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VCs Are Science Fiction, Not Non-Fiction Writers

science fiction, camera lens, city

With the crazy market we’re in today, VCs are frontloading their diligence. They’re having smarter conversations earlier. Before 2021, most investors would have intro conversations with founders before taking a deeper dive into the market to see if the opportunity is big enough. Nowadays, investors do most, if not all, their homework before they start conversations with founders. And when they’ve gotten a good understanding of the market and a more robust thesis, then:

  1. They go out finding and talking to the founders who are solving the problems and gaps in the market they know exist.
  2. They incubate their own companies that solve these same issues.

Subsequently, they are more exploratory than ever before. In frontloading their diligence, VCs have become more informed, if not better, predictors of not only where the market is today, but where the market is going to be tomorrow. They have a better grasp on the non-obvious. Or at the very minimum, have a much better understanding on the obvious, so that the boundaries of the non-obvious are pushed further. In turn, they can truly invest in the outliers. Outliers that are more than three standard deviations from the mean.

Startup ideas are often pushing the boundaries of our understanding of the world we live in. The team at Floodgate use an incredible breakdown to frame the amount of data that needs to be present to qualify the validity of a team and idea. “[W]e like to say some secrets are plausible, some are possible, and some are preposterous, all different types of insights. It matters what type it is because the type of team you need, the type of people you need to hire, the fundraising strategy, the risk profile, the amount of inflections that have to come together. All of those things vary, depending on the type of secret about future that you’re pursuing,” said Mike Maples Jr. recently on the Invest Like the Best podcast.

Science fiction is, by definition, preposterous. But so are the true outliers. And as any great investor knows, that’s where the greatest alphas are generated.

Preposterous ideas are backed by logic and insight

To quote PG from an essay he wrote earlier this year, “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.”

But no matter how implausible your startup idea sounds, there still has to fundamentally be an audience. And while it may not be obvious today, the goal is that it will be obvious one day. Frankly, if it’s forever non-obvious and forever in the non-consensus, you just can’t make any money there. If Airbnb stuck only with the convention industry or Uber only with the black cab, or Shopify only with snowboards, they would never have the ability to be as big as they are today.

Shopify’s Alex Danco has this great line in his essay World Building. “If you can create a world that’s more clear and compelling than the complex, ambiguous real world, then people will be attracted to that story.”

As investors, we have to start from first principle thinking. Investors, in frontloading their diligence, find the answers to “why now” and “why this”. All they’re looking for after is the “why you.” The further down the line towards preposterous science fiction you are, the more you need to sell investors on “why you”.

Idea PlausibilityKey QuestionContext
PlausibleWhy this?Most people can see why this idea should exist. Because of the consensus, you’re competing in a saturated market of similar, if not the same ideas. Therefore, to stand out, you must show traction.
PossibleWhy now?It makes sense that this idea should exist, but it’s unclear whether there’s a market for this. To stand out, you have to convince investors on the market, and subsequently the market timing.
PreposterousWhy you?Hands down, this is just crazy. You’re clearly in the non-consensus. Now the only way you can redeem yourself is if you have incredible insight and foresight. What’s the future you see and why does that make sense given the information we have today? If an investor doesn’t walk out of that meeting having been mind-blown on your lesson from the future, you’ve got no chance.

And when answering the “why you”, it’s not just on your background and years of experience, but your expertise. As Sequoia’s Roelof Botha puts it, “So what was the insight? What is the problem that you’re addressing? And why is your solution compelling and unique in addressing that problem? Even if it’s compelling, if it’s not unique there’re going to be lots of competitors. And then you’re probably going to struggle to build a distinctive business. So it’s that unique and compelling value proposition that I look for.” So before anything else, the best investors, like Roelof, “think of value creation before value capture.”

In order to find that earned secret – that compelling and unique secret sauce – in the first place, you have to love what you’re working. And not just passionate, but obsessive. The problem you’re trying to solve keeps you up at night. You have to be more of a “missionary” than a “mercenary” as Roelof would put it. If you’re truly a missionary, even the most preposterous idea will sound plausible if you can break down why it truly matters.

