

She replied, “I don’t know. It could be a good time now. It could be a good time five years from now. If you’re set on sticking around for the long term, it really doesn’t matter. ‘Cause whether it’s a good time or not, you’re going to be raising a fund regardless. So just do it.”

Not gonna lie, it was serious wake-up call. While I was initially looking for her perspective on the changing venture market, what she said was right. If you’re set on doing something, say starting a fund or a business, the “right time” to start is irrelevant. The world around us changes so much so frequently. We only know when’s the right time in hindsight. So focus on what we can control. Which is starting and doing.

So as an aspiring founder, which idea do you start with? And how do you test it?

Starting a business is scary

Starting a business is scary for most people. And well, the government doesn’t always make it easy to do so. Just like what WordPress and Squarespace did for websites, you have companies, like Stripe (and their Stripe Atlas), Square, Shopify, Kickstarter, just to name a few, streamlining the whole process for entrepreneurship. For an aspiring entrepreneur, not only is it taking that leap of faith, before you begin, there’s a slew of things you have to worry about:

  • Figure out how to incorporate your business (C-corp, LLC, or S-corp),
  • Assign directors and officers to your business,
  • Buy the stock, so you actually own your stock,
  • Learn to file your taxes (multiple forms, including your 83(b) election),
  • When you raise funding, get a 409A valuation,
  • And that’s just the beginning.

Of course for the above, do consult with your professional lawyer and accountant. It’s two of the few startup expenses I really recommend not skimping on. While the purpose of this post isn’t designed to solve all the documents you’ll have to go through in starting a business, hopefully, this will help with one front – taking that leap of faith. Specifically finding early validation for your idea.

The superpower of writing

I stumbled on Max Nussenbaum‘s, who’s leading On Deck‘s Writing Fellowship, provocative tweetstorm:

He boils it down to, effectively, four reasons:

  1. You can test the validity of an idea faster by writing than with code.
  2. Writing well trains your ability to sell.
  3. Publishing regularly gets you comfortable with shipping early and often.
    • To which he cited one of my favorite Reid-isms: “If you’re not embarrassed by the first version of your product, you’ve launched too late.” – Reid Hoffman
  4. Writing is easier for most people to pick up than coding.

There’s a “5th reason” as well, but I’ll let you uncover that yourself. Talk about creativity. Side note. Max created one of my favorite personal websites to date.

Much like Max, I write to think. And in sharing my raw thoughts outside of the world of startups via the #unfiltered series, often far from perfect, as well as my take in this fast-changing universe, my cadence of writing twice a week has forced my brain to be accustomed to the velocity of growth. In the sense, I better be learning and fact-checking my growth week over week. Over time, I’ve developed my own mental model of finding idea and content catalysts.

Of course, if you know me, I just had to reach out. Particularly around the third point in his tweetstorm.

What mental models or practices did he use to help him wrestle with his embarrassment from his own writing? And he replied with two loci that provided so much more context:

  1. “Reading other writers who open up way more than I do, which makes what I’m doing feel easy by comparison. Two favorites I’d recommend are Haley Nahman and Ava from Bookbear Express.”
    • And another I binged for an hour last night. Talk about counterintuitive lessons. My favorites so far are Stephen’s 12th and 16th issue. You might not agree with everything, but he really does challenge your thinking. Thank you Max for the rec.
  2. “Publicly committing to writing weekly and finding that the embarrassment of publishing was outweighed by the embarrassment I’d feel if I missed a week. Also, like all things, I’ve found it very much gets easier with practice.”

Why not both?

Then again, why not both? I go back to Guillaume‘s, founder of lemlist, recent LinkedIn post. He says:

And he’s completely right. If I were to analogize…

Writer = common
Writer + coder = uncommon
And… writer + coder + X = holy grail

You don’t have to own one unique skill. And in this day in age, there aren’t that many individually unique skills out there that haven’t been ‘discovered’ yet. Rather than search for the singularly unique skill that you can acquire, I’d place a larger bet on a combination of skill sets that can make you unique. As a founder, test your ideas early with writing. If there’s evidence of it sticking, build it with code. And it doesn’t just to be just writing and code, whatever set of skills you can acquire more quickly and deeper with the circumstances and experiences you have. Even better if there’s a positive flywheel effect between your skills.

