Tag: passion

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Three Mindsets To Being A Great Venture Investor

compass, path, direction, future

“Readily available quantitative information about the present is not gonna give you they key to the castle. […] If everyone has all the company data today and the means to massage it, how do you get a knowledge advantage?

“The answer is you have to either:

  1. Somehow do a better job of massaging the current data, which is challenging; or you have to
  2. Be better at making qualitative judgments; or you have to
  3. Be better at figuring out what the future holds.”

Those are the words of the great Howard Marks on a recent Acquired episode.

When most of us first learned economics — be it in high school or college, we learned of the Efficient Market Hypothesis. In short, if you had access to both public and private information, you would be capable of generating outsized returns that outperformed the market.

The truth is that reality differs quite a bit. And that’s especially in early-stage investing. Investors often make investment decisions with both public and private information at their disposal. There is admittedly still some level of asymmetric information, but that depends on deep of a diligence the investors do. Yet despite the closest thing to a strong efficiency, there’s still a large delta between the top half and bottom half of investors. The gap widens further when you compare with the top quartile. And the top decile. And the top percentile. Truly a power law distribution.

Massaging the data

I’m no data scientist, although I am obsessed with data. But there are people who are, and among them, people I deeply respect for their opinion.

There’s been this relentless, possibly ill-placed focus on growth (at all costs) over the last two years. Oftentimes, not even revenue growth, but for consumer startups, user growth.

I want to say I first heard of this from a Garry Tan video. The job of a founder pre-product-market fit (pre-PMF) is to catch lightning in a bottle. The job post-PMF is to keep lightning in that bottle. Two different problems. Many founders ended up focusing on or were forced to focus on (as a function of taking venture money) scale before they caught lightning in that bottle. They spent less time on A/B testing to find a global maximum, and ended up optimizing for a local maximum.

Today, or at least as of September 2022, there’s this ‘new’ focus on retention and profitability (at all costs). But there’s no one-size-fit-all for startups. As a founder, you need to find the metric that you should be optimizing for — a sign that your customers love your product. Whether it’s the percent of your customers that submit bug reports and still use your product or if you’re a marketplace, the percent of demand that converts to supply. Feel free to be creative. Massage your data, but it still has to make sense.

From a fund perspective, equally so, it’s not always about TVPI, IRR, and DPI, especially if you’re an emerging fund manager. Or in other words, a fund manager who has yet to hit product-market fit. You probably have an inflated total-value-to-paid-in capital (TVPI) — largely, if not completely dominated by unrealized return. The same is true for your IRR as well. In the past two years, with inflated rounds and fast deployment schedules, everyone seems like a genius. So many investors — angels, syndicate leads, and fund managers — found themselves with IRRs north of 70% for any vintage of investments 2019 and after. Although an institutional LP that I was chatting with recently discounts any vintage of startups 2017 and after.

So the North Star metrics here, for fund managers, isn’t IRR or TVPI. It’s other sets of data. I’ll give two examples. For a fund manager I chatted with a few weeks ago, it was the percent of his portfolio that raised follow-on capital within 24 months of his investment because it was more than twice as great as the some of the best venture firms out there. Another fund manager cited the number of his LPs who invested in his fund’s pro rata rights through SPVs.

Making qualitative judgments

In this camp, these are folks who have an extremely strong sense of logic and reasoning. When a founder has yet the data to back it up, these investors go back to first principles.

In my experience, these investors are incredible at asking questions, like how Doug Leone asks a founder for their strengths and weaknesses. But more than just asking questions, it’s also about building frameworks and knowing what to look for when you ask said questions.

For instance, every investor knows grit is an important trait in a founder. More than knowing at a high level that grit is important, what can you do to find it out? For me, it boils down to two things.

  1. Past performance. In other words, prior examples of excellence that they worked hard to get.
  2. Future predictors. I ask: Why does this problem keep you up at night? Or some variation. Why does this problem mean so much to you? Why are you obsessed? Are you obsessed? Why is this your life’s calling? And I’m not looking for a market-sizing exercise here.

While I don’t claim to hold all the truths in this world, nor can I yet count myself in the highest echelons of startup investing, the most I can do here is share my own qualitative frameworks for thinking:

Futurists

One of my favorite thought pieces on the internet is written by a legendary investor, Mike Maples Jr. of Floodgate fame. In it, he illuminates a concept he calls “backcasting.” To quote him:

“Legendary builders, therefore, must stand in the future and pull the present from the current reality to the future of their design. People living in the present usually dislike breakthrough ideas when they first hear about them. They have no context for what will be radically different in the future. So an important additional job of the builder is to persuade early like-minded people to join a new movement.”

Early-stage investors must have the same genetics: the ability to see the future for what it is before the rest of humanity can. And they back founders who are capable of willing the future into existence and create reality distortion fields, a term popularized by Bud Tribble when describing Steve Jobs.

When I first jumped into venture, one of the first VCs I met — in hindsight, a futurist — told me, “Some of the best ideas seem crazy at first.” A visionary investor is willing to take the time to detect brilliance in craziness. Paul Graham, in a piece titled Crazy New Ideas, proposed that it’s worth taking time to listen to someone who sounds crazy, but known to be otherwise, reasonable because more than anyone else, they know they sound crazy and are willing to risk their carefully-built reputation to do so.

For 10x founders and investors alike, the more you hear them out, the more they make sense. That said, if they start making less and less sense the more you listen, then your time is most likely better spent elsewhere.

In closing

As you may already know, a great early-stage investor requires a different skillset than a great public equities trader or a hedge fund investor. You’re more likely to work with qualitative data than quantitative data. Regardless of what archetype of a venture investor you are, you have to believe that we are capable of reaching a better future than the one we live in today. It is then a question of when and how, not if.

Of course, I don’t believe that these three archetypes are mutually exclusive. They are more representative of spectrums rather than definitive traits. Think of it more like an OCEAN personality test than a Myers-Briggs 16 personalities.

To sum it all, I like the way my friend describes venture investors: pragmatic optimists. Balance the realities of today with how great the future can be.

Photo by Jordan Madrid on Unsplash

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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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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!

Photo by mari lezhava on Unsplash

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Creativity is a Luxury

“Creativity is a residue of time wasted.”

I recently came across the above quote – the attribution to Einstein. And I found it extremely prescient. In the world last year. And in the years ahead.

Creativity is the ability to find inner peace in a busy world. To weave cacophony into symphony. The ability to recognize and chart patterns between the pixels and decibels around us. A guiding, focusing, and metaphorical – and I mean metaphorical in its truest form – principle that abstracts you from the literal shackles of your current situation. Now before I get to abstract…

I’ve written about where I find my inspiration on numerous occasions, including while I’m:

  • Exercising
  • Driving
  • Cooking
  • Showering
  • Listening to podcasts
  • Washing the dishes

… just to name a few. In each of the above, I give myself the intellectual bandwidth and the time to ponder. Simply ponder. With no goal or predestination in mind. Frankly, this blog is a product of such intellectual adventures.

And I know I’m not alone. In the world coming out of the pandemic, this may cause a new revolution of creativity.

Our grassroots

Hundreds of thousands of years ago, we transitioned from a nomadic to a more specialized lifestyle. The transition to specialized roles in a hunter-gatherer society allowed hominids to share the responsibility of survival. As we learn in the basics of economics, economies that have comparative advantages who trade can create a larger global supply of goods and services. In this case, it was the cooperation among the citizens of the same society that freed individuals’ bandwidths to explore other interests, including, but not limited to:

  • Controlled use of fire
  • Adaptability to colder climates
  • Specialized hunting tools, like fishhooks, bow and arrows, harpoons and bone and ivory needles
  • Intricate knowledge of edible plants

While hand-built shelters likely go as far back as 400,000 years ago, and huts made of wood, rock and bone as far back as 50,000 years ago, it wasn’t until the Neolithic Revolution that agricultural culture became a permanent habitual change. In the emergence of an agricultural lifestyle, humans now freed up time they would have otherwise spent on migration or hunting. And with that same free time, they invented more creative means of living, not just survival, like the means to combat disease and increased agricultural knowledge. Economists Douglass North and Robert Paul Thomas call this Neolithic Revolution the “first economic revolution“. The two state this was the result of “a decline in the productivity of labour in hunting, a rise in the productivity of labour in agriculture, or [an] … expansion of the size of the labour-force”.

Maslow’s Hierarchy

If we look at Maslow’s Hierarchy of Needs, the evolution of free time, and therefore creativity, makes complete sense. Psychologist Abraham Maslow wrote in 1943 that humans make decisions motivated five tiers of psychological needs.

Maslow’s Hierarchy of Needs

A person’s most basic, tangible needs are at the bottom, whereas the intangibles reside at the top. And according to Maslow, you cannot begin to fathom the higher echelons of your needs, like esteem and self-actualization, until you’ve fulfilled the tiers underneath. Maslow also calls self-actualization “growth needs” and the lower tiers “deficiency needs”. In a very real sense, when you’re struggling to find food and shelter or job security, you don’t have the mental capacity or free time to entertain how high your potential can go. Time, specifically leisure time, is a luxury for people who have fulfilled all their deficiency needs. And that leisure time is what creatives need.

Asking the best

Of course if I was to write anything on creativity, I had to ask my buddy, DJ Welch (IG, LI) – one of the most creative minds I know. Not only did he grow his YouTube channel to 370,000 subscribers in less than three years, he was also an artist for Lucasfilm, Instagram, Cartoon Network and more. Now, he’s working on a new project – Primoral Descent – one that I’ve been excited for the public to finally see.

“As a child, my parents let me have a lot of free time. They let me make my own choices. They let me be imaginative. That’s when you come up with innovation. Creativity is a river above everyone’s head.”

When I asked him to unpack that, he said, “Good ideas are gifts from the universe – fish that swim in that river. All you have to do is learn how to reach up and fish for them. And just like fishing, if you stick around long enough – if you’re patient enough, you’ll be able to catch a few. But you never know what fish you’ll reel in. Just that you will.”

Toys for adults

We see the same with entrepreneurs and creatives. They have time to think. Time to reach into that river and pull out an idea. They are investors and the medium of investment is their time. In fact, you can argue they’ve dedicated almost every waking hour to optimize themselves to offer a creative solution or perspective into the market. They’ve made it their job to be innovative. After all, innovation, by definition, is a creative solution. Under Einstein’s definition, we could call them professional time wasters.

As Chris Dixon says, “The next big thing will start out looking like a toy.” Today, we see the rise of NFTs, VR/AR, content creation, e-sports, and much more. Not too long ago, we had the telephone, and eventually the smartphone, as well as the internet. All of which had their origins as toys. And I know I’m only scratching the surface here. In order to have time to create toys, or for that matter, even play with toys, you need leisure time.

With that same time, more and more people are pursuing their interests and passions, creating, what Li Jin at Atelier Ventures dubbed, the “passion economy“. Similarly, more people are dabbling into new hobbies. In the pandemic, the average person saved 28 minutes of time that would have been spent on going to work. An hour on average for the round trip. Some people used that time saved to get more work done. Others used their time saved to discover new passions – be it baking, starting a podcast, hiking, or gaming. For many Americans, that extra time was paired with stimulus checks and communities coming together to cause political and economic shifts – for better or worse.

As Tal Shachar, former Chief Digital Officer at Immortals, said, “The next big thing in 2021 is the YOLO economy. Consumers will be more open to trying new products/services and spending on novel experiences, particularly with friends, as we emerge from the pandemic with pent up demand and few routines.” In the process of trying, you will inevitably uncover more surface area to expand on.

In closing

In 2021 and onwards, as entrepreneurship and solo-preneurship lowers its barriers to entry, we’re lowering the Gini Index equivalent for creativity. More people will have increased access to time – time to self-actualize. Time to challenge our status quo.

I love this line in Kevin Kelly‘s “99 Additional Bits of Unsolicited Advice“: “The greatest rewards come from working on something that nobody has a name for. If you possibly can, work where there are no words for what you do.” If you can succinctly describe what you’re working on, then you’re not really pushing the envelope.

Later in that same essay, Kelly writes, “A multitude of bad ideas is necessary for one good idea.” And to have ideas, you need time. As DJ and I were wrapping up our conversation, I asked, “So, DJ, how do you optimize for creative moments?”

And he responded with some great food for thought. “I nap. Sleeping is how I process information. As I go lay down for a nap, right in that lucid moment, I come up with my ideas. I quickly scribble them down, then go back to sleep. When I finally wake up, I go work on them. The great Winston Churchill’s naps were a non-negotiable part of his day. In fact, during WWII, he had a bed set up in the War Rooms so he could take his daily afternoon naps. Similarly, I often take 20-minute power naps around 2-3PM. And I’ve never pulled all-nighters. Thinking isn’t hard for me. Thinking is the part ‘efficient people’ [who work straight through the day] get stuck on.”

Cover Photo by Jr Korpa on Unsplash

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#unfiltered #41 Pondering Purpose and Passion – Notes from Naval Ravikant on Clubhouse

fire, passion, purpose

I’ve been a long time fan of Naval Ravikant, so when he went on Clubhouse recently to share his thoughts, despite not having an iPhone (I know ?), I had to find a way to tune in. While Clubhouse is designed to be the ephemeral demystification of the broader world, there are a rarified few conversations I believe are and should be evergreen. Naval’s happens to be one of them. Whether Clubhouse itself compiles these knowledge banks or through some third-party service, we already have listeners and Clubhouse users recording these conversations. A temporary hack that paves the way for a broader solution.

Over the weekend, I found Naval’s definition of purpose to be one of the best I’ve heard to date:

“You have to live up to your own moral code. Your life is an eternal single-player game. You’re not competing against anybody else; you’re competing against yourself. You set your own desires and your goals. You have your own perspective. You have your own morality. And you have to live up to it.

“There is no standard meaning or purpose. If there was a single purpose or meaning for all of us, then we’d all be slaves to that single purpose. We’d all be robots – every one of us fighting each other in conflict to get to that one purpose. And there’s not even a single purpose for you necessarily, other than the one that you create. So, you get to create your meaning and purpose. You get to craft your own story here. […]

“It is a race, but you’re just running against yourself. You pick the finish line; you pick the goal line; you pick the meaning; you pick the purpose. So you can pick a meaning or purpose that is antithetical to happiness, or one that aligns with it.”

A month ago, my friend and I watched Pixar’s Soul. In it, the writers illustrated a powerful lesson on life’s inspiration. As Jerry enlightens Joe, that distilling your whole life into a singular purpose is “so basic”, Joe enlightens Soul 22, “your spark isn’t your purpose. The last box fills in when you’re ready to come live.” To live means to enjoy and savor every minute, every second, the entire 24-hour day, all 365 days of the year, and every year we are alive and breathing. Not just, and I’m generalizing here, the 40-100-hour workweeks. Joy and purpose, after all, was never meant to measured as a unit of time alone.

Many of us live life looking for our purpose in life – a singular destination. A singular raison d’être. We compartmentalize our entire lives into self-prescribed labels. In high school, it was either by our grades or our extracurriculars. In college, by our majors. In our adult life, by our job title. I can’t speak for everyone, but I’m willing to bet that most, if not all people, are more robust than just their full-time roles make them out to be. Just like I’m more than a VC Scout. That’s why I’m so fascinated by polymaths in our society.

In opening our minds to a world beyond a single degree of freedom, we give ourselves more surface area to find inspiration and happiness. As Tim Ferriss once said, “It is not that beauty is hard to find; it’s that it is easy to overlook.”

Equally so, his rhetoric on passion is equally as provocative. Or specifically, the relationship between your passion/obsession (more on obsession here and here) and domain expertise. The latter, as Naval calls it, “specific knowledge”:

“How do you gain specific knowledge? It’s almost a catch 22. Specific knowledge is built up by you through your passions. So, when they say follow your passion, it’s kind of what they mean. It doesn’t always lead to money, but it can. Because if you’re obsessive about something and learning it for your own genuine intellectual curiosity – not to get a degree, not to make money, not to impress your friends – you’re going to end being better at it than anybody else. So, I really believe that you should only read and engage in activities that you genuinely enjoy. And you should cultivate your intellectual obsessions without any goal that you may be surprised when you look back and connect the dots later that one of them developed into a goal. One of the hallmarks of specific knowledge is that it will feel like play to you, but it will look like work to others. So, anything that fits that model, you should develop. […]

“You get what you want out of life. You just have to want it badly enough. If it’s your all-consuming desire, you will get it. You will create the path to the destination no matter what it takes.”

Naval’s encyclopedic answers asked underscored once again a question I ask myself when I am the most lost:

What would I do if, at the end of the day, I would be only one applauding myself?

Photo by Almos Bechtold on Unsplash

#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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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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