The Regulatory Dilemma

The most important and arguably the hardest part about writing science fiction – and this is equally true for funders as it is for founders – is that we have to self-regulate. Regulation will always be a lagging indicator of technological development. Regulators won’t move until there’s enough momentum.

But, as we learned in high school physics, with every action, you need an equal and opposite reaction. The hard about momentum, and I imagine this’ll only be more true in a decentralized world, is that it’s second order derivative is positive. In other words, it’ll only get faster and faster. On the other hand, regulation follows the afterimage of innovation. It sees where the puck was or, at best, is at, but not, until much later, where the puck is going. And truth be told, innovation will eventually plateau, as it follows a rather step-wise function, as I’ve written before. And when it does, regulation will catch up.

S-Curves
Source: Tim Urban’s “The AI Revolution: The Road to Superintelligence“

So, in the high school physics example of Newtonian physics, the reaction, in this case, regulation, needs to be equal and opposite force comparative to where the puck will be. But as you’ve guessed, that will stop innovation. And I don’t think the vast majority of the world would want that. Progress fuels the human race.

Science fiction needs rules

Brandon Sanderson, one of my favorite fictional authors, has these three laws that govern great worldbuilding. To which, he coined as Sanderson’s Three Laws. The second of which reads:

Limitations > powers

In fantastical worlds, we are often used to how awesome things can be. Making the impossible possible. But as Brandon explains, “the truth is that it’s virtually impossible to come up with a magical effect that nobody else has thought of. Originality, I’ve seen, doesn’t come so often with the power itself as with the limitation.”

As the infamous line goes, “with great power comes great responsibility.” If you end up having access to every single person on this planet’s data, what makes you a company worth betting on isn’t your power, but how you use that power. How you self-regulate in using that power. Take, Open AI’s GPT-3. Instead of sharing the entire AI with the world, they limited that power to prevent malicious actors through an API.

What does self-regulation mean? Simply, aligning incentives so that all stakeholders win. When you have two people, you have a 2×2 matrix to account for four possible outcomes. There’s a situation where both people win, two situations where one wins, one loses, and another where both lose. Needless to say, we want to be maximizing for win-win situations.

As Balaji Srinivasan said on the Tim Ferriss Show recently, “When you have three people, it’s a 2x2x2, because there’s eight outcomes, win/lose times win/lose times win/lose. It’s a Cartesian product.. […] When you have N people, it’s two by two by two to the Nth power. It’s like this hypercube it as it gets very complicated.” Subsequently, the greater the organization, the more stakeholders there, and the harder it is to account for the “win” to the Nth power outcome. Nevertheless, it’s important for founder and funders at the frontier of technological and economic development to consider such outcomes. And at what point is there a divergence of incentives.

There’s usually a strict alignment in the value creation days. But as the business grows and evolves to worry more about value capture, there needs to be a recalibration of growth and an ownership of responsibility as the architects who willed a seemingly preposterous idea into existence.

In closing

We live in a day in age that is crazier than ever before. To use Tim Urban’s analogy, if you brought someone from 1750 to today and had them just observe the world we live in, that person will not only be mind-blown, but literally, die of shock. To get the same effect of having someone die of shock in 1750, you can’t just bring someone from 1500, but you’d have to go further back till 12,000 BC. The world is changing exponentially. And new technologies further that. Who knows? In 50 years, we in 2021, might die of shock from what the world will have become.

And rightly because of such velocity, innovators – founders and investors – will have to lead the charge not only technically and economically, but also morally.

Photo by Octavian Rosca on Unsplash

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My Top Founder Interview Questions That Fly Under The Radar

questions

As I am co-leading a VC fellowship with DECODE (and here’s another shameless plug), a few fellows asked me if I had a repository of questions to ask founders. Unfortunately, I didn’t. But it got me thinking.

There’s a certain element of “Gotcha!” when an investor asks a founder a question they don’t expect. A question out of left field that tests how well the founders know their product, team or market. In a way, that’s the sadist inside of me. But it’s not my job, nor the job of any investor, to force founders to stumble. It’s my job to help founders change the world for the better. By reducing friction and barriers to entry where I can, but still preparing them as best as I can for the challenges to come.

I’m going to spare you the usual questions you can find via a quick Google search, like:

  • What is your product? And who is your target audience?
  • How big is your market? What is your CAGR?
  • What is your traction so far?
  • How are you making money? What is your revenue model?
  • And many more where those come from.

Below are the nine questions I find the most insightful answers to. As well as my rationale behind each. Some are tried and true. Others reframe the perspective, but better help me reach a conclusion. I do want to note that the below questions are described in compartmentalized incidents, so your mileage may vary.

Here’s to forcing myself into obsolescence, but hopefully, empowering the founders reading this humble blog of mine to go further and faster.

The questions

I categorize each of the below questions into three categories:

  1. The market (Why Now)
  2. The product (Why This)
  3. And, the team (Why You)

Together, they form my NTY thesis. The three letters ordered in such a way that it helps me recall my own thesis, in an unfortunate case of Alzheimer’s.

Why Now

What are your competitors doing right?

This is the lesser-known cousin of “What are your product’s differentiators?” and “Why and how do you offer a better solution than your competitors?”. Founders are usually prepared to answer both of the above questions. I love this question because it tests for market awareness. Too often are founders trapped in the narratives they create from their reality distortion fields. If you really understand your market, you’ll know where your weaknesses are, as well as where your competitors’ strengths are.

There have been a few times I’ve asked this question to founders, and they’d have an “A-ha!” moment when replying. “My competitors are killing it in X and Y-… Oh wait, Y is our value proposition. Maybe I should be prioritizing our company’s resources for Z.”

Why is now the perfect time for your product to enter the market?

As great as some ideas are, if the market isn’t ripe for disruption, there’s really no business to be made here… at least, not yet. What are the underlying political, technological, socio-economical trends that can catapult this idea into mass adoption?

For Uber, it was the smartphone and GPS. For WordPress and Squarespace, it was the dotcom boom. And, for Shopify, it was the gig economy. For many others, it could be user habits coming out of this pandemic that may have started during this black swan event, but will only proliferate in the future. As Winston Churchill once said, “Never let a good crisis go to waste.”

A great way to show this is with numbers. Especially your own product’s adoption and retention metrics. Numbers don’t lie.

What did your customers do/use before your product?

What are the incumbent solutions? Have those solutions become habitual practices already? How much time did/do they spend on such problems? What are your incumbents’ NPS scores? In answering the above questions, you’re measuring indirectly how willing they are to pay for such a product. If at all. Is it a need or a nice-to-have? A 10x better solution on a hypothetical problem won’t motivate anyone to pay for it. A 10x on an existing solution means there’s money to be made.

Before we can paint the picture of a Hawaiian paradise, there must have been several formative volcanic eruptions. It’s rare for companies to create new habits where there weren’t any before, or at least a breadcrumb trail that might lead to “new” habits. As Mark Twain says, “History doesn’t repeat itself, but it often rhymes.”

Why This

What does product-market fit look like to you?

Most founders I talk to are pre-product-market fit (PMF). The funny thing about PMF is that when you don’t have it, you know. People aren’t sticking around, and retention falls. Deals fall through. You feel you’re constantly trying to force the product into your users’ hands. It feels as if you’re the only person/team in the world who believes in your vision.

On the flip side, when you do have PMF, you also know it. Users are downloading your product left and right. People can’t stop using and talking about you. Reporters are calling in. Bigger players want to acquire you. The market pulls you. As Marc Andreessen, the namesake for a16z, wrote, “the market pulls product out of the startup.”

The problem is it’s often hard to define that cliff when pre- becomes post-PMF. While PMF is an art, it is also a science. Through this question, I try to figure out what metrics they are using to track their growth, and inevitably what could be the pull that draws customers in. What metric(s) are you optimizing for? I wouldn’t go for anything more than 2-3 metrics. If you’re focusing on everything, you’re focusing on nothing. And of these 1-3 metrics, what benchmark are you looking at that will illustrate PMF to you?

For example, Rahul Vohra of Superhuman defines PMF with a fresh take on the NPS score, which he borrows from Sean Ellis. In feedback forms, his team asks: “How would you feel if you could no longer use the product?” Users would have three choices: “very disappointed”, “somewhat disappointed”, and “not disappointed”. If 40% or more of the users said “very disappointed”, then you’ve got your PMF.