In closing

There’s a Chinese proverb that goes something along the lines of, “The best time to plant a tree was 20 years ago. The second best time is now.” And it circles back to Reid’s quote that Max cited, “If you’re not embarrassed by the first version of your product, you’ve launched too late.” As an entrepreneur, or as an emerging fund manager, it’s a given you’re going to mess things up. But all the time fretting around at the starting line is time better spent stumbling and standing back up.

I followed up with Shuo after our call, and she elaborated a bit more, “In all honesty, you can argue now is a good time (a lot of capital available for good managers) or a bad time (valuations are frothy), but in the long-term, these variables even out and it’s how you add value as an investor that’s most important.”

If I were to liken that same insight to aspiring entrepreneurs… Yes, investors look for timing. And yes, understanding the timing of the market is important, when you’re launching a product that will revolutionize the way we live in a fundamental way. But that boils down to which idea you plan to pursue. But if you’re looking to be a founder, it’s finding that overlap in the 3-way Venn diagram between (1) what the market needs and (2) where you, as the founder, can provide the most value. And (3) where your competitors are not maximizing their potential in.

For many aspiring founders, that first step can be practicing the art of writing. Writing for clarity. Writing to practice selling. Learning to ship early and embracing imperfection. Frankly, it’s also something I need to get better at myself.

Though I’m not a religious fellow, I’m reminded of a quote from Jesus’ teaching, which I first found in Jerry Colonna’s book, Reboot. “If you bring forth what is in you, what is in you will save you. If you do not bring forth what is in you, what is in you will destroy you.” Writing is that act of bringing forth what is in you. And well, if you’re like me, I often find my greatest regrets come from a lack of action rather than in taking action.

If you’re looking for a place to start…

Top photo by Cathryn Lavery on Unsplash

Thank you Shuo and Max for reviewing early drafts of this essay.

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Being the Only > Being the Best

crown, being the only, startup, marketing

This week I revisited David Sacks’ essay Your Startup Is a Movement. It was first brought to my attention during my conversation with Yin Wu, founder of Pulley. And again, with a friend who recently jumped into venture after an operating career, particularly around the topic of our investment theses. Our conversation underscored his fourth point in his Movement Marketing playbook.

david sacks, craft ventures, your startup is a movement, category leader
* Excerpt from David Sacks’ Your Startup Is a Movement

It’s much easier to compete in the market of one – the only one – than in a market to be the best one. As some VCs call it, companies that are “allergic to competition.”

Why?

The goal for any startup is to achieve product-market fit before your competitors, especially your incumbents, notice the market opportunity. Frankly, the incumbents have more cash, more talent, more resources, more in every regard except one… problem obsession. Insatiable desire to fundamentally change the way we live. And with that desire comes speed.

It reminds me of a time over a decade ago, right after the spectacular Olympics which put the greatest Olympian of all time on center stage. Our swim coach asked the team, “How do you beat Michael Phelps?”

A few of my teammates suggested we work longer and harder. Another suggested that we should’ve started younger. And another suggested we wait till he retired. But my coach responded, “Just don’t race against him in butterfly. Race him in breaststroke.” While Michael Phelps is by no means slow in breaststroke, still faster than 95% of swimmers out there in it, the theory holds. It’s the stroke one would have the best chance to beat him in. But what stood out to me most was what the wisecrack on the swim team shouted out as an answer.

“He can swim while I run.”

And he was right.

Another fascinating aspect I realized in hindsight was that no one suggested the question was impossible.

Photo by Ashton Mullins on Unsplash

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Predictions Are Popular

Predictions are in season. It started back during the holidays. A number of my friends, colleagues and folks online have been making predictions of what is going to happen this year. And I’m sure some are sure to hit. Many to miss. Since I’ve been reasonably active on Quora and given my role in the startup community, many people have asked me: “What are some of the best startup ideas to start in 2021? In 2022?”

Over the past year, the pandemic became a forcing function for late majorities and laggards of the adoption curve to pick up newer social and technological trends. Subsequently, accelerating many timelines. Timelines that would have otherwise been realized two, three, maybe even five years out.

