The past 2 weeks brought me a whirlwind of conversations with emerging managers and LPs, catalyzed by the emerging LP playbook. And of the former, I’ve come across two main themes:
Everyone — I kid you not… everyone — has top-tier VCs as their follow-on and/or their co-investors. What was once upon unique is no longer so.
Eric was right. There’s an overabundance of the word “signal” in venture wonderland these days — to the point the word itself has lost its meaning. By definition, it should mean that is unique and stands above a sea of noise. For many investors, that means either investing in brand-name startups (i.e. SpaceX, Figma, etc.) or investing alongside brand-name investors. The latter, unfortunately, is also a product of the ecosystem as many LPs seek social proof about your investment thesis from others’ who have a proven track record. The former gets a bit sticky. A lot of these logos are either off-fund-thesis or came as a Series B syndicate investment (but the fund itself is investing in pre-seed or seed).
After publishing the emerging LP playbook last week, I've been lucky to chat with quite a few emerging managers raising their Fund I's
And there are 2 common themes I see in their decks:
1. Tier 1 VCs as follow on investors are table stakes 2. There's a lot of logo shopping
To piggyback on the above, the notion of signal is worth elaborating on, likely a vestigial appendage of the past two years.
Let me preface by saying that it takes a lot to get to conviction.
In 2020 and 2021, many investors’ calculus of startup signal boiled down to three things: great investors, great traction, and great team. And in that order. That is first and foremost what I see a lot of professionalizing investors do. I can’t entirely blame them since the ecosystem itself propagates the belief that if a Tier 1 VC jumps in, you’re more likely to get to a great exit. Or at the minimum, get a great mark-up to make your IRRs and TVPIs look better. On paper, of course.
But what I believe a lot of investors are missing is that… venture is a game that’s not about your batting average, but about the magnitude of the home runs you hit. You’ve heard it before, and you’ll continue to hear more of it. Unlike other financial services, VC is driven by the power law. 80% of your returns will be driven by 20% of your bets. That’s the 10,000 foot view. Let’s be honest. Most of us, myself included, don’t take that panoramic view every day or even every week. In fact, I see many emerging managers only take that view when they’re forced to. In other words, when they’re in fundraising mode.
For many professionalizing angels and syndicate leads, that becomes trying to string a narrative from seemingly disparate data points. Or at least, it seems that way.
As Asher Siddiqui told me, “[after] you look at their whole life and career history, and look at their thesis, if the thesis doesn’t make complete and perfect sense, then I don’t think this is a ‘great‘ fund manager. If it fits like a glove, then yes, they could be.”
The best GPs are disciplined even before they start fundraising. They focus on the thesis they want to raise on when they do. That’s not to say they don’t invest off-thesis every so often. But they don’t pitch their off-thesis angel or syndicate investments as part of their thesis-driven track record. But I digress.
In chasing signal for the sake of signal, when you hear of a hot deal every other day, many investors forget to be that belief capital for founders. I’m not saying that an investor should do so for every founder out there. But to pick a few, or even just one. One that they’re willing to take the swing before others do.
The signal is their own conviction in the founder.
The first half
Because of this progression, there’s been a new two-part question I really enjoy asking emerging GPs. The first half:
Which company in your portfolio you think is still underestimated?
Which company in your portfolio didn’t get the investor attention you expected but are still extremely bullish on their growth? And why do you still believe in them? What are other investors missing out on?
It’s not about track record or social proof here. It’s about the ability to recognize exceptional talent and articulate it clearly. Hopefully, a rose growing in concrete.
Well, in terms of the odds, you’re likely to be wrong. But that’s okay. You need to be willing to be wrong to achieve outlier success.
Fund I is often the proof-of-concept fund for the emerging managers I’ve talked to. They start by writing small checks, don’t lead rounds, and don’t fight for ownership targets. They claim to be extremely helpful and hands on. Then again, expectation often differs from reality, especially if they’ve never been so before (where LPs discover through reference checks). And because they’re writing smaller checks now, I’ve seen many implicitly hold off on developing a framework to get to conviction until Fund III. Whereas the best GPs start thinking about it early on.
You can think about it this way. As long as you’re benchmarking on signal via other investors, why should an LP back your thesis when they can back your “signal”?
For individuals and smaller family offices, they’ll still back you. What they’re buying is access, since they can’t afford nor have the relationship to be an LP in the “signals.” Larger LPs have the optionality to do so. And if you’re an emerging GP hoping to grow as a professional manager by having larger and larger funds, you eventually need to raise from large LPs. At least, until the SEC changes their 99 limit. And to do so, from larger LPs, means you need to bet where their existing portfolio has not bet before. Plus do it well.