Founders don’t have to be 100% accurate in their forecasts. But you have to be able to explain why and how you are measuring these metrics. As well as how fluctuations in these metrics describe user habits. If founders are starting from first principles and measuring their value metric(s), they’ll have their priorities down for execution. Can you connect quantitative and qualitative data to tell a compelling narrative? How does your ability to recognize patterns rank against the best founders I’ve met?

If in 18 months, this product fails. What is the most likely reason why?

This isn’t exactly an original one. I don’t remember exactly where I stumbled across this question, but I remember it clicking right away. There are a million and one risks in starting a business. But as a founder, your greatest weakness is your distraction – a line in which the attribution goes to Tim Ferriss. Knowing how to prioritize your time and your resources is one of the greatest superpowers you can have. Not all risks are made equal.

As Alex Sok told me a while back, “You can’t win in the first quarter, but you can lose in the first quarter.” The inability to prioritize has been and will continue to be one of the key reasons a startup folds. Sometimes, I also walk down the second and third most likely reason as well, just to build some context and see if there are direct parallels as to what the potential investment will be used for.

On the flip side, one of my favorite follow-ups is: If in 18 months, this product wildly succeeds. What were its greatest contributing factors?

Similar to the former assessing the biggest threats to the business, the latter assesses the greatest strengths and opportunities of this business. Is there something here that I missed from just reading the pitch deck?

What has been some of the customer feedback? And when did you last iterate on them?

I’m zeroing in on two world-class traits:

  1. Open-mindedness and a willingness to iterate based on your market’s feedback. As I mentioned earlier with Marc Andreessen’s line, “the market pulls product out of the startup.” Your product is rarely ever perfect from the get-go, but is an evolving beast that becomes more robust the better you can address your customer’s needs.
  2. Product velocity. How fast are your iteration cycles? The shorter and faster the feedback loop the better. One of the greatest strengths to any startup is its speed. Your incumbents are juggernauts. They’ll need a massive push for them to even get the ball rolling. And almost all will be quite risk-averse. They won’t jump until they see where they can land. Use that to your advantage. Can you reach critical mass and product love before your incumbents double down with their seemingly endless supply of resources?

Why You

What do you know that everyone else doesn’t know, is underestimating, or is overlooking?

Are you a critical thinker? Do you have contrarian viewpoints that make sense? Here, I’m betting on the non-consensus – the non-obvious. While it’s usually too early to tell if it’s right or not, I love founders who break down how they arrived at that conclusion. But if it’s already commonly accepted wisdom, while they may be right, it may be too late to make a meaningful financial return from that insight.

But if you do have something contrarian, how did you learn that? I’m not looking for X years of experience, while that would be nice, but not necessary. What I’m looking for is how deep founders have gone into the idea maze and what goodies they’ve emerged with.

Why did you start this business?

Here, unsurprisingly, I’m looking for two traits:

  1. Your motivation. I’m measuring not just for passion, but for obsession and the likelihood of long-term grit. In other words, if there is founder-market fit. Do you have a chip on your shoulder? What are you trying to prove? And to whom? Do you have any regrets that you’re looking to undo?

    Most people underestimate how bad it’s going to get, while overestimating the upside. The latter is fine since you are manifesting the upside that the wider population does not see yet. But when the going gets tough, you need something to that’ll still give you a line of sight to the light at the end of the tunnel. Selfless motivations keep you going on your best days. Selfish motivations keep you going on your worst days.
  2. Your ability to tell stories. Before I even attempt to be sold by your product or your market, I want to be sold on you. I want to be your biggest champion, but I need a reason to believe in the product of you. You are the product I’m investing in. You’re constantly going to be selling – to customers, to potential hires, and to investors. As the leader of a business, you’re going to be the first and most important salesperson of the business.

What do you and your co-founders fundamentally disagree on?

No matter how similar you and your co-founders are, you all aren’t the same person. While many of your priorities will align, not all will. My greatest fear is when founders say they’ve never disagreed (because they agree on everything). To me, that sounds like a fragile relationship. Or a ticking time bomb. You might not have disagreed yet, but having a mental calculus of how you’ll reach a conclusion is important for your sanity, as well as the that of your team members. Do you default on the pecking order? Does the largest stakeholder in the project get the final say after listening to everyone’s thoughts?