  • Social is back.
    • Consumer social has been back. The pandemic has saved on average 2-3 hours of travel time per day for the average worker, job-permitting. At the same time, quarantining has reduced, if not eliminated, many in-person interactions with friends. More time means people seek to find more places to place their attention.
    • Enterprise social is here. The pandemic has forced many businesses to go remote. Similarly, there’s been a migration away from metropolitan/urban areas to save on rent, as well as an opportunity to not be shackled by geography in the past few months. Now, as well as “post-pandemic”, businesses, as well as individuals, are looking for new ways to improve efficacy, communication, and culture at work. In efforts to both retain and attract talent.
  • Impact-driven and socially-responsible businesses are hot.
  • Diversity in the board room is gaining traction. And it’s created ripple effects in the financial world. LPs are demanding venture funds to invest in diverse founders. At the same time, when diverse founders consider which investors to bring on, they look at if the checkwriters at the firm are diverse. Some investors have acted proactively; some reactively. Nevertheless, the cogs are moving.
  • E-commerce, entertainment, streaming, gaming, remote tools, edtech are all up.
  • SPACs and 2020’s string of IPOs have created many “overnight” millionaires.
  • Investing in the stock market, in alternative assets, in syndicates, and more mean more capital is being recycled back into the economy at various stages.
  • There is more capital available at the early stages. New angels. More startups. Just like pre-seed/seed is the Series A from a decade ago, more institutional investors will move upstream. Who knows, there may be a pre-pre-pre-seed round one day.
  • Innovation around the home office space is building momentum.
  • Unsurprisingly, Zoom fatigue is real, which will only led a hand in hybrid work-life models post-pandemic. Equally so, innovation around virtual meetings is only a matter of time.
  • Oculus brought down the price of a VR headset to be as much as a video game console, which means more people can and will adopt VR. Leading to larger markets and more diverse consumers for VR/AR. More startups.
  • Mental health has taken center stage, where it had previously been overlooked or disregarded.

When will the pandemic end? I don’t know.

When will we get vaccines? While experts have given us an expected date, I also don’t know.

When will “normal” return? I’m willing to bet it’s on the magnitude of years rather than months. Then again, will “normal” ever return? I might be completely wrong, but I’m willing to bet the “normal” we knew will never return. But instead, we’ll have a normal 2.0.

In truth, I can only answer what I see in my very narrow periphery. And by definition, there are a hundred-fold more that are in my blind side. And the thing is, what I’ve thought of I guarantee many other founders have already seen, tried, or are trying. What I’m looking for this year, and every year, is what I haven’t thought of yet. But when I hear and see it, it’ll click. Everything I know will make sense.

Investors are lagging indicators of innovation.

Founders are the leading indicators. Listen to them.

Photo by Nathan Anderson on Unsplash

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Fantastic Unicorns and Where to Find Them

As a venture scout and as someone who loves helping pre-seed/seed startups before they get to the A, I get asked this one question more often than I expect. “David, do you think this is a good idea?” Most of the time, admittedly, I don’t know. Why? I’m not the core user. I wouldn’t count myself as an early adopter who could become a power user, outside of pure curiosity. I’m not their customer. To quote Michael Seibel of Y Combinator,

… “customers are the gatekeepers of the startups world.” Then comes the question, if customers are the gatekeepers to the venture world, how do you know if you’re on to something if you’re any one of the below:

  • Pre-product,
  • Pre-traction,
  • And/or pre-revenue?

This blog post isn’t designed to be the crystal ball to all your problems. I have to disappoint. I’m a Muggle without the power of Divination. But instead, let me share 3 mental models that might help a budding founder find idea-market fit. Let’s call it a tracker’s kit that may increase your chances at finding a unicorn.

  1. Frustration
  2. The highly fragmented industry with low NPS
  3. Right on non-consensus
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Myths around Startups and Business Ideas

In a number of recent conversations with friends outside of venture and “aspiring entrepreneurs”, a couple myths, which I’m going to loosely define here as popular beliefs held by many people, were brought to my attention. 4 in particular.

  1. If I have a great idea and build it, it’ll sell itself.
  2. That idea/startup is over-hyped.
  3. The startup/venture capital landscape is over-saturated.
  4. If it doesn’t make sense to me, it’s not a good idea.

Quite fortuitously, a question on Quora also inspired this post and discussion.

If I have a great idea and build it, it’ll sell itself.