The second half
If you haven’t already, a great way to build a referenceable track record is to sweat the details. Yes. The details matter. Nate Silver, one of the best poker players of our generation, said earlier this year, “you can’t just get the big things right in poker. You have to get the small things right too. It’s too competitive of a field right now.”
Though he said venture is different, I believe he’s half right. Most investors don’t sweat the small things. But investors should. Today, that’s how you stand out.
It might not have been true a decade ago, but now it is. Just last year, in 2021, there were 730 funds created. To put that number into perspective, on average, that literally means two firms closed every single day last year, including the holidays and weekends!
Capital has become a commodity. In 2021, speed was a differentiator. Clearly, in 2022, it is not. Today, it’s tough being a founder. If you’ve raised in the last two years, you’re considering extending your runway. That means having tough conversations to reduce your workforce, your benefits, or your salaries. If you haven’t raised, it’s a hard market to be raising in now. And so the differentiator today, is in two parts:
Helping founders navigate these tough situations. In other words, being (proactively) helpful.
And helping founders raise their next round. Mac Conwell recently shared a great thread on how powerful a founders’ network is to get funding. The same applies to an investors’ ability to help their portfolio raise capital. How liquid is your network? It’s not about who you know, but how well you know your friends downstream, and how can you get them over the activation energy to invest. Don’t get me wrong. There still needs to be a certain level of hustle from the founders themselves. But a great investor often steps in to reduce as much friction as we can in that process.
Both of which have long been the job description of being a VC. It’s in the small things. Jump on a 2AM call. Help your founders figure out the wording for a reduction-in-force. Fix the sales copy to better close leads.
There are 10-15 character-building moments in a founder’s journey where the moat they build around the business (as opposed to just the product) is not IP or early product traction, but rather from the lessons obtained from scar tissue.
It’s hard to predict looking through the windshield when these moments are, but quite obvious via the rearview mirror. And the best an investor can do is be there as much as he/she can. Albeit hard to do for every company in your portfolio, and that’s the truth. The wealth of information creates a poverty of attention. The larger your portfolio, the harder it is to be truly helpful to every single one. So focus on founders who need you, rather than those who will do great without you. Reputation is built in wartime and realized in peacetime.
So, the second part to the above question is:
What did you do for this company that no other investor or advisor did?
… where I’m looking for answers on how this investor went above the call of duty to help a company they believed in grow.
In closing
In summary,
Which company in your portfolio you think is still underestimated?
What did you do for this company that no other investor or advisor did?
This is by no means original, but heavily inspired by the recent conversations I’ve had, as well as helps me build my own framework for analysis. In parts, this question is a derivation to the check size to helpfulness ratio (CS:H). How helpful are you as an investor? When you say you’re founder-friendly, do you mean it?
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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.
Back in mid-2020, I started writing a piece on 99 Pieces of Unsolicited, (Possibly) Ungooglable Startup Advice. There was no ETA on the piece. I had no idea when I would publish it, other than the fact, that I would only do so once I hit the number 99. Yet, just like how I was inspired to write how similar founders and funders are, it finally dawned on me to start writing a similar piece for investors around mid-2021. The funny thing, is though I started this essay half a year later, I finished writing it one and a half months sooner while I was still on advice #95 for the former.
Of course, you can bet your socks I’ve started my next list of unsolicited advice for investors already. Once again, with no ETA. As I learn more, the subsequent insight that leads to an “A-ha!” moment will need to go deeper and more granular. And who knows, the format is likely to change.
I often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve more nuance, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites for investors below cover everything, in no particular order other than categorical resonance, including:
Unfortunately, many of the below advice came from private conversations so I’m unable to share their names. Unless they’ve publicly talked about it. Nevertheless, I promise you won’t be disappointed.
As any Rolodex of advice goes, you will not resonate with every single one, nor should you. Every piece of advice is a product of someone’s anecdotal experience. While each may differ in their gravitas, I hope that each of the below will serve as a tool in your toolkit for and if the time comes when you need it most.
To preface again, 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.
General advice
1/ To be in venture capital, you fundamentally have to be an optimist. You have to believe in a better tomorrow than today.
2/ “Everyone has a plan until they get punched in the mouth.” – Mike Tyson. Told to me by an LP who invests in emerging and diverse managers.
3/ Have good fluidity of startup information. “No founder wants to meet a partner and have to answer the same questions again and again. Best partnerships sync and with every discussion, process the questioning.” – Harry Stebbings
4/ The lesson is to buy low, sell high. Not to buy lowest, sell highest.
5/ “The New York Times test. Don’t do anything you wouldn’t want to see on the front page of the NY Times.” – Peter Hebert
6/ “It takes 20 years to build a reputation and five minutes to ruin it.” – Warren Buffett
7/ When you’re starting off as an investor, bet on one non-obvious founder – a real underdog. Support them along their entire journey. Even if there’s no huge exit, the next one will be bigger. When their VPs go off and start their own businesses, they’ll think of you first as well.
8/ When planning for the next generation of your firm’s successors, hire and mentor a cohort of brilliant investors, instead of focusing on finding the best individual. Investing is often a lonely journey, and it’s much easier to grow into a role if they have people to grow together and commiserate with.
9/ “When exit prices are great, entry prices are lousy. When entry prices are great, exit prices are lousy.” – David Sacks
10/ Illiquidity is a feature, not a bug. – Samir Kaji
11/ Three left turns make a right turn. There is no one way to break into VC. Oftentimes, it’s the ones with the most colorful backgrounds that provide the most perspective forward.
12/ “Whenever you find yourself in the majority, it is time to pause and reflect.” As an early stage investor, I find Mark Twain’s quote to be quite insightful.
13/ “It’s not about figuring out what’s wrong; it’s about figuring out what is so right. The job of an investor is to figure out what is so overwhelmingly great, or so tantalizingly promising that it’s worth dealing with all the stuff that’s broken.” – Pat Grady retelling a story with Roelof Botha
15/ Track your deal flow. Here’s how I track mine. Another incredible syndicate lead with over 5x TVPI (total value to paid in capital) I met keeps it even simpler. A spreadsheet with just 4 columns.
Company
Valuation in
Valuation out
Co-investors – This is where you start sharing deal flow with each other here.
16/ One of your best sources of deal flow might not be from other investors, but those who are adjacent to the venture ecosystem, like startup lawyers and VC attorneys.
17/ A WhatsApp group with your portfolio is a great tool for diligencing investments, not as much for sourcing deals.
18/ “Decide once you have 70% conviction.” – Keith Rabois. Don’t make decisions with 40% conviction since that’s just gambling. Don’t wait till 90% conviction because you’ll miss the deal for being too slow.
19/ Ask questions to founders where they show grit over a repeated period of time. They need to show some form of excellence in their life, but it doesn’t have to be in their current field. From a pre-seed manager with 3 unicorns in a portfolio of 70.
20/ As an emerging manager, one of the best reasons for investing in emerging markets: Do you want to see the deals that the top 0.1% see? Or do you want to see the deals that the 0.1% passed on? From the same pre-seed manager with 3 unicorns in a portfolio of 70.
21/ Every day, open your calendar for just one hour (two 30-minute slots) to founders you wouldn’t have had otherwise. Your network will compound. From a manager who’s invested in multiple unicorns and does the above from 10-11PM every night.
22/ The bigger your check size, the harder you have to fight to get into the round.
23/ The best investors frontload their diligence so they can have smarter first conversations with founders.
24/ Perform immersion-based diligence. Become super consumers and super users of a category, as close as you can get to subject-matter experts. That way you know very quickly after meeting a founder if their product is differentiated or unique. While you’re at it, write 2-3 page bug report stress-testing the product. Founders really do appreciate it.
26/ When a founder can’t take no for an answer and pushes back, “I always have to accept the possibility that I’m making a mistake.” The venture business keeps me humble, but these are the benchmarks that the team and I all believe in. Inspired by JCal and Molly Wood.
27/ Win deals by “sucking the oxygen out of the air.” In investing there are two ways to invest: picking or getting picked. Picking is naturally in a non-competitive space. Getting picked is the exact opposite. You have to eat competition for breakfast. And when you’re competing for a deal everyone wants to get into, you have to be top-of-mind. You need to increase the surface area in which founders remember you, not just to take their time, but to be really, really valuable in as much time as you can spend with them. Inspired by Pat Grady on an anecdote about Sarah Guo.
Pitching to LPs
28/ Surprises suck. On Samir Kaji’s podcast, Guy Perelmuter of GRIDS Capital once said: “There’s only one thing that LPs hate more than losing money. It’s surprises.” More here.
29/ Fund I: You’re selling a promise. Fund II: You’re selling a strategy. And, Fund III: You’re selling the returns on Fund I.