Co-founder and CEO of Twilio, Jeff Lawson, once said: “If your exec team isn’t arguing, you’re not prioritizing.” 

I find First Round’s recent interview with Dennis Yu, Chime’s VP of Program Management, useful. While his advice centers around high-impact managers, it’s equally as prescient for founding teams. Provide an onboarding guide to your co-founders as to what kind of person are you, as well as what kind of manager/leader you are. What does your work style look like? What motivates you? As well as, what are your values and expectations for the company? What feedback are you working through right now?

In closing

Whether you’re a founder or investor, I hope these questions and their respective rationale serve as insightful for you as they did for me. Godspeed!

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How Fictional Worldbuilding Applies to Building Startup Narratives

startup narratives, trees, forest, fantasy, science fiction, worldbuilding

Last week I spent some time with my friend, who joined me in my recent social experiment, brainstorming and iterating on feedback. Specifically, how I could host better transitions between presentations. She left me with one final resonating note. “Maybe you would’ve liked a creative writing class.”

I’ve never taken any creative writing courses. I thought those courses were designed for aspiring writers. And given my career track, I never gave it a second thought. Well, until now. I recently finished a brilliant fictional masterpiece, Mistborn: The Final Empire written by #1 New York Times bestselling author, Brandon Sanderson. So, that’s where I began my creative journey.

In my homework, I came across his YouTube channel. One of his lectures for his 2020 BYU writing students particularly stood out. In it, he shares his very own Sanderson’s Laws.

The three laws that govern his scope of worldbuilding are as follows:

  1. Your ability to solve problems with magic in a satisfying way is directly proportional to how well the reader understands said magic.
  2. Flaws/limitations are more interesting than powers.
  3. Before adding something new to your magic (setting), see if you can instead expand what you have.

Outside of his own books, Sanderson goes in much more depth, citing examples from Lord of the Rings, Star Wars, and more. So, if you have the time, I highly recommend taking one and one-fifth of an hour to hear his free class. Or if you’re more of a reader, he shares his thesis on his First Law, Second Law, and Third Law on his website.

But for the purpose of this post, the short form of the 3 laws suffices.

The First Law

Your ability to solve problems with magic in a satisfying way is directly proportional to how well the reader understands said magic.

The same is true in the world of entrepreneurship. Your ability to successfully fundraise is directly proportional to how well the investor understands your venture. Or more aptly put, how well you can explain the problem you are trying to solve. This is especially true for the 2 ends of the spectrum: deep tech/frontier tech startups and low-tech, or robust anti-fragile products/business models. Often times, the defensibility of your product comes down to how well people can understand what pain points you’re trying to solve. You may have the best product on the market, but if no one understands why it exists, it’s effectively non-existent.

Though not every investor will agree with me on this, I believe that too many founders jump straight into their product/solution at the beginning of their pitch deck. While it is important for a founder to concisely explain their product, I’m way more fascinated with the problem in the market and ‘why now?’.

You’re telling a story in your pitch. And before you jump into the plot (the product itself), I’d love to learn more about the setting and the characters involved (the underlying assumptions and trends, as well as the team behind the product). As my own NTY investment thesis goes (why Now, why This, why You, although not in that particular order), I’m particularly fascinated about the ‘why now’ and ‘why you’ before the ‘why this’. And if I can’t understand that, then it’s a NTY – or in millennial texting terms, no thank you.

My favorite proxy is if you can explain your product well to either a 7-year old, or someone who knows close to nothing about your industry. Brownie points if they’re excited about it too after your pitch. How contagious is your obsession?

The Second Law

Flaws/limitations are more interesting than powers.

Investors invest in superheroes. The underdogs. The gems still in the rough. And especially now, at the advent of another recession and the COVID crisis, the question is:

  1. How much can you do with what little you have?
  2. And, can you make the aggressive decisions to do so?

I realize that this is no easy ask of entrepreneurs. But when you’re strapped for cash, talent, solid pipelines, are you a hustler or are you not? Can you sell your business regardless? To investors? New team members? Clients/paying users?

On the flip side, sometimes you know what you need to do, but just don’t have the conviction to do so, especially for aggressive decisions. You may not want to lay off your passionate team members. Or, let go of that really great deal of a lease you got last year. You may not want to cut the budget in half. But you need to. If you need to extend what little you have to another 12-18 months, you’ve got to read why you should cut now and not later. Whether we like it or not, we’re heading into some rough patches. So brace yourselves.

But as an investor once said to me:

“Companies are built in the downturns; returns are realized in the upturns.”

The Third Law

Before adding something new to your magic (setting), see if you can instead expand what you have.

And finally consider:

  • Can you reach profitability with what you have without taking additional injections of capital?
  • Can you extend your runway by cutting your budget now?
  • But if you need capital to continue, do you need venture capital funding? I’m of the belief, that 90% of businesses out there aren’t fit for the aggressive venture capital model.

How scrappy are you? How creatively can you find solutions to your most pressing problems? And maybe in that pressure, you may find something that the market has never seen before.

In closing

Like a captivating fantastical story, your startup, your team, your investors, and especially you yourself, need that compelling narrative. The hardest moments in building a business is when there’s no hope in sight – when you’re on the third leg of the race. In times of trial, you need to convince yourself, before you can convince others. To all founders out there, godspeed!

And as Sanderson’s Zeroth Law goes:

Always err on the side of what’s awesome.

If you’re interested in the world of creative writing or drawing parallels where I could not, check out Brandon Sanderson’s completely (and surprisingly) free series of lectures on his YouTube channel.

Photo by Casey Horner on Unsplash

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My Thesis (2019)

I jumped into the fascinating world of venture capital about three years ago. It’s not like I planned it out or had a life-long dream of being in VC. Maybe it was a result of too many bedtime stories from my dad or maybe it was my admiration of Remy from Pixar’s Ratatouille. Either way, I just knew I was enamored innovators and their stories.

Three years in, I don’t claim to know everything, or even anything. After all, a brilliant veteran investor once told me:

“You won’t know if you’re good at it until you’re ten years in.”

And it just so happens that ten years is the average lifetime of a fund. As of now, I’ve accrued quite a bit of unrealized IRR – less so monetarily, but more so in terms of pattern recognition. In this cycle (as I believe, rather than psychology’s four linear stages of competence) of incompetence and competence, I know what I don’t know – my conscious incompetence. But here is what I do know – my (hypo)thesis after reading thousands of pitch decks, meeting 700+ founders and learning from 100+ investors. Granted, a mix of pre-seed, seed, and Series A folks.

Why this?

The first leg of my thesis happens to be the most explicit, and often times, the easiest for founders to answer. Why are you pursuing this problem? What makes your solution appealing to people currently facing this dilemma? And, how are you different from your direct and indirect competitors?

‘Why this?’ is, simultaneously, a question about product and market. How does this product fit in the larger picture of the market? Is the market well-defined, growing, or nascent? How saturated is the market? What is everyone else missing entirely or underestimating?

Why now?

What market forces, technological advancements, and/or social dynamics have made this problem ripe for the taking? Timing is crucial for startups. Too early, the stage has yet to be set. Had Uber or Lyft been founded prior to the smartphone, it would have folded in the blink of an eye against the looming giant of taxis. Same if coding bootcamps came before demand exceeded supply of software engineer roles in technology. Too late, and you’re feeding on scraps, if at all.

Often times, there’s more than one team that realizes the intersection of social, technological, political, and economic trends at the same time. But each might have a unique perspective on why the intersection came to be. The question I ask myself when looking at each potential investment is: What did you catch that makes money, which everyone else underestimating or missing entirely? Of course, it does make it easier when the founder(s) help spell that out for me.

Why you?

Early-stage investing is mostly about the founders, especially when there’s so little numeric evidence the earlier the stage is. Their obsession (similar, but not the same as passion), their grit, their domain expertise, their chemistry, and their ambition.

Obsession. Passion is what keeps you going during the day and when you have free time. It’s what you love. For example, there are many things in this world that I love: swimming, art, travelling, and eating, among many others, but I would never throw away my life to pursue these. After meeting with hundreds of founders, I learned it’s easy to mistake eagerness for passion, especially during the first 30-minute coffee chat. Obsession, on the other hand, is what keeps you going during the night, while burning the midnight oil. It’s what you hate. It’s a personal vendetta, which is catalyzed by a problem that you face first-hand, rather than through market diligence. As one of my good founder buddies, Mike, prompts it:

“How you sleeping?”