Unfortunately, most times, it won’t. As Reid Hoffman puts it: “A good product with great distribution will almost always beat a great product with poor distribution.” As a founder, you have to think like a salesperson (for enterprise/B2B businesses) or a marketer (for consumer/B2C businesses). People have to know about what you’re building. ’Cause frankly you could build the world’s best time machine in your basement, but if no one knows, it’s just a time machine in your basement. Probably a great story to tell for Hollywood one day (even then you still need people to find out), but not for a business.

That idea/startup is over-hyped.

I’ll be honest. This really isn’t a myth, more of a common saying.

Maybe so, at the cross-section in time in which you’re looking at it. But if you rewind a couple months or a year or 2 years ago, they were under-hyped. In fact, there’s a good chance no one cared. While everyone has a different technical definition of over- and under-hyped, by the numbers, time will tell if it’ll be a sustainable business or not. If it’s keeping north of 40% retention even 6 months after the hype, we’re in for a breadwinner.

Take Zoom, for example. Pre-COVID, if you asked any rational tech investor, “would you invest in Slack or Zoom?” Most would say Slack. Zoom existed, but many weren’t extremely bullish on it. Today, well, that may be a different story. As of this morning (Oct. 12, 2020), while I’m editing this post before the market opens, the stock price of Zoom is $492 (and same change). Approximately 343% higher than it was on March 17th, the first day of the Bay Area shelter-in-place. And, right now, the price of Slack is $31. Approximately 56% up from the beginning of quarantine.

Neither are startups anymore, but the analogy holds. Also, a lesson that predictions, even by experts, can be wrong.

The startup/venture capital landscape is over-saturated.

“There’s too much money being invested (wasted) on startups.”

From the outside, it may very well look that way. Every day, every week we see this startup gets funded for $X million or that startup gets funded for $YY million. According to the National Venture Capital Association (NVCA), $133 billion were invested into startups last year. Yet, it pales in comparison to the capital that’s traded in the public markets.

VC funds see thousands of startup pitches a year. Per partner (most funds 2–3 partners), they each invest in 3–5 per year (aka about once per quarter). Meaning >99% of startups that a single VC sees are not getting funded by them. That doesn’t mean 99% never get funded, but it’s just to illustrate that proportionally, capital isn’t being spent willy-nilly.

If we look at it from a macro-economic perspective, if we are reaching saturation in the startup market, we should be getting closer to perfect competition. And in a perfectly competitive market, profit margins are zero. The thing is profits aren’t nearing zero in the startup/venture capital market. In fact, though the median fund isn’t returning much on invested capital. A good fund is returning 3–5x. A great one >5x. And well, if you were in Chris Sacca’s first fund, which included Uber, Twitter, and more, 250x MOIC. That’s $250 returned on every $1 invested.

If it doesn’t make sense to me, it’s not a good idea.

Finding Product-Market Fit and “Idea-Market Fit”

Revolutionary ideas aren’t meant to conform. If an idea is truly ground-breaking, people have yet to be conditioned to think that a startup idea is great or not. As Andy Rachleff, co-founder of Wealthfront and Benchmark Capital, puts it: “you want to be right on the non-consensus.” Think Uber and Airbnb in 2008. If you asked me to jump in a stranger’s car to go somewhere then, I would have thought you were crazy. Same with living in a stranger’s home. I write more about being right on the non-consensus here and in this blog post.

Frankly, you may not be the target market. You’re not the customer that startup is serving. The constant reminder we, on the venture capital side of the table, have is to stop thinking that we are the core user for a product. Most products are not made for us. Equally, when a founder comes to us pre-traction and asks us “Is this a good idea?”, most of the time I don’t know. The numbers (will) prove if it’s a good idea or not. Unless I am their target audience, I don’t have a lot to weigh in on. I can only check, from least important to most important:

  1. How big is the market + growth rate
  2. Does the founder(s) have a unique insight into the industry that all the other players are overlooking or underestimating or don’t know at all? And will this insight keep incumbents at bay at least until this startup reaches product-market fit?
  3. How obsessed about the problem space is the founder/team, which is a proxy for grit and resilience in the longer run? And obsession is an early sign of (1) their current level of domain expertise/navigating the “idea maze”, and (2) and their potential to gain more expertise. If we take the equation for a line, y = mx + b. As early-stage investors, we invest in “m’s” not “b’s”.