30/ Steven Spielberg didn’t know what E.T. should look like, so he had everyone write down people they respected. And so E.T. looked a bit like everyone on that list, including Carl Sandburg, Albert Einstein and Ernest Hemingway. In a very similar way, come up with a list of your ideal LPs. And create a fund based on what they like to see and what you can bring to the table. Oftentimes, it’s easier to ask them for personal checks than checks out of their fund.
31/ Ask the founders you back for intros to their other investors as potential LPs in your fund.
32/ The return hurdles for LPs are different per fund type: *subject to market motions. Timestamped in Sept 2021 by Samir Kaji
Nano-fund (<$20M): 5-7x+
Seed fund: 3-5x+
Series A: 3x+
Growth: 2-2.5x+
Crossover/late growth (driven by IRR, not multiples): 10-12%+
33/ “If you know one family office, you know one family office.” Said by one of the largest LPs in venture funds. Each family office situation is uniquely different.
34/ Family offices are surprisingly closed off to cold emails, but often share a lot of deal flow with each other. Have co-investors or founders introduce you to them.
35/ It takes on average 2 months for an institutional LP to do diligence and reference checks. Plan accordingly.
36/ LPs look for:
Track record (could be as an individual angel as well)
Value add
Operational excellence
37/ Data shows that first-time/emerging managers are more likely to deliver outperformance than their counterparts, but as one, you still need to show you have experience investing.
38/ People, including LPs, tend to remember stories, more than they do data. Teach your LPs something interesting.
39/ LPs have started looking more into two trends: private investments and impact/ESG initiatives. By nature of you reading this blogpost, you’re most likely the former already. The latter is worth considering as part of your thesis.
40/ Every coffee is worthwhile in some form.
41/ LP diligence into VCs break down into two types: investment and operational DD.
Investment DD includes team, incentive alignment, strategy, performance, current market, and terms/fees.
Team: What does leadership look like? How diverse are you?
Alignment: Do you have performance-based compensation?
Strategy: What sectors are you investing into? What does your underwriting discipline look like?
Performance: What do your exits look like? Are you exits repeatable?
Market: What are the current industry valuations? Economies of scale?
Terms/fees: Are they LP friendly? Are the fees based on alphas or betas? Are they aligned with your value add?
Operational DD includes business model, operational controls, tech platforms, service providers, compliance and risk.
42/ If you’re pitching to other venture funds to be LPs, say for $250K checks, larger funds (i.e. $1B fund) typically have fund allocations because check size is negligible. And a value add as deal flow for them at the A. Whereas, smaller funds don’t because it is a meaningful size of their fund. So, GPs write personal checks.
43/ If you’re planning to raise a fund, think of it like raising 10 Series A rounds. For most Series A rounds, a founder talks to about 50 investors. So for a Fund I, you’re likely to talk to 500 LPs to close one.
44/ Send potential LPs quarterly LP updates, especially institutions. Institutions will most likely not invest in your Fund I or II, but keep them up to date on the latest deals you’re getting into, so you’re primed for Fund III.
45/ Family offices want to get in top funds but most can’t because top funds have huge waitlists. Yet they still want access to the same deals as top funds get access to. They’re in learning mode. Your best sell to family offices is, therefore, to have:
Tier 1 investors as your fund’s LPs
Tier 1 investors as co-investors
Deals that they wanted to get into anyway
46/ Your Fund I LPs are going to be mostly individual angels. They believe in you and your promise, and are less worried about financial returns.
47/ Institutional LPs are looking for returns and consistency. If you say you’ll do 70% core checks and 30% discovery checks, they’re checking to see if you stick to it. Institutions aren’t in learning mode, instead you as a fund manager fit into a very specific category in their portfolio. Subsequently, you’re competing with other funds with similar foci/theses as you do.
48/ Be transparent with your IRRs. If you know you have inflated IRRs due to massive markups that are annualized, let your (potential) LPs know. For early stage, that’s probably 25-30%+. Especially when you’re in today’s frothy market (timestamped Jan 2022). Or as Jason Calacanis says it for his first scout fund that had crazy IRRs, “It’s only down from here.”
49/ Don’t waste a disproportionate amount of time convincing potential LPs about the viability of your thesis. Shoot for folks who can already see your vision. If you manage to convince an LP that didn’t previously agree, they may or may not end up micromanaging you if your thesis doesn’t work out as “expected.” Inspired by Elizabeth Yin.
50/ “The irony for us was LPs asking about portfolio construction was a sign that the meeting was going poorly.” – Jarrid Tingle.
51/ Institutional LPs prefer you to have a concentrated startup portfolio – less than 30 companies. They already have diversification across funds, so they’re maximizing the chance that their portfolio has fund returners. That said, you’re probably not raising institutional capital until Fund III. Inspired by Jarrid Tingle.