On the same token, obsession is contagious and inspiring. It is a key quality I look for, which can reasonably help predict how proficient an entrepreneur is and will be in hiring early team members, as well as onboarding future stakeholders.

Grit is a function of obsession. The more obsessed you are, the easier it is to weather through obstacles during the founding journey. It’s a trait I learned to recognize as a former competitive swimmer. The more obsessed I became with a achieving a certain time, the easier it was for me to overlook the short-term pain for the long-term gain. I could put in 40-hour swim weeks and still be as eager and excited coming out of them. Similarly, I’ve seen obsessed founders be able to pull off cup ramen meals, moving from comfortable houses to stuffy 2-room apartments, and taking rejection after rejection from investors, friends, and family. With limited resources, how much cognitive flexibility does the founding team have? I’m not saying that founders need to live in a garage and have cold pizza to be successful, but I do want to see founders’ ability to be scrappy and resourceful, like Brian Chesky and his team at Airbnb went to each of host’s house to take high-quality pictures for the site or when Michelin created the Michelin Guide for restaurants to help sell their tires.

Domain expertise. One of my favorite questions to ask founders is: “What is each of your competitors doing right?” It’s easy to get bogged down in the thought process of “I’m right, you’re wrong” and many founders that I’ve seen do end up living in a bubble of how “unique” (whether true or not) they are. What separates a good entrepreneur from a great entrepreneur is the ability is to ability to adapt and be open-minded about the changing landscape, which includes getting to know your market, and subsequently, competitors, like the back of your hand. Domain expertise isn’t just understanding the market, the product and the team, but also having accumulated deep, unique insights into all the above and being able to defend each insight. It is one of the few traits that I look for that cannot be static and should grow over time.

Chemistry. Rather than asking how long co-founders have known or worked with each other, I found it more insightful to ask how co-founders would resolve problems between themselves and their first impressions of each other. Both provided me with context on whether pressure and friction can create gems or mashed potatoes.

Ambition. When I first entered the world of venture capital, I thought ambition was a given. I mean, who would want to create a startup if they weren’t ambitious? Over time, I learned there were varying degrees of ambition. Some envisioned transforming an industry, some wanted to be acquired, and some just wanted to be their own boss. None are better or worse than the others, but not all are suited for VC financing. VCs bet big to win big. I’ve watched VCs turn down many great ventures, just because they couldn’t justify their potential ROI to their team, fund, and/or limited partners (LPs for short – the folks who invest in VC funds). Why? VCs take on big, but calculated risks. Because of that philosophy, they expect many misses, but for each investment, they’re hoping that that venture makes back a majority of their fund, if not more. Of course, there are a few other factors that determine VCs return on any investment, but at the very early stages, it’s the first check mark entrepreneurs have to check. You can only catch as much fish as how wide the net you cast.

Conclusion

The uncomfortable truth, especially in the San Francisco Bay Area, where people from around the world come to build a dream, is that not all ventures are meant for the venture capital model. VCs ask founders to tackle aggressive schedules and metrics, whether it’s the Rule of 40 for SaaS startups, or the minimum Month-over-Month growth of 30%, as I was first taught. There are many profitable startups and brilliant builders out there that are excluded from the VC model.

My friends and colleagues call it my NTY thesis – the millennial abbreviation for “No thank you”. When I first started scouting, it was all about finding the best ones out there. It was saying “yes” to each opportunity to each conversation – quantity. But when I reached critical mass, had started developing an investment thesis, in conjunction with learning how other theses came to be, it wasn’t about quantity anymore; it was about quality. It wasn’t about finding; it was about eliminating. The hardest part for me was turning my eager “yes’s” to reluctant, but necessary “no’s.” A good mentor of mine once said:

“If you can’t say no, don’t invest.”

Although I have yet to invest in these startups, the calculus is the same. I really boil it into one final question: Am I willing to risk my political or social capital with my connections for your venture? Is there something about the founder and/or startup I can nerd out about? It could be an extraordinary track record for getting shit done. It could be brilliant traction. It could be a unique insight. What really tips the scale is the secret sauce.

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