In closing

While I know not everyone echoes these thoughts, hopefully, this post can provide more context to some of the entrepreneurial motions we’re seeing today. Of course, take it all with a grain of salt. I’m an optimist by nature and by function of my job. Just as a VC I respect told me when I first started 4 years back,

“If you’re going to pursue a career in venture, by nature of the job, you have to be an optimist.”

Happened to also be one of the VCs who shared his thoughts for my little research project on inspiration and frustration last week.

Photo by K. Mitch Hodge on Unsplash

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VCs = Gatekeepers?

vc gatekeepers, gate

Not too long ago, I had the fortune of chatting with a fascinating product mind. During our delightful conversation, she asked me:

Are VCs the gatekeepers of ideas?

…referencing Michael Seibel‘s recent string of tweets:

And I’m in complete accordance. I want to specifically underscore 2 of Michael’s sentences.

… and…

The only ‘exception’ to this ‘rule’ would be if investors themselves were the target market for the product. At the same time, I can see how the venture industry has led her and many others to believe otherwise. So I thought I’d elaborate more through this post.

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Part-time vs. Full-time Founders

Over the weekend, my friend and I were chatting about the next steps in her career. After spending quite some time ironing out a startup idea she wants to pursue, she was at a crossroads. Should she leave her 9-to-5 and pursue this idea full-time, or should she continue to test out her idea and keep her full-time job?

Due to my involvement with the 1517 Fund and since some of my good friends happen to be college dropouts, I spend quite a bit of time with folks who have or are thinking about pursuing their startup business after dropping out. This is no less true with 9-to-5ers. And some who are still the sole breadwinner of their family. Don’t get me wrong. I love the attention, social passion, literature and discourse around entrepreneurship. But I think many people are jumping the gun.

Ten years back, admittedly off of the 2008 crisis, the conversations were entirely different. When I ask my younger cousins or my friends’ younger siblings, “what do you want to be when you grow up?” They say things like “run my own business”, “be a YouTuber”, and most surprisingly, “be a freelancer”. From 12-yr olds, it’s impressive that freelancing is already part of their vocabulary. It’s an astounding heuristic for how far the gig economy has come.

Moreover, media has also built this narrative championing the college dropout. Steve Jobs and Apple. Bill Gates and Microsoft. And, Mark Zuckerberg and Facebook. There’s nothing wrong in leaving your former occupation or education to start something new. But not before you have a solid proof of concept, or at least external validation beyond your friends, family and co-workers. After all, Mark Zuckerberg left Harvard not to start Facebook, but because Facebook was already taking off.

Honing the Idea

The inherent nature of entrepreneurship is risk. As an entrepreneur (and as an investor), the goal should always be to de-risk your venture – to make calculated bets. To cap your downside.

Marc Benioff started his idea of a platform-as-a-service in March 1999. Before Marc Benioff took his idea of SaaS full-time, he spent time at Oracle with his mentor, Larry Ellison, honing this thesis and business idea. When he was finally ready 4 months later, he left on good terms. Those terms were put to the test, when in Salesforce’s early days, VCs were shy to put in their dollar on the cap table. But, his relationship he had built with Larry ended up giving him the runway he needed to build his team and product.

Something that’s, unfortunately, rarely talked about in Silicon Valley and the world of startups is patience. We’ve gotten used to hearing “move fast and break things”. Many founders are taught to give themselves a 10-20% margin of error. What started off as a valuable heuristic grew into an increase in quantity of experiments, but decrease in quality of experiments. Founders were throwing a barrage of punches, where many carried no weight behind them. No time spent contemplating why the punch didn’t hit its mark. And subsequently, founders building on the frontlines of revolution fight to be the first to market, but not first to product-market fit. Founders fight hell or high water to launch their MVP, but not an MLP, as Jiaona Zhang of WeWork puts it.

In the words of the one who pioneered the idea of platform-as-a-service,

The more transformative your idea is, the more patience you’ll need to make it happen.”

– Marc Benioff

As one who sits on the other side of the table, our job is to help founders ask more precise questions – and often, the tough questions. We act more as godmothers and godfathers of you and your babies, but we can’t do the job for you.

The “Tough” Questions

To early founders, aspiring founders, and my friends at the crossroads, here is my playbook:

  • What partnerships can/will make it easier for you to go-to-market? To product-market fit? To scalability?
  • What questions can you ask to better test product feasibility?
  • How can you partner with people to ask (and test) better questions?
  • What is your calculus that’ll help you systematically test your assumptions?
  • Do you have enough cash flow to sustain you (and your dependents) for the next 2 years to test these assumptions?