52/ If you’re an emerging manager with a fund is less than 4 years old, boasting high IRR (i.e. 50%+) is meaningless to sophisticated and institutional LPs. Focus on real comparative advantages instead. – Samir Kaji.
53/ When raising early checks from LPs, ask for double the minimum check size. Some LPs will negotiate down, and when they only have to commit half of what they thought they had to, they leave feeling like they won.
54/ When potential LPs aren’t responding to your follow ups/LP updates, send one more follow up saying: “I am assuming you are not interested in investing into our fund. If I am wrong, please let me know or else this will be your last update.” Told to me by a Fund III manager who used this as her conversion strategy.
55/ It’s easier to have larger checkwriters ($500K+) commit than smaller checkwriters (<$100K). $500K is a much smaller proportion of larger checkwriters’ net worth than checkwriters who write $100K checks. And as such, smaller checkwriters write less checks, have less “disposable income”, and push back/negotiate a lot more with fund managers before committing. Told to me by a Fund III manager.
Fund strategy/management
56/ As an investor, if you want to maintain your ownership, you have to continue requesting pro-rata rights at each round.
58/ “Opportunity funds are pre-established blind pool vehicles that eliminate the timing issues that come with deal-by-deal SPVs. Opportunity funds sometimes have reduced economics from traditional 2/20 structures, including management fees that are sometimes charged on deployed, not committed capital. Unlike individual SPVs, losses from one portfolio company in an opportunity fund offset gains from another when factoring in carried interest.” – Samir Kaji. See the full breakdown of pros and cons of opportunity funds here.
59/ There are two ways to generate alphas.
Get in early.
Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.
60/ Sometimes being right is more important than being in the non-consensus. Inspired by Kanyi Maqubela.
Market risk as a function of ownership – What is the financial upside if exit happens? Is it meaningful enough to the fund size?
Judgment risk – Are you picking the right companies?
Win rate risk – How can you help your portfolio companies win? What is your value add?
62/ By Fund III, you should start having institutional capital in your investor base.
63/ The closer you get to investing in growth or startups post-product-market fit, the closer your capital is to optimization capital. Founders will likely succeed with or without you, but your name on the cap table will hopefully get them there faster and more efficiently.
64/ If you’re a traditional venture fund, you have to invest in venture-qualifying opportunities, like direct startup investments. But you can invest up to 20% of your fund’s capital in non-venture-qualifying opportunities, like tokens/SAFTs (simple agreement for future tokens), real estate, secondaries, and so on.
65/ If increased multiples coming out of various vintage funds, feel free to deviate from the normal 2-20. Many funds have 25 or 30% carry now, or accelerators where 20% scales with multiples (and often with a catch-up back to 1.0x at higher carry). – Samir Kaji
66/ Normally, fund managers take 2% management fees, usually over 10 years, totaling 20% over the lifetime of the fund. These days, I’m seeing a number of emerging managers take larger management fees over less years. For example, 10% as a one-off. Or 5% over 2-3 years.
67/ “The razor I apply to investing and startups is that every decision that increases your probability of wild outlier success should also increase your probability of total failure. If you want to be a shot at being a 10x returning fund? You’ll have to take on the higher likelihood of being a 1x. If you think you’re going to build the next Stripe? You’re going to have to run the risk of going nowhere.” – Finn Murphy
69/ The longer you delay/deprioritize having diverse partners, the harder it’ll be to hire your first one.
Advising founders/executives
70/ A founder’s greatest weakness is his/her/their distraction. Don’t contribute to the noise.
71/ It’s far more powerful to ask good questions to founders than give “good answers”. The founders have a larger dataset about the business than you do. Let them connect the dots, but help them reframe problems through questions.
72/ You are not in the driver’s seat. The founder is.
73/ A great reason for not taking a board seat is that if you disagree with the founders, disagree privately. Heard from a prolific late-stage VC.
74/ Advice is cheap. Differentiate between being a mentor and an ally. Mentors give free advice when founders ask. Allies go out of their way to help you. Be an ally.
75/ The best way to be recognized for your value-add is to be consistent. What is one thing you can help with? And stick to it.
76/ Productize your answers. Every time a founder asks you a question, it’s likely others have the same one. Build an FAQ. Ideally publicly.
77/ If you have the choice, always opt to be kind rather than to be nice. You will help founders so much more by telling them the truth (i.e. why you’re not excited about their business) than defaulting on an excuse outside of their control (i.e. I need to talk with my partners or I’ve already deployed all the capital in this fund). While the latter may be true, if you’re truly excited about a founder and their product, you’ll make it happen.
