Last week, I was chatting with Maya from Spice Capital. And in part of our conversation, she said that the advice she gives to folks looking to break into VC is that they should study late-stage founders, so that they know what excellence and quality looks like.
And I wholeheartedly agree. To get a bit more surgical, for anyone looking to break into VC, study founders who’ve gotten to at least a Series C round. And not only that, if you can, reach out to founders who’ve hit at least Series C, with 8- to 9-figure ARR from EACH set of vintage years. From the bull run of 2020-2021 to the growth periods of 2012-2019 to the GFC to the dot com boom and crash.
If you were to only take one vintage, you have a skewed view of what “great” looks like. But to sample across the eras allows you to pattern match with a greater and less-biased sample size. And instead of focusing on what changed in each era, focus on what hasn’t changed.
To the average person who’s looking to break into VC without a network, aka 99.9% of the world, myself and Maya included when we first did, cold emails and coffee chat asks will only get you so far. In fact, more often than not, you’ll either be ghosted or rejected. So, get creative.
If it helps, here are some ideas that may kindle the fire:
Start a podcast. I don’t care if you only have an audience of one. Start it. At some point it’ll grow. But giving people a platform to share their advice is better than having one isolated conversation. After all, that’s how Harry Stebbings started.
Or a newsletter or a blog. Vis a vis, Lenny Rachitsky or Packy McCormick. Hell, even a book, like Paige Doherty did. Although the last of which is a lot more work, but tends to be have more evergreen content.
Get into investment banking or tech/management consulting. This isn’t new. But if you get the chance to work with pre-IPO companies and take them public, there is immense value in seeing excellence in play.
Host events. While I personally like intimate dinners, there is also value from hosting large networking events, fireside chats, and panels. Like Maya, or Jonathan Chang, or David Ongchoco.
I reread PG’s blogpost on the cities and ambition recently thanks to a good friend of mine down in San Diego. And in it, there’s a specific phrase that caught my eye, “the quality of eavesdropping.” A phrase that has since worked its way into my own rotation. If I were to tie the above examples thematically together, it’s that the quality of eavesdropping is really high. At events, and in consulting, you’re around the buzz of talent. And the jazz of inspiration. When tuning into a podcast, one is often multitasking. Driving, exercising, walking, cooking, you name it. And one might say it is one of the best forms of passive learning out there.
Meriam Webster defines eavesdropping as the act of secretly listening to something private. George Loewenstein says one of the triggers to curiosity is access to information known to others. Private information, in other words, information with an element of exclusivity, fits just that. And as such, while doing the above is useful and helpful to you, it is just as helpful to everyone else. To a busy individual, that just might make her attendance worth it.
All that said, know that if you forever look to lagging indicators of success, you will always be one step behind. If not more. As long as you are tracking successful founders, their companies and their key talent (early employees or key executives), there will be others who will out-execute you. Their networks are larger. And stronger. Especially in that regard.
As someone young, or someone new to an industry, your best bet is to take market risk, not execution risk. Another perspective that both Maya and I share. Betting on new markets mean you are starting off at the same start line as everyone else is. If you can’t get home field advantage, play in a field no one’s played in before.
So after doing the above, and learning from the best, draw your conclusions. And graduate to a new market. But also, beware of the potholes pattern recognition creates.
If it may help, at least for me, it’s useful to remember that excellence is everywhere. And someone who is both ambitious and has a track record for fulfilling promises, is bound to go far. For the latter, it’s especially important to fulfill promises to oneself. The more impossible it is to that individual at that point in time, the better. Whether it was to be an Olympian, or asking their high school crush to prom. Or as Aram Verdiyan calls it “distance travelled.“
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Would the founders in your portfolio let you in on the cap table if you weren’t an investor? If you had no money? If they could only borrow your brain for two hours every three months, and that’s it?
The uncomfortable truth is that most founders won’t.
But to find the founder who will take that deal is the person you want to be focusing on. They’re the archetype of founder you want to win — that you put your whole heart into perfecting your craft for that founder.
Play to your strengths, not your weaknesses. Where do you have home field advantage?
Why does this matter?
All cards on the table, it won’t matter if you plan to stay a boutique VC firm or angel whose check size for an investment never goes past $250K. Even better if you don’t have any pro rata. But if you plan to institutionalize your firm — and I don’t mean to say this is the only way to institutionalize — you need to hire. To hire, you need enough management fees to support a team of that size. And to get enough management fees, most of the time, that requires you to scale your fund size.
Whereas in Fund I and maybe II, you played the participating investor. Squeezing in great deals. And everyone’s your friend. Founders love you. Your co-investors love you. With larger funds, you may end up scaling your check size. If you don’t, you start diversifying your portfolio more and more. And most large LPs prefer concentrated portfolios. Why?
They often do the diversification work in their own model. They pick their own verticals and stages they want exposure to. The product they want to buy is not to be their portfolio for them, but that it is just one asset in a larger portfolio. A lot of LPs also fear diversified portfolios in managers because at some point, managers will be investing in the same underlying asset. No LP wants to invest in 10 funds and have four of them all be investors in Stripe. If that’s the case, they might as well invest directly in Stripe via co-investment.
But at the end of the day, if your checks are bigger (along with ownership targets), it’s hard to always be 100% friendly with other investors since they have their own mandates. And at some point, the founder is forced to pick: you or any of those other interested investors.
And for you to win that deal, you must have something enduring that founders want outside of capital.
Examples
Of course, there are different ways to prove that you can win deals to your prospective LPs. The list below is by no means all-encompassing, but may help in giving you an idea of how people who have walked the path before you have done so.
Being chosen as the independent board member in other companies you didn’t invest in (Kudos to Ben Choi for sharing this one in our episode)
Even better if super pro rata (rarely happens though, especially after Series A)
(Co-)Leading rounds (met an emerging GP last year who syndicated the whole $2M round)
Repeat founders (with previous exits >$100M) let you invest in oversubscribed rounds with a check larger than $250K
Founders letting you invest on previous round’s terms (or highly preferential treatment)
Incubating the company
Evidence or repeatable ability for you to pre-empt rounds before founders go out to fundraise
Some combination of the above
In closing
Unintentionally, this blogpost is the unofficial part two of my first one on the topic of sourcing, picking, and winning. Part one was on sourcing. This one is on winning. No guarantees on picking, but who knows? I may end up writing something.
For the uninitiated, this was said by both Ben Choi and Samir Kaji on the Superclusters podcast. That to be a great investor, you need to be great in at least two of three things: sourcing, picking, and/or winning. If you only have great deal flow, but don’t know how to pick the right companies that come your way or have the best founders pick you, then you don’t have an advantage. If you’re really good at winning deals, but no one comes to you or you pick the wrong deals to win, then you also don’t have anything. You need at least two. Of course, ideally three.
But as you institutionalize, the third may come in the form of another team member or as you build out the platform.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
“‘Mutation’ is simply the term for a version of a gene that fewer than 2 percent of the population has. […] Imagine enough letters to fill 13 complete sets of Encyclopaedia Britannica with a single-letter typo that changes the meaning of a crucial entry.” A fascinating line from David Epstein. One that makes you pause and think. I apologize that this is where my mind wanders to every time I read something that stops me cold in my tracks. The world of startups, at least in fundraising, is no different.
Let me elaborate.
While this is rather anecdotal, the average VC I know takes 10 or less first meetings in any given week. As an average of 500 emails land in their inbox every week, that’s a 2% chance of having your cold message land you a meeting. And that’s not even counting the heavy bias towards warm intros. In other words, to get noticed, you have to stray from the norm. A variant. A mutation.
The good news about being a mutated monkey with two left ears and an overbite hosting two dozen fangs is that unlike in nature, you can genetically modify and give birth to a mutated product of your choosing. While I probably could’ve used more floral language, I realize I’m also not writing a rom com, but a documentary capturing the cold realities of an investor’s virtual real estate. That has more eyes trying to peer into it than it has time, space, and most importantly, attention to open doors.
Your appearance on that stake of land is your debutante ball. The question is how will you grace the ballroom floor among a sea of people who have access to the same town tailors, dressmakers, and dance instructors as you do. A name. A subject line. And at most 50 characters to make a first impression.
The short answer is you don’t.
I also understand that in writing a piece on how to stand out in an investor’s inbox, I run the risk of sounding like every other Medium article who’s covered this topic before me. So, instead of sharing the five steps to get every investor to open your email, I’m going to share three examples, starting with some initial frameworks of how and some of my favorite thought leaders think about narratives.
As a compass for the below, I’ll share more about:
For the purpose of this essay, I’ll focus on cold emails, rather than warm intros. But many of the below lessons are transferrable.
The investor product
Blume’s Sajith Pai recently wrote a great piece detailing on what he calls the investor product. And how that is different from the content product — what customers see and hear — and the internal comms product — what your team members see and hear. Even in my own experience, I see founders often conflate at least two. They bucket it into the internal story… and the external story — bundling, ineffectively, the investor and content product.
In short, the investor product is the narrative that you tell your investors. A permutation of your personality and your vector in the market in a sequence you think investors find most compelling. That narrative, while not mutually exclusive, is different from the story you tell your customers. For customers, you are the Yoda to their Luke Skywalker. For investors, you’re the Anakin to the Jedi Order. The future.
Not all pitches are created equal
Just like expository writing differs from persuasive writing which differs from narrative writing, there are different flavors of fundraising pitches as well. Kevin Kwokboils it down to three.
Narrative pitches: What could be. What does the future look like?