Simultaneously, it’s also to important to consider the flip side:

  • What partnerships (or lack thereof) make your bets more risky?
  • How can you limit them? Eliminate them?

And in sum, these questions will help you map out:

At this point in your career, does part-time or full-time help you better optimize yourself for reaching my next milestone?

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The Different Types of Risk a VC Evaluates

Photo by trail on Unsplash

Founders take on many different types of risk when creating a business. Subsequently, investors constantly put founders and their businesses under scrutiny using risk as a benchmark. In broad terms, in my experience, they largely fall under two categories: execution risk and market risk.

Finding Product-Market Fit and “Idea-Market Fit”
Where I first introduced the dichotomy of market and execution risk in the frame of idea-market fit.

Some Background

Contrary to popular belief, VCs are some of the most risk-averse people that I know. As an investor, the two goals are to:

  1. Take calculated bets, via an investment thesis and diligence;
  2. And de-risk each investment as much as possible.

From private equity to growth equity to venture capital, more and more investors are writing ‘discovery checks.’ Typically, funds write checks that are 2-4% of their fund size. For example, $100M fund usually write $2-4M initial checks. Yet, more and more investors are writing increasingly smaller check sizes (0.1-0.5% fund size). In the $100M fund example, that’s $100-500K checks. This result is a function of FOMO (fear of missing out), as well as a proving grounds for founders before the fund’s partners put in their core dollar. Admittedly, this upstream effect does lead to:

  • Less diligence before checks are written (closing within 48-72 hours on the extreme end, and inevitably, more buyer’s remorse);
  • Less bandwidth allotted per portfolio startup (even less for startups given discovery checks);
  • And, inflated rounds (and therefore, inflated startup valuations).

The Risks

The risks for a startup investor are fairly obvious, and so are the rewards. Effectively, an early-stage investor is betting millions of dollars on a stranger’s claim. But not all risks are the same.

In the eyes of a VC, an execution risk is categorically less risky than a market risk. Furthermore, even within the category of execution, a product risk is usually less risky than a team risk.

Execution Risk

Why are more and more early-stage investors defaulting to enterprise over consumer startups?

Two reasons.

  1. Enterprise startups often run on a SaaS (software-as-service) subscription business model. There will always be recurring revenue, assuming the product makes sense. For an investor, that’s foreseeable ROI.
  2. It’s an execution risk, not a market risk. Often times, an enterprise tech startup is the culmination of existing frustrations prevalent in the respective industry already. And therefore, have reasonably stable distribution channels and go-to-market strategies.

Eric Feng, formerly at Kleiner Perkins, now at Facebook, used Y Combinator’s data set at the end of last year to illustrate the consumer-to-enterprise shift.

Using discovery checks, and playing pre-core business, VCs can evaluate team risk. Between the discovery check and their usual ‘core checks’, VCs can also test their initial hypotheses on their founders.

As a startup grows, especially after realizing product-market fit, market risk becomes more of a product risk. Best illustrated by market share, product risk is when a product fails to meet the expectations of their (target) customers. It can be evaluated via a permutation of key metrics, like unit economics, NPS, retention and churn rate. There is an element of technological risk early on in the startup lifecycle for deep tech ventures, but admittedly, it’s not a vertical I have my finger on the pulse for and can share insight into.

Given that VCs are either ex-operators or have seen a breadth of startup life-cycles, VCs can best use their experience to mitigate a startup’s execution risk.

Market Risk

Market risk requires a prediction of human/market behavior. And unfortunately, the vast majority of investors can predict about the constant evolution of human behavior as well as a founder can. What does that mean? Founders and VCs are walking hand-in-hand to gain market experience. It, quite excitingly, is an innovator’s Rubrik’s cube to solve.

Market risk is frequently attributed to consumer tech products. In an increasing proliferation of consumer startups, consumers have become more expensive to acquire and harder to retain. Distribution channels change frequently and are determined by political, economic, technological, and social trends.

In Closing

Every VC specializes in tackling a certain kind of risk. But founders must quickly adapt, prioritize, and tackle all the above risks at some point in the founding journey. As Reid Hoffman, co-founder of LinkedIn, famously said:

“An entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”

Happy hunting!

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