78/ Help founders with their firsts. It doesn’t have to be their first check, but could also be their first hire, engineer, office space, sale, co-founder, team dispute, and so on.
79/ There are four big ways you can help founders: fundraising, hiring, sales pipeline, and strategy. Figure out what you’re good at and double down on that.
80/ Focus on your check-size to helpfulness ratio (CS:H). What is your unique value add to founders that’ll help them get to their destination faster? Optimize for 5x as a VC. 10x as an angel.
81/ “The job of a board is to hire and fire the CEO. If you think I’m doing a bad job, you should fire me. Otherwise, I’m gonna have to ask you to stay out of my way.” – Frank Slootman to Doug Leone after he was hired as CEO of ServiceNow.
SPVs and syndicates
82/ The top syndicates out there all have 3 traits:
Great team
Great traction
Tier 1 VC
If your deal has all of the above, and if you raise on AngelList, your deal is shared with the Private Capital Network (PCN), which AngelList’s own community of LPs and investors, a lot of which are family offices, who allocate at lest $500K of capital per year.
83/ If you’re raising an AngelList syndicate, you need to raise a minimum of $80K or else the economics don’t really make sense. AL charges an $8K fee.
84/ If you want to include Canadian investors in your syndicate, for regulation purposes, you need to invest 2% of the allocation size or $10K.
85/ Investing a sizeable check as a syndicate lead (e.g. $10K+) is good signal for conviction in the deal, and often gets more attention.
86/ 99% of LPs in syndicates want to be passive capital because they’re investing in 50 other syndicates. You can build relationships individually with them over time, but don’t count on their strategic value.
87/ Historically, smaller checkwriters take up 99% of your time. Conversely, your biggest checkwriters will often take up almost no time. Even more true for syndicates.
88/ LPs don’t care for deals where syndicate leads have time commitment without cash commitment.
89/ Don’t give LPs time to take founders’ time. Most of the time LPs don’t ask good questions, so it’s not worth the effort to set up time for each to meet with founders individually. On the other hand, a good LP update would be to host a webinar or live Q&A session. One to many is better than one to one.
90/ There’s a lot of cannibalism in the syndicate market. The same LPs are in different syndicates.
91/ Choose whether you will or will not send LP updates. Set clear expectations on LP updates. And if you do, stick to that cadence. The people who write you the $1-5K checks are often the loudest and demand monthly updates. If you choose not to, one of my favorite syndicate leads says this to their LPs, “We won’t give any LP updates. I’ve done my diligence, and I won’t give information rights. I have a portfolio of hundreds of deals, and I can’t be expected to give deal-by-deal updates every month or every quarter. So if you are investing, just know you’re along for the ride.” Some LPs won’t like that and won’t invest, but mentioning that upfront will save you from a whole lot of headaches down the road.
92/ If you’re setting up an SPV to solely invest in a fund (or where more than 40% of the SPV is going into the fund), all your SPVs can’t against the 249 LPs cap on a fund <$10M and a 99 cap on a fund >$10. But you can invest in funds if you’re setting up an SPV to invest in more than one fund. Context from Samir Kaji and Mac Conwell.
Evergreen/Rolling funds
93/ Just like vintage years/funds are important for traditional funds, vintage quarters matter to your LPs. If they didn’t give you capital during, say Q2 of 2021, when you invested in the hottest startup on the market, your Q1 and your Q3 LPs don’t have access to those returns.
94/ Whereas GPs typically make capital calls to their LPs every 6 months, AngelList’s Rolling Funds just institutionalized the process by forcing GPs to make capital calls every 3 months.
Angel investing
95/ “The best way to get deal access isn’t to be great with founders—it’s to have other investors think you’re great with founders. Build a high NPS with investors, since they have meaningfully more reach than an operator. But of course, fight hard to be great with founders too or else this will all crash down.” – Aaron Schwartz
96/ Make most of your personal mistakes on your own money as an angel (before you raise a fund).
97/ When you’re starting off, be really good at one thing. Could be GTM, growth, product, sales hires, etc. Make sure the world knows the one thing you’re good at. From there, founders and investors will think of you when they think of that one thing. Unless you’re Sequoia or a16z, it’s far better to be a specialist than a generalist if you want to be top of mind for other investors sharing deal flow.
98/ “As an angel investor, it’s more important to be swimming in a pool of good potential investments than to be an exceptionally good picker. Obviously if you’re able to be both, it’s better 🙂 but if you had to choose between being in a position to see great deals and then picking randomly, or coming across average deals and picking expertly, choose the former.” – Jack Altman
99/ “Just like the only way to get good at wine is to drink a lot of wine. The only way to get good at investing is to see a lot of deals.” – Lo Toney.
Disclaimer: None of this is 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.
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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.
“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.
Last weekend, I tuned into Samir Kaji’s recent episode with LPs (limited partners). Not once, but twice. And as you might’ve guessed, was damn inspired by their conversation. The more I listened to it, the more synonymous the paths of a founder and an emerging manager (EM) seemed to be. Or what I call the entrepreneur and the entrepreneurial VC. If you’re a regular here, you’ll know I love writing about the intellectual horsepower of both sides of the table. But in this post, rather than delineating the two, I’d love to share how similar founders and funders actually are.
Surprises suck, but pivots are okay
On Samir’s podcast, Guy Perelmuter of GRIDS Capital voiced: “There’s only one thing that LPs hate more than losing money. It’s surprises.”
Be transparent. Be clear on your expectations, and steer clear of left hooks. As a fund, something I’ve heard a number of GPs and LPs say is don’t deviate on your thesis. LPs invest in you for your strategy. But as soon as you deviate from that initial strategy, you become increasingly unpredictable.
Take, for example, you go to a steakhouse and order steak. But they serve you sushi instead. If it’s not good sushi, obviously you’re not coming back. Not only did they surprise you, but it was also a poorly executed one. This goes in the column of one-star Yelp reviews.
But, say it was great sushi. You had one great dining experience and you’re a happy customer. Some time in the future, you think of getting sushi again. And you remember what a great experience you had at the steakhouse. So you go back to the steakhouse, only to realize it was a fluke and the sushi wasn’t like the last time you’ve had it. Your inability to replicate surprises scares LPs, which limits your ability to raise a subsequent fund.
Nevertheless, these days markets are changing quickly. And sometimes your initial thesis may not serve you as well in today’s market as it did yesterday. As John Maynard Keynes, father of Keynesian economics, once said, “When the facts change, I change my mind.” But, if you do need to deviate, communicate it clearly, formulate a new strategy, and preemptively tell your LPs. Then at that point, it’s no longer a surprise, but a strategy. Great examples include:
Not investing via their fund strategy (i.e. typically ad hoc),
Require less diligence and therefore less conviction,
Send negative signals to other investors if the GP doesn’t do a follow-on check at the next round, and
Because of (2) and (3) are usually cash sinks.
The On Deck Accelerator (ODX) – Backing founders at the earliest stages (i.e. pre-product, pre-revenue) as long as they have deep conviction in their own business.
The recent announcement of The Sequoia Fund – a systematic and predictable strategy to invest in not just startups, but venture funds backing incredible founders as well.
The same holds for founders. Don’t get me wrong. Startups pivot. And they should. Mike Maples Jr., founder of one of the best performing seed stage venture firms, recently shared: “Most investors are going to look at what the company does and evaluate the business for what it is, but 90% of our exit profits have come from pivots.” And just like fund managers, clearly convey why, how, and what you’re pivoting to to your shareholders. It’s always better to preempt these conversations than leave these as surprises. Often times, you’ll find your investors, having seen as many pivots as they have and knowing that is the name of the game, can offer you much more feedback and insight than you imagined for your pivot.
Optimize for the “Oh shit! moment*
In every conversation, your goal should just be to teach your investors something. An earned secret. A unique insight. What do you know that other people don’t, overlook, or underestimate? What do you know that other people would find it very hard to learn organically? This is especially true for consensus ideas – or obvious ideas. The best obvious products may seem obvious at first glance, but usually have non-obvious insights to back them up.
If you’re a fund, what is your insight – your access point – that’ll win you an asymmetric upside?
I’ve talked to too many founders and EMs that claim to be experts with X years of experience in a particular field. Yet after 30 minutes, I realized I learned nothing from them. I realize that for half an hour straight I ended up with a prep book full of buzzwords and vague jargon that would rival the SAT vocab section. But let’s be real. The SAT doesn’t get me excited to want to retake the test.
The best founders and funders out there are able to break down deep, technical, esoteric, and sometimes crazy concepts into simple bitesize ideas. The equivalent of taking the whole universe and simplifying it to its origin. A single point. The Big Bang.
I’ve also realized over the years that the world’s smartest teachers – and when you’re trying to convince people to join you in a non-obvious vision, you are teaching – lead with analogies. And the best analogies lead investors to that “Oh Shit! moment.”
COVID made capital cheaper
Equally true for startups and funds. Capital is digital. If you think about capital in the frame of investor acquisition cost, you no longer have to travel to your investors to pitch to them. This means you can take far more meetings than before. Less travel and more meetings mean your investor acquisition cost goes down.
Founders no longer have to book a week to Sand Hill Road or South Park to have introductory conversations with investors. Only to have 80-90% turn down a second conversation. This becomes even more costly the earlier you are in your startup journey. You have to have a lot more first conversations as a pre-seed founder than you do as a founder raising an A. At the same time, you have many more options for raising capital today: accelerators, syndicates, equity crowdfunding, and roll-up vehicles (RUVs). While it’s not that these resources didn’t exist before COVID, the pandemic made it much more apparent that VC money didn’t have to be the only way to raise capital. And that you can also leverage speed and your community to help you grow.
Similarly, EMs no longer have to travel across the states to talk to institutional capital. Even more so, as an EM, you’re most likely raising from individual investors. Raising a rolling fund or a 506c lets you generally solicit investments, where you couldn’t with a 506b. Subsequently, Twitter and having a community became your superpower. Mac at Rarebreed, Packy’s Not Boring Fund I, and Harry at 20VC all raised during the time of COVID, leveraging the power of their following and community to do so.
Keep it simple
“There’s no favorable wind for the sailor who doesn’t know where to go.” – Seneca
Two Saturdays ago, I caught up with my ridiculously smart engineer friend from college – “Fred”. We were reminiscing about the “good ol’ days” when we first started punching above our weight class. Particularly in regards to cold outreaches to individuals we really admired. While I was an operator at two startups that shaped my entrepreneurial career, I spent many a night struggling on how to best position our products in the market. Many hours of copy and rephrasing and reframing. In both we were competing against the existing saturation of information and solutions on the market. How do we tell our customers and investors the reason we’re awesome is because of A and B and C, and also D?
Most people, friends, customers, and investors didn’t understand the value we thought we were obviously conveying. And subsequently, we were rejected more often than I would have liked to admit. In the early days, we didn’t lose on price nor on quality, but on brand and messaging. And while we thought and strove to prove we were better in areas that mattered, both startups eventually ended up having exceedingly simple one-liners.
On the other hand, “Fred” was working on something related to liquid fuel and cold fires. Something extremely technical. But he was able to win proportionally more yes’s than I was able to. When I asked him how, he said it was simple. “We’re putting a rocket into space. That’s it. And that’s really exciting.”
I made something extraordinarily simple into something extraordinarily complex. In all honesty, I sounded really, really smart. And I felt like I was the shit. Except no one else did. “Fred” took something extraordinarily complex and made it extraordinarily simple. He didn’t sound as smart. But celebrities, sponsors, companies – people just got it.
The true value of a product is usually exceedingly simple. The fallacy of including a Rolodex of esoteric jargon comes in two-fold. Either you’re trying to sound smarter than you actually are. Or you’re trying to cram too many things in too little space. As economist Herbert A. Simon said, “A wealth of information creates of poverty of attention.”
In closing
Whether you’re an entrepreneur or an emerging manager, you’re swinging for the fences. I was chatting with an investor yesterday who had an incredible analogy. “It’s like a pinball machine. The ball goes up, and you never know how it’ll fall down. You don’t know how many bounce pads and flippers it will hit. You don’t know how many points you’re going to get. But no matter how many points you’ll get, the ball has to go up first.” Similarly, whether you start a company or a fund, you have to step up to the plate to bat. You don’t know what the upside will be. You don’t know if you’re going to return your investors 2x, 5x or a 100x.
You’re taking an asymmetric bet on the compelling future you bring. Your valuation as a startup is not how much your startups is worth, which is why the 409a valuation is always different from the valuation your investors set for you. Your valuation is a bet your investors made that you will be as big as the major players in the market. If you’re valued at $10M today, your investors are saying you are 10 in 1000, or a 1% chance, to be a unicorn. And a 0.1% chance to be a decacorn.
Valuations might seem crazy today. VC firms are also raising larger and larger funds, which lead many to be skeptical on their ability to return capital. In fairness, most funds will return a modest 2-3x over their lifetime, if at all. Most startups are and will be overvalued. On the same token, the best ones, despite their crazy price, are still undervalued. Imagine if you were an investor who could invest in Facebook’s then-unicorn valuation. You’d have made a lot of money. But we’re in an optimistic market.
At the end of the day, both parties are just managing someone else’s capital. And as such, through a fiduciary responsibility, in that regard, both are cut from the same cloth.
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