I know I just wrote a blogpost on how LPs assess if GPs can win deals. But after a few recent conversations with LPs in fund of funds, as well as emerging LPs, I thought it would be interesting to draw the parallel of not only proxies of how GPs win deals, but also proxies of how LPs win deals. And as such, coming back with a part two. Maybe a part one and a half. You get the point.
The greatest indicator for the ability to win deals as a VC is to see what the largest check (and greatest ownership target) a world-class founder will take from you. (That said, if you are only capable of winning deals based on price, you might want to consider another career. You should have other reasons a brilliant founder will pick you.) And even better if they give you a board seat.
The greatest indicator for the ability to win deals as an LP is to see what the smallest check a world-class GP will take from you. And even better if they give you a seat on the LPAC.
In the world where capital is more or less a commodity, the more capital one can provide (with some loose constraints on maximums), the better. But if someone who has no to little trouble raising is willing to open doors in a potentially over-subscribed fund for you, that’s something special.
An LP I was chatting with recently loves asking the question, “How big of a check size would you like me to write?” And to him, the answer “As much as you can.” Or “I’ll take any number.” is a bad answer. According to him, the best GPs know exactly how much they’re expecting from LPs, and sometimes as a function of how helpful they can be, especially in a Fund I or II. But always as a function of portfolio construction. Your fund size is after all your strategy, as the Mike Maples adage goes. While I don’t know if I completely agree with this approach, I did find this approach intriguing, and at least worth a double take.
I’m forgetting the attribution here. The curse of forgetting to write things down when I hear them. But I was listening to a podcast, or maybe it was a conversation, where they used the analogy that being a VC is like watching your child on the playground. You let your child do whatever they want to. Go down the slides. Climb the monkey bars. Sit on the swings. And so on. You let them chart their own narratives. But your job as the parent is once you see your kid doing something dangerous, that’s when you step in. When they’re about to jump off a 2-story slide. Or swing upside-down. But otherwise your kid knows best on how to have fun. In the founders’ case, they know how to build an amazing product for an audience who’s dying for it.
Excluding the fact that you’re a good friend or family that go way back, you likely have something of great strategic value to that GP — be it:
Network to other LPs
Operational expertise and value to portfolio companies (to a point where you being an LP will help the GP win deals with founders)
Operational expertise to the GP and the investment team
Investment expertise to help check the GP’s blindside
Access to downstream capital
Deal flow, or
Simply, mentorship
At the same time, ONSET Ventures once found that “if you had a full-time mentor who was not part of the company’s management team, and who had actually run both a start-up and a larger business, the success rate increased from less than 25% to over 80%.” (You can find the case study here. As an FYI, the afore-mentioned link leads to a download of the HBS case study.)
That’s the role of the board. The LPAC. Of the advisory board. For a founder or emerging GP, the full-time availability of said board members or LPAC members is vital.
A proxy of a mentor’s availability is pre-existing relationships between founder/emerging funder and said investor or advisor. Another is simply the responsiveness of the investor or advisor. Do they take less than 12 hours to reply? Or 3-5 business days? It’s for that latter reason Sequoia’s Pat Gradyonce lost out on an investment deal to his life partner, Sarah Guo. Being responsive goes a long way.
In sum, for LPs in fund of fund managers, small things go a long way.
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.
Two weeks ago, in an On Deck Angels workshop, one of our community members asked: “What do you recommend to do to increase access to allocation and top-performing deals?” To which I responded briefly with my belief that investors should always try to win their right on the cap table — whether it’s in the current round or the next. And, there are four ways to win that right:
Go early.
Being a valuable asset to the company.
You are never too good to chase the best.
Get to know the lead investor. Specifically, in their mind, be different.
As a footnote to all this, Founder Collective did a study a year or so ago where they found the 30 most valuable companies in the world raised half as much and were worth 4x the 30 most funded companies in the world. So, while hot rounds are great and all, there’s no telling that they’ll be the most valuable companies in ten, even five, years’ time. All that to say, I realize I’m writing this blogpost in a down market — likely only a few quarters of many more before we see the end of this recessionary period. The truth is, there are probably not as many hot rounds as there are before. But they still exist. And as an investor, you want to be ready for when that happens. While you set yourself up to have a prepared mind for getting picked, focus on picking.