Inflection pitches: New unveiled secrets. In Kevin’s words, for investors, “now is the ideal risk-adjusted time to invest.” Why is the present so radically different? Why is the second derivative zero?
Traction pitches: Results and metrics. How does the past paint you in glorious light? Admittedly, people rarely index on the past. So, traction pitches are on decline. It’s akin to, if someone were to ask, “What is your greatest accomplishment?” You say, “It has yet to happen.”
The truth is most early-stage founder pitches are narrative pitches, focused on team and vision. But the most compelling ones for VCs are inflection ones. One of my favorite investor frameworks, put into words by the an investor in the On Deck Angels community, is:
Do I believe this founder can 10x their KPIs within the funding window?
The funding window is defined as usually 12 to 18 months after the round closes. And usually the interim time before a venture-scale company goes out to raise another round. In order to 10x during the next 12 to 18 months, you have to be on either a rising market tide that raises all boats, or more importantly, the beginnings of the hockey stick curve in your product journey. Do you have evidence that your customers just love your product? For instance, for marketplaces, that could be early organic signs as demand converts to supply. In other cases, it could be the engagement rate post-reaching the activation milestone.
What channel does the pitch land in
While the message — the narrative — is important, the channel in which the pitch is received is just as, if not more important. As Reid Hoffmanonce wrote, “the cold and unromantic fact is that a good product with great distribution will almost always beat a great product with poor distribution.”
The truth is that email is a saturated channel.
While Figma’s Naira Hourdajian notes that this applies to any form of communications, not just politics, she put it best, “Essentially, when you’re working in politics, you have your earned channels, owned channels, and your paid channels.”
Owned — Anything you control on your own channels. Your website, blog, your own email, and in a way, your own social channels.
Paid — Anything you put out into the world using capital. For instance, ads.
Earned — Because others are not willing to give it to you and that it is their real estate, you have to earn it. Like press and in this case, others’ email inboxes.
On an adjacent point, the thing is most founders don’t spend enough time and effort on owned and earned channels when it comes to the content product. Both are extremely underleveraged. Many think, especially outside of the context of fundraising, and within go-to-market strategies, think paid is the only way to go. While powerful, it is the channel that carries the most weight post-product-market fit. Not pre-.
In the context of fundraising, I always tell founders I work with to always be fundraising, just like they should always be selling. There’s a saying that investors invest in lines, not dots. But the first time you pop up in someone’s inbox is, by definition, just a dot. Nothing more, nothing less. Rather, you should start your conversations with your future investors before you kickstart your fundraising. Ask for advice. Host events that you invite them to. Interview them on a podcast or a blogpost. Feature them in a TikTok reel. (Clearly, I spend the bulk of my time with consumer startups).
As you might have guessed, sometimes it has to be outside of the inbox. To get their attention, there are two ways you can pick your channel:
Target powerful channels in an innovative way,
Target powerful, but neglected channels,
And, target new and upcoming channels.
As such, I’ll share an example for each.
Powerful channel used in an innovative way: Email
In one of Tim Ferriss’ 5-Bullet Friday newsletters recently, I found out that Arnold Schwarzenegger handwrites all his emails.
Source: Tim Ferriss’ 5-Bullet Friday — Jan 13, 2023
It’s brilliant. Genius, I might say. I don’t know how much intentionality went into why Arnold does so, but here’s why I think it’s brilliant.
If you’re sending it to someone who owns a Gmail, you’ve just given yourself 100% more real estate (albeit ephemeral) in their inbox. If their inbox is set on Gmail’s default view. Additionally, via the attachment name, that’s 10-15 characters more of information you can share at just a glance. Or at the minimum, if they’re reading via the compact view, an extra moniker that most emails do not have. A paper clip. To a reader’s eyes, it draws the same amount of attention as a blue check mark on Twitter or Instagram.
Once they click open the email, instead of plain text, your reader, your investor, sees font that stands out from all the other email text. A textual mutation that leads to curiosity. Something that begs to be read.
Powerful, but neglected channel: Physical mail
When I started in venture, I didn’t have a network, but I knew I needed one. Particularly, with other investors. After all, I didn’t know smack. I quickly realized that email and LinkedIn were completely saturated. One investor I reached out to later told me that he doesn’t check his LinkedIn at all, since he got 200 connection requests a day. So, it begged the question: Where must investors spend time but aren’t oversaturated with information?
Well, the thing is they’re human. So I walked through every step of what a day in the life of an average human being would go through, then guesstimated if there were any similarities with an investor’s schedule. Meal time, time in the bathroom, when they were driving or in an Uber (but I don’t run a podcast they’d listen to). And, like every other human being, they check their physical mail. Or someone close to them, checks them.
I knew they had to check their mail for their bills (a surprising number of investors haven’t gone paperless). But it couldn’t seem sales-y because they or their spouse or assistant would immediately throw it out. That’s when I decided I would write handwritten letters to their offices.
The EA is the one who usually sorts through the stack, and is someone who also doesn’t get the attention he/she deserves. Nevertheless, I believed:
Handwritten letters are going to stand out among a sea of Arial and Times New Roman font.
The envelope had to be in a non-white color to stand out against the other white envelopes. So, I went to Michael’s to buy a bunch of blue and green envelopes. Truth be told, I thought red was too much for me, and often carried a negative connotation.
The EA or office manager has to deem it not spam or marketing, so including a name and return address is actually a huge bonus, AND a note that doesn’t seem market-y on the envelope (i.e. thank you and looking forward to catching up).
At the end of the letter, I’d write I’d love to drop by and meet up with them in the office. Then I’d show up at their office within the week, and say, “I’m here to see ‘Bob.'”
The EA would ask if I had an appointment, and I would say that he should’ve received a letter in earlier in the week that let him know I would be here. Then, the EA would go back and ask if ‘Bob’ was free. If not, I’d wait in the lobby until they were, without overstaying my welcome. If they weren’t in the office, I’d ask to “reschedule” and book a time with them via the EA. Which would then officially get me on their calendars.
New and upcoming channel: Instacart
In a blogpost I wrote in 2021, I recapped how Instacart got into YC:
Garry Tan and Apoorva Mehta have bothshared this story publicly. Apoorva, founder of Instacart, back in 2012, wanted to apply to Y Combinator. Unfortunately, he was applying two months late. So he reached out to all the YC alum he knew to get intros to the YC partners. He just needed one to be interested. But after every single one said no, Garry, then a partner at YC, wrote: “You could submit a late application, but it will be nearly impossible to get you in now.”
For Apoorva, that meant “it was possible.” He sent an application and a video in, but Garry responded with another “no” several days later. But instead of pushing with another email and another application, Apoorva decided to send Garry a 6-pack of beer delivered by Instacart. So that Garry could try out the product firsthand. 21st Amendment’s Back in Black, to be specific. In the end, without any precedent, Instacart was accepted. And the rest is history.
In the above case, Instacart in and of itself was the emerging platform of choice. The application portal and email here were both saturated and had failed to produce results. What I missed in the above story is that the 6-pack arrived cold, which meant that the product worked and could deliver in record time. A perfect example of a product demo, in a way the partners were least expecting it.
In closing
Siddhartha Mukherjeeonce wrote: “We seek constancy in heredity — and find its opposite: variation. Mutants are necessary to maintain the essence of ourselves.”
Variation — being different — is necessary for the survival of our species. That’s what evolution is. That said, what worked yesterday isn’t guaranteed to work tomorrow. ‘Cause that same mutation that enabled the survival of a species has become commonplace. The human race, just like any other species, replicates what works to ensure greater survival.
The same is true for great ideas. A great idea today — even the above three — will be table stakes at some point in the future. Thus, requiring the need for even newer, even more innovative ideas. Hell, if it’s not via my blog, it’ll come from somewhere else. With the rise of generative AI — ChatGPT, Midjourney, Dall-E, you name it, if you’re average, you’ll be replaced. If you don’t have a unique voice, you’ll be replaced. Some algorithm will do a better and faster job than you will. As soon as more people start using the afore-mentioned tactics, the above will no longer be original. As such, I don’t imagine the case studies will age well, but the frameworks will. That said, the only unsaturated market is the market of great. To be great, you must be atypical. You must go where no one has gone before.
For those interested in startup pitches that stand out, specifically how to think about compelling storytelling, I highly recommend two places that inspire much of my thinking on the topic:
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
As you know from this blog, I spend a lot of time writing from my head. Startup, this. Venture capital, that. But comparatively little from my heart. This blog, Cup of Zhou, is not going to be the next Stratechery. Or a 20-minute VC. Or a Not Boring. For each one of the afore-mentioned, I have a tremendous respect for. Ben at Stratechery, Harry at 20VC, and Packy at Not Boring all do something I can not. And they do it really, really well. This blog is just nothing more and nothing less than me. It’s not a publicity stunt. And sure as hell, a terrible branding platform. In fact, I’m willing to shoot myself in the foot again and again, as long as I can be true to myself here.
Four people last week reached out to me. Two founders. A friend from college. And another from high school. They told me that life was tough. Things weren’t working out. And rejection sucks. They’re right. Whether your goal is to change the world or have an enduring marriage, life is rarely easy. You’re going to get that left hook more often than you’d like. And rejection fucking sucks. To those who said it gets better over time, it doesn’t. At least for me. You may get desensitized to each blow, but there will always be jabs and uppercuts that will sting more than the rest.
While I find comfort in writing my thoughts here, most people don’t have a safe space to be candid. As COVID is slowing its pace, at least in the Bay where we’ve reached a level of herd immunity, a while back, I decided to start a new series of in-person dinners where people will feel safe being vulnerable.
In hopes that this will help those hosting such circles outside of the Bay, here’s what I learned.
With both online and offline, I played around with a combination of social experiments and social observations. The former, I would lead and guide conversation through centering exercises and intentional “stage time.” The latter of which I would bring everyone together, but spend less time steering the conversation. Both were structured and all attendees were informed of the ground rules, theme for the night, and homework, oftentimes a personal story to share with the group, necessary to bring thoughtful conversation to the table.
Eyes are the windows to the soul
In group settings, shyer attendees would allocate more of their eye contact when speaking towards people they were familiar with. And given that I bring strangers (to each other) together, shyer attendees make eye contact with me – the one person they do know – more often than with others. But as they find more comfort in their fellow attendees, they slowly allocate more attention to them.
I often found that the best remedy for this was in two parts:
Make eye contact with them while speaking,
Mention their name intentionally a few more times than I do with other more confident guests, and
Once they sustain eye contact with you when you’re openly speaking to them, redirect their attention to another attendee by then mentioning an adjacent topic that the other attendee brought up, and making eye contact with the other attendee.
Give people a path to retreat for them to stay.
Vulnerability and true authenticity is tough. For some people, it’s easier to do with strangers. For others, it’s much harder to open up to people who you’ve never met before. Nevertheless, I like to err on the side of caution. Even after I send out personal invites to each person via DM or text, where I give them the context of what they’re about to embark on, I still preface the email that includes all the details, specifically the ground rules of authenticity, open-mindedness, and candor, with: Are you willing to be vulnerable?
Then right below that question:
If your answer is “no“, I completely understand, and I won’t force you to come. Just let me know if you’re opting out, as I need an updated headcount for our reservation.
But if it’s “yes“, … [read on]
And in that same email, everyone is BCC’ed. The guest list on the calendar invite is also not visible to each guest.
Guests have multiple opportunities to opt-out. And they should if they’re uncomfortable with the setting, since the people who do come are the ones who will truly find value in having a vulnerability circle.
Being time sensitive doesn’t matter
I initially thought that people really cared that each session was going to last 2 hours and everyone only had 15 minutes of “stage time”. And the implicit promise that I would be cognizant of everyone’s times mattered. And while it still does to a reasonable degree, it hasn’t seemed to be a priority for folks especially in my social observations. The only times it does matter are:
The energy in the conversation is waning and people start noticing hot silence, as opposed to cold silence.
Borrowing the terminology of “hot” and “cold” from Jerry Colonna, hot silence is what most people deem as awkward silence. A silence where people intentionally seek to fill the void. On the other hand, cold silence is where people are comfortable with or seek comfort in the absence of speech. Either that it lets ideas and thoughts ruminate or there is a space for tranquility that one might find calming.
Someone has another commitment right after the event.
People who don’t enjoy the conversations, topics, or people.
Luckily, this last one has yet to happen since I curate each person who comes to these circles myself. But, given how many more circles I will host in the future, it’s something I’m aware might happen.
Conversely, many of the ongoing conversations former attendees are still having with each other have come from circles that have gone overtime. This is something I’ll continue to have my pulse on to see if anything deviates from this thesis.
In closing
These vulnerability circles are only the first of many more to come. And of course, future circles will come in different variations. The ones I have planned for early next year thematically revolve around the absence and the dulling of particular senses, in order to heighten other ones. And you betcha I’ll have much more to write about then.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
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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I recently read Fable‘s Padmasree Warrior‘s breakdown of leadership lessons. Prior to Fable, she held executive positions at Motorola, Cisco, and NIO and currently serves on Microsoft and Spotify’s board. Out of all the insights she shared, I couldn’t help but reach out on one intriguing point she brought up: “Hire for expertise, not experience.”
Expertise ≠ Experience
Before reading the blogpost on her, I had never thought of expertise and experience as two separate wheelhouses of knowledge. While there is definitely some overlap, as Holly Liu, founder of Kabam, says:
Expertise and experience are similar, but not the same. It is to no surprise most people often conflate the two, myself included. Experience is a record of past events. Expertise is your ability to leverage experience to positively influence the outcome of future events.
I’m reminded of something Henry Ford once said. “If I had asked people what they wanted, they would have said faster horses.” Experience would have dictated faster horses. Expertise would have dictated why we once chose horses over other modes of transportation. And the framework to think about transportation in the next century.
Hiring for expertise
When I asked Padma, “What kinds of questions do you ask potential hires to measure on expertise rather than experience?”
She responded: “I usually as ‘if X happened what would you do?’ ‘If there is nothing here… how would you start a product?'”
I followed up with a David classic: “If I can be completely selfish one more time, and I understand if you don’t have the time, for the question, ‘if there is nothing here, how would you start a product?’ or similar ones, what differentiates between a good answer and a great answer?”
Padma added: “If someone says ‘I did this at such and such’ – wrong answer. I look for ‘I would start with … then do… then grow’.”
Everyone’s guilty of a bit of revisionist’s history when looking in hindsight. It’s in our DNA. We are the only species that create narratives from seemingly disparate data points. After talking with multiple recruiters, executives, and CEOs on the topic, I realized there is often a tendency for people connect their past achievements together and sound like they knew exactly what they were doing all along. But in foresight, that often isn’t true. There’s a lot of guesswork and uncertainty when looking through the windshield, compared to images that often seem closer in the rearview mirror.
To follow up on Padma’s thoughts, I had to ask my former professor, Janet Brady, the former Head of Marketing and Head of Human Resources for Clorox, about hiring for expertise. “I’m a big fan of situational interviewing, where I ask ‘What would you do if…?’ In the process, I am looking for (a) how would this come up, and (b) how would they approach the problem. It’s easy to make the puzzle pieces fit and make up narratives in the past, but much harder when given a situation to deal with on the spot.”
As with any matter, things are not as binary as they first seem to be. She concedes that there is validity in asking about experience as well. But the context around experience is often more insightful than the experience itself. Brady shared, “You never do something alone. If you see a turtle on top of a fence post, you don’t know how it got there, but you know it had help.” How many people were on your team? What was your role on the team? What problems did you run into? And how did you deal with those problems?
But one of her interview questions in particular stood above the crowd for me. “What did you do in this role that no one else in this role has done?” While past achievements aren’t always predictors of future progress, in this case, what you’re looking for aren’t anecdotes but general themes in life, specifically, the ability to question the status quo and act on it.
Echoing Brady’s questions on problems a hire has faced, what might be more interesting is what didn’t work out in the past. The scar tissue someone’s accumulated over the years. Marco Zappacosta of Thumbtack loves the question: “What’s your biggest professional regret?”. And he elaborates, “I’m under no illusions that I’m hiring perfect people, but I want to make sure I’m hiring people who are self-aware of being imperfect.”
Put into practice
SaaStr’s Jason Lemkin shared a great example in his blogpost. How the expertise of VPs of Marketing differ depending on what stage of a company’s maturity they earned their stripes. A corporate marketer’s experience might translate poorly to running marketing at a startup. Equally so, a seed-stage startup marketer’s job might carry much less significance in a Fortune 500 role.
Corporates focus on corporate marketing and brand marketing. A form of marketing that’s “all about protecting and reinforcing the brand once you are way past scale.” It’s less about getting your brand recognized since customers have already heard of your brand. It’s about getting potential customers over the activation energy required before making a buying decision. As Jason puts it, “the brand creates so many leads and customers all on its own.”
Startups, on the other hand, are all about demand generation. In other words, generating leads. It’s a numbers game. Spend X dollars to get Y leads, that generate five times of $X of revenue. The equivalent of an LTV-to-CAC ratio of 5x. At the same time, he notes that “brand marketing is very expensive in the early days – and frustratingly, generates zero leads.”
Someone with Z years of marketing experience might have a lot of scar tissue, but might not be able to solve the marketing problem for your startup. Demand gen folks can’t hide anywhere if they don’t get results, but corporate marketing folks can hide behind a brand. Focus on finding the expertise you need rather than the years of experience that might look sexy on a resume or on a pitch deck. As always they’re not mutually exclusive, but it’s important to know the difference.
Who knows? Maybe the next generation of lead gen is all about Twitter presence and memes, as a16z’s Andrew Chen recently tweeted.
Bottoms up SaaS founder to Enterprise sales founder:
On a bigger picture, the process of sales and marketing is a form of free education for a customer base. The better you can get your users to understand what you’re building, the more likely they will buy. Memes are just another medium of analogy and education. Better yet, of storytelling.
The better you can weave together seemingly disparate data points to create a compelling narrative without confounding extraneous variables, the greater your level of expertise. As Packy McCormick, one of my favorite writers, wrote on an a16z blogpost on expertise, “We live in a world where expertise can be justly claimed by anyone who can continue to prove it. Synthesis and storytelling are the keys to navigating that world. In a world with so much information available and fewer unquestioned experts, the ability to let large amounts of information wash over you, figure out where to dive deep, pull out the most compelling bits, and tie them all together is key.”
In closing
Hiring great talent across all levels breaks down to less of how many years of experience, but more so how you can leverage those experiences to understand and use unique and seemingly disparate data points going forward. Fall forward; don’t fall backward. An expert hire might not have all the answers to your problems, but will have built stress-tested mental models that’ll help in finding the answers for the questions you have.
Back when I was at SkyDeck, Caroline taught me that great entrepreneurs follow the “scientific method of entrepreneurship.” If I were to analogize her idea to expertise, an expert is a champion of the “scientific method of application.”
Of all the experts I’ve met – a title which is often one that society has deemed rather than being self-prescribed – they’ve almost always had an answer or multiple to a certain question. What proof would it take for you to change your mind?
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I’ve been this self-proclaimed “few screws loose” for a while. Rationally, what I do, it doesn’t always make sense. But in their post-mortems, my adventures often turn out to be invaluable lessons of growth. The month of March was no exception.
It all started with someone who reached out to tell me I didn’t know what I was talking about. And subsequently, that I should stop writing. It certainly wasn’t the first, but definitely the most direct one to date. I saw where he was coming from. I’d never personally taken an idea from inception to scale, much less exit. On the venture side, I’m a scout, and well that means, I don’t personally invest in many deals, if at all.
At the same time, it’s not like I didn’t expect such a comment. As a content creator, even an amateur one, I’m putting myself out there. And in doing so, I’m opening myself up to criticism. This, well, just the first of many more to come. In fact, I’ve alluded to it before. As Jeff Bezos once said, “If you can’t tolerate critics, don’t do anything new or interesting.” Now before I make myself seem smarter than I actually am by appealing to authority, I’m not. Simply, I believe their few words profoundly summarize what might take me an essay to convey.
In writing weekly content, and subsequently, doing my homework to write the best I can on any given topic, I give off the illusion that I’m smarter than I actually am. And every once in a while, I fall victim to using esoteric phrases. Like I could say the same statement above as: I give off the illusion that I have a larger repository of information than I have. But I do so because sometimes I really, really like the phrasing I come up with or come across. It’s more of a personal fulfillment than a misleading façade.
Like I’ve mentionedbefore… I write to think. An unrefined concept that through the process of writing, I come to a more robust understanding. But let’s be honest, it’s not all up and to the right. It’s a rollercoaster. I love how Packy McCormick, who authors Not Boring, described his own writing process.
After all, mine doesn’t fall too far from the apple tree. But I digress. That one message led me down a path to jump on phone calls with other folks who found my content or myself to be disagreeable. Some more perverse and antagonistic than others. Five people total. Four who had just fallen on a series of unfortunate events. Two of which just wanted to be heard. The other two seeking advice and feedback. And last who seemed to find power through berating me for 20 straight minutes. One other who has yet to respond.
Why? I’ve known for a while that I’m terrible at having tough conversations. Some of my friends might know from personal experience. A number of other founders who’ve been on the receiving end of my inability to say “No”. Especially when I first began in venture.
I thought that maybe – just maybe – if I go to the more extreme end of the spectrum, I might get better at giving others the respect and time they deserve. While I’m not sure if the five conversations have helped me mature, they made me a better listener.
When two broke down during our short call, what they needed wasn’t advice or feedback or someone to tell them everything was going to be alright. They just wanted someone to listen. Just listen. Given my personality, I was constantly tempted to respond. To give advice. And to ease the “awkward silence.” But it wasn’t awkward at all. My inability to recognize the sanctity of silence made it awkward.
For the two other founders, they sought feedback since no investor they chatted with so far gave them any constructive ones. I couldn’t promise connections nor capital. All I could promise was my own radical candor. And they were free to do with it as they saw fit. So I spent 10-15 minutes with each, listening to their pitch. No questions in between. My thoughts only chronicled on a 5×8 notepad in front of me. And only after they’d concluded, I would share my thoughts.
The last one, frankly, there was nothing I could do or say that would have changed his mind. And rather than trying to, which would only reinforce his belief, the best I could do was stay silent and occasionally smile.
I’m reminded once again of a line someone I deeply respect once told me, “The quality of communication is measured by not how much comes out of your mouth, but by how much reaches the other person’s ear.” And another, “We have two ears and one mouth; we should use them in that proportion.”
And I am still working on it. I have a long road ahead, but I’m positive if I keep the above lessons in mind, I’ll go further faster.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
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Founders often ask me what’s the best way to cold email an investor. *in my best TV announcer voice* Do you want to know the one trick to get replies for your cold email startup pitches that investors don’t want you to know? Ok, I lied. No investor ever said they don’t want founders to know this, but how else am I going to get a clickbait-y question? Time and time again, I recommend them to start with the one (at most two) metrics they are slaying with. Even better if that’s in the subject line. Like “Consumer social startup with 50% MoM Growth”. Or “Bottom-up SaaS startup with 125% NDR”. Before you even intro what your startup does, start with the metric that’ll light up an investor’s eyes.
Why? It’s a sales game. The goal of a cold email is to get that first meeting. Investors get hundreds of emails a week. And if you imagine their inbox is the shelf at the airport bookstore, your goal is to be that book on display. Travelers only spend minutes in the store before they have to go to their departure gate. Similarly, investors scroll through their inbox looking for that book with the cover art that fascinates them. The more well-known the investor, the less time they will spend skimming. And if you ask any investor what’s the number one thing they look for in an investment, 9 out of 10 VCs will say traction, traction, traction. So if you have it, make it easy for them to find.
That said, in terms of traction, most likely around the A, what growth metrics would be the attention grabber in that subject line?
Strictly annual growth
A while back, my friend, Christen of TikTok fame, sent me this tweetstorm by Sam Parr, founder of one of my favorite newsletters out there, The Hustle. In it, he shares five lessons on how to be a great angel investor from Andrew Chen, one of the greatest thought leaders on growth. Two lessons in particular stand out:
2. Run towards the heat.
If a company has tons of hype and seems overvalued, don't run away. Run towards it. Hype is good. Means they'll raise, exit at higher valuation. And the price likely won't feel overpriced after the startup exits.
3. Look for stuff that's growing at least 3x a year.
A business can grow slowly and still be great. But if you want a huge exit as an angel, you need at 3x annual growth for users, revenue, or something else important in order to get a multi-billion outcome.
Why 3x? If you’re growing fast in the beginning, you’re more likely to continue growing later on. Making you very attractive to investors’ eyes – be it angels, VCs, growth and onwards. Neeraj Agrawal of Battery Ventures calls it the T2D3 rule. Admittedly, it’s not R2-D2’s cousin. Rather, once your get to $2M ARR (annual recurring revenue), if you triple your revenue each year 2 years in a row, then double every year the next 3 years, you’ll get to $100M ARR and an IPO. More specifically, you go from 2 to 6, then 18, 36, 72, and finally $144M ARR. More or less that puts you in the billion dollar valuation, aka unicorn status. And if you so choose, an IPO is in your toolkit.
Source: Neeraj Agrawal’s analysis on public SaaS companies that follow the T2D3 path
For context, tripling annually is about a 10% MoM (month-over-month) growth rate. And depending on your business, it doesn’t have to be revenue. It could be users if you’re a social app. Or GMV if you’re a marketplace for goods. As you hit scale, the SaaS Rule of 40 is a nice rule of thumb to go by. An approach often used by growth investors and private equity, where, ideally, your annual growth rate plus your profit margin is equal to or greater than 40%. And at the minimum, your growth rate is over 30%.
For viral growth, many consumer and marketplace startups have defaulted to influencer marketing, on top of Google/FB ads. And if that’s what you’re doing as well, Facebook’s Brand Collabs Manager might help you get started, which I found via my buddy Nate’s weekly marketing newsletter. Free, and helps you identify which influencers you should be working with.
But what if you haven’t gotten to $2M ARR? Or you’ve just gotten there, what other metrics should you prepare in your data room?
I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?
As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?
Let’s look for a second from the investor side of the table…
Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.
On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.
Up to a $20m fund, there are are many ways to do 3x+
Up to a $60m fund, there are several ways
After $150m fund, there is probably 1 way
— Jason ✨Be Kind✨ Lemkin 🇮🇱 (@jasonlk) April 5, 2017
Why does a VC’s fund strategy matter to you as the founder?
A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.
I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.
If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.
While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:
The uncommon – Differentiators
The common – What everybody else is doing
The uncommon
Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:
Ability to build communities having built large followings
Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
Getting in’s to top executives at Fortune 500 companies
Closing government contracts
Access/domain expertise on international markets
In-house production teams
They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
Ability to get you on the front page of NY Times, WSJ, or TechCrunch
Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
Influencer network
Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
Surprisingly, not as common as I thought, VCs that pick up your call “after hours”
The common
Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:
Money, maybe follow-on investments
Access to the VC’s network (i.e. potential customers, advisors, etc.)
Access to the partner(s) experience
Intros to downstream investors
That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.
Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.
Finding investor NPS
You can find CS:H, or investor NPS, out in a couple of ways:
The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
You find out by asking portfolio founders during your diligence.
Your founder friends are highly recommending said investor to you.
Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quotedBrett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
In closing
“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:
If you were to start a new company tomorrow, would you still want this investor on your cap table?
With three options:
No
Yes
It’s a no-brainer.
And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.
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As a venture scout and as someone who loves helping pre-seed/seed startups before they get to the A, I get asked this one question more often than I expect. “David, do you think this is a good idea?” Most of the time, admittedly, I don’t know. Why? I’m not the core user. I wouldn’t count myself as an early adopter who could become a power user, outside of pure curiosity. I’m not their customer. To quote Michael Seibel of Y Combinator,
… “customers are the gatekeepers of the startups world.” Then comes the question, if customers are the gatekeepers to the venture world, how do you know if you’re on to something if you’re any one of the below:
Pre-product,
Pre-traction,
And/or pre-revenue?
This blog post isn’t designed to be the crystal ball to all your problems. I have to disappoint. I’m a Muggle without the power of Divination. But instead, let me share 3 mental models that might help a budding founder find idea-market fit. Let’s call it a tracker’s kit that may increase your chances at finding a unicorn.