To take a deeper dive on getting picked…
Just like it’s important for a founder to find product-market fit, it’s equally as important for an investor to find investor-market fit. Think of your check or your vehicle as a product in and of itself. As an investor, you are either great at picking or great at getting picked or both. For the purpose of responding to the above question, I’ll focus on the latter — getting picked.
It’s a three-sided marketplace where your customers are your LPs, founders, and your co-investors. Of all the above, to be fair, LPs loving you doesn’t necessarily get you better access to deals, so we’ll save that discussion for another day. And while there are many factors to getting picked, it boils down to two things:
Founders love you
Co-investors love you
In both scenarios, you get proprietary access to deals. As Sapphire’s Beezersaid, “‘proprietary deal flow’ is not really a thing.” Proprietary access, on the other hand, is a thing.
Lenny Rachitsky and Yuriy Timen put out a great piece on activation rates recently. In it, there’s one line I particularly like, when they defined the activation metric:
“Your activation milestone (often referred to as your ‘aha moment’) is the earliest point in your onboarding flow that, by showing your product’s value, is predictive of long-term retention.”
The product, your fund or check. Retention, how likely they are to keep you on their speed dial (for a particular topic or function). And there are two distinct qualities of a great activation metric: “highly predictable” and “highly actionable.”
Highly predictable: The founders know exactly what they can get from you. The value you give isn’t vague, like “we invest in the best early-stage founders.” a16z can afford to say that. You can’t.
Highly actionable: Knowing what value founders can get from you, they know the exact types of questions to ask you to best extract that value.
The earlier you are in your investing journey, the more obvious you should make the above.
Taking the product analogy in stride, how do you get to a point where your customers get to your activation milestone? Where they form a new habit around keeping you top of mind?
How do you get founders to love you?
In my mind, there are two ways we can measure if founders love you:
For founders you’ve invested in: If they answer with your name to “If you were to start a new company, who are the first three investors you would bring back to your cap table?”
For founders you haven’t invested in: You get (great) deal flow from founders you passed on.
Tactically, in combination with being predictable and having your value be actionable…
Go early. Be the first check in when they’re still non-obvious. This of course requires a combination of luck and conviction. The latter is more predictable than the first. Be bullish when others are bearish.
Being a valuable asset to the company. Founders have 2 jobs: (a) make money and (b) hire people to make money. As an investor, everything you do is directly or indirectly involved in that. Also, when a founder fundraises, I would ask them what they plan to do with that money (i.e. hire VPs, more engineers, scale to X # of customers), and see if you can be preemptively helpful there.
You are never too good to chase the best. This is something that I picked up from a Pat Grady video some long while back. But to win the best deals, you go to where the founders are, don’t expect them to come to you. That’s how Sarah Guo, Pat’s wife, won a lot of deals that Sequoia wanted to get into.
How do you get co-investors to love you?
The best way to measure this is your co-investors proactively invite you to invest in future deals together.
The best way to get there is to:
Get to know the lead investor. Specifically, in their mind, be different.
Their lead investor might have a large portfolio where they can’t be as helpful to every investment they make. Try to squeeze in the round and be insanely helpful to their/your portfolio. And over time, as you co-invest in more deals, they’ll keep you top of mind for future ones.
For this one, it pays not to be generalist. I don’t mean as a function of industry but as a function of how you add value to your portfolio. Someone who can do everything is less desirable than someone who is really good at just one thing. Say, hiring executives or getting FDA approval or generating PR buzz. Interestingly enough, responsiveness is also a differentiator. I heard an investor say recently that the value of an investor is determined not by what happens during the meeting, but in between meetings. And I completely agree. The cap table doesn’t need another investor. The cap table needs people who will increase the chances of the company’s multi-billion dollar outcome.
The takeaway here is to not be better, but to be different. People can’t tell better, but they can tell different. That’s why the word differentiated is used so much. Have a differentiated approach. Have a diversified portfolio. On the other hand, having a better generalist strategy than a16z or Sequoia is hard to measure. While it may be true in the long run, better is difficult to measure in foresight, but obvious in hindsight. Just like product-market fit. Hard to pinpoint in the windshield, but obvious in the rearview mirror. It’s better to be the in a pool of one than a pool of many. Be the one CEO coach. Be the one who helps founders build robust communities. Or, be something that no one expects. Like Charlie Munger, be the best 30 second mind in the world.
Another reason I left this in the co-investor love section is that while being different does help you stand out to founders, there seems to be a lot more logo chasing from founders. Differentiation, unfortunately, falls short of brand recognition. I genuinely hope that this does change in the next few quarters.
In closing
While the question that inspired this blogpost is meant for hot rounds, the same holds for just being a great investor. One thing I’ve told many applicants to On Deck Angels is that we look for folks who are excited about putting investor on their resume and is willing to put in the legwork to become a great investor. The above is one of many paths to become one.
Arguably the above is how to be a great champion of people. The investor part comes with luck and having an eye for great talent, ideally before others. Betting on the non-obvious before they become obvious.
The best startup investors are disciplined and constantly learning. Some might argue that they may not have the time to entertain hot startups in general. Or at least startups when they are hot.
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.
Back in mid-2020, I started writing a piece on 99 Pieces of Unsolicited, (Possibly) Ungooglable Startup Advice. There was no ETA on the piece. I had no idea when I would publish it, other than the fact, that I would only do so once I hit the number 99. Yet, just like how I was inspired to write how similar founders and funders are, it finally dawned on me to start writing a similar piece for investors around mid-2021. The funny thing, is though I started this essay half a year later, I finished writing it one and a half months sooner while I was still on advice #95 for the former.
Of course, you can bet your socks I’ve started my next list of unsolicited advice for investors already. Once again, with no ETA. As I learn more, the subsequent insight that leads to an “A-ha!” moment will need to go deeper and more granular. And who knows, the format is likely to change.
I often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve more nuance, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites for investors below cover everything, in no particular order other than categorical resonance, including:
Unfortunately, many of the below advice came from private conversations so I’m unable to share their names. Unless they’ve publicly talked about it. Nevertheless, I promise you won’t be disappointed.
As any Rolodex of advice goes, you will not resonate with every single one, nor should you. Every piece of advice is a product of someone’s anecdotal experience. While each may differ in their gravitas, I hope that each of the below will serve as a tool in your toolkit for and if the time comes when you need it most.
To preface again, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
General advice
1/ To be in venture capital, you fundamentally have to be an optimist. You have to believe in a better tomorrow than today.
2/ “Everyone has a plan until they get punched in the mouth.” – Mike Tyson. Told to me by an LP who invests in emerging and diverse managers.
3/ Have good fluidity of startup information. “No founder wants to meet a partner and have to answer the same questions again and again. Best partnerships sync and with every discussion, process the questioning.” – Harry Stebbings
4/ The lesson is to buy low, sell high. Not to buy lowest, sell highest.
5/ “The New York Times test. Don’t do anything you wouldn’t want to see on the front page of the NY Times.” – Peter Hebert
6/ “It takes 20 years to build a reputation and five minutes to ruin it.” – Warren Buffett
7/ When you’re starting off as an investor, bet on one non-obvious founder – a real underdog. Support them along their entire journey. Even if there’s no huge exit, the next one will be bigger. When their VPs go off and start their own businesses, they’ll think of you first as well.
8/ When planning for the next generation of your firm’s successors, hire and mentor a cohort of brilliant investors, instead of focusing on finding the best individual. Investing is often a lonely journey, and it’s much easier to grow into a role if they have people to grow together and commiserate with.
9/ “When exit prices are great, entry prices are lousy. When entry prices are great, exit prices are lousy.” – David Sacks
10/ Illiquidity is a feature, not a bug. – Samir Kaji
11/ Three left turns make a right turn. There is no one way to break into VC. Oftentimes, it’s the ones with the most colorful backgrounds that provide the most perspective forward.
12/ “Whenever you find yourself in the majority, it is time to pause and reflect.” As an early stage investor, I find Mark Twain’s quote to be quite insightful.
13/ “It’s not about figuring out what’s wrong; it’s about figuring out what is so right. The job of an investor is to figure out what is so overwhelmingly great, or so tantalizingly promising that it’s worth dealing with all the stuff that’s broken.” – Pat Grady retelling a story with Roelof Botha
15/ Track your deal flow. Here’s how I track mine. Another incredible syndicate lead with over 5x TVPI (total value to paid in capital) I met keeps it even simpler. A spreadsheet with just 4 columns.
Company
Valuation in
Valuation out
Co-investors – This is where you start sharing deal flow with each other here.
16/ One of your best sources of deal flow might not be from other investors, but those who are adjacent to the venture ecosystem, like startup lawyers and VC attorneys.
17/ A WhatsApp group with your portfolio is a great tool for diligencing investments, not as much for sourcing deals.
18/ “Decide once you have 70% conviction.” – Keith Rabois. Don’t make decisions with 40% conviction since that’s just gambling. Don’t wait till 90% conviction because you’ll miss the deal for being too slow.
19/ Ask questions to founders where they show grit over a repeated period of time. They need to show some form of excellence in their life, but it doesn’t have to be in their current field. From a pre-seed manager with 3 unicorns in a portfolio of 70.
20/ As an emerging manager, one of the best reasons for investing in emerging markets: Do you want to see the deals that the top 0.1% see? Or do you want to see the deals that the 0.1% passed on? From the same pre-seed manager with 3 unicorns in a portfolio of 70.
21/ Every day, open your calendar for just one hour (two 30-minute slots) to founders you wouldn’t have had otherwise. Your network will compound. From a manager who’s invested in multiple unicorns and does the above from 10-11PM every night.
22/ The bigger your check size, the harder you have to fight to get into the round.
23/ The best investors frontload their diligence so they can have smarter first conversations with founders.
24/ Perform immersion-based diligence. Become super consumers and super users of a category, as close as you can get to subject-matter experts. That way you know very quickly after meeting a founder if their product is differentiated or unique. While you’re at it, write 2-3 page bug report stress-testing the product. Founders really do appreciate it.
26/ When a founder can’t take no for an answer and pushes back, “I always have to accept the possibility that I’m making a mistake.” The venture business keeps me humble, but these are the benchmarks that the team and I all believe in. Inspired by JCal and Molly Wood.
27/ Win deals by “sucking the oxygen out of the air.” In investing there are two ways to invest: picking or getting picked. Picking is naturally in a non-competitive space. Getting picked is the exact opposite. You have to eat competition for breakfast. And when you’re competing for a deal everyone wants to get into, you have to be top-of-mind. You need to increase the surface area in which founders remember you, not just to take their time, but to be really, really valuable in as much time as you can spend with them. Inspired by Pat Grady on an anecdote about Sarah Guo.
Pitching to LPs
28/ Surprises suck. On Samir Kaji’s podcast, Guy Perelmuter of GRIDS Capital once said: “There’s only one thing that LPs hate more than losing money. It’s surprises.” More here.
29/ Fund I: You’re selling a promise. Fund II: You’re selling a strategy. And, Fund III: You’re selling the returns on Fund I.
30/ Steven Spielberg didn’t know what E.T. should look like, so he had everyone write down people they respected. And so E.T. looked a bit like everyone on that list, including Carl Sandburg, Albert Einstein and Ernest Hemingway. In a very similar way, come up with a list of your ideal LPs. And create a fund based on what they like to see and what you can bring to the table. Oftentimes, it’s easier to ask them for personal checks than checks out of their fund.
31/ Ask the founders you back for intros to their other investors as potential LPs in your fund.
32/ The return hurdles for LPs are different per fund type: *subject to market motions. Timestamped in Sept 2021 by Samir Kaji
Nano-fund (<$20M): 5-7x+
Seed fund: 3-5x+
Series A: 3x+
Growth: 2-2.5x+
Crossover/late growth (driven by IRR, not multiples): 10-12%+
33/ “If you know one family office, you know one family office.” Said by one of the largest LPs in venture funds. Each family office situation is uniquely different.
34/ Family offices are surprisingly closed off to cold emails, but often share a lot of deal flow with each other. Have co-investors or founders introduce you to them.
35/ It takes on average 2 months for an institutional LP to do diligence and reference checks. Plan accordingly.
36/ LPs look for:
Track record (could be as an individual angel as well)
Value add
Operational excellence
37/ Data shows that first-time/emerging managers are more likely to deliver outperformance than their counterparts, but as one, you still need to show you have experience investing.
38/ People, including LPs, tend to remember stories, more than they do data. Teach your LPs something interesting.
39/ LPs have started looking more into two trends: private investments and impact/ESG initiatives. By nature of you reading this blogpost, you’re most likely the former already. The latter is worth considering as part of your thesis.
40/ Every coffee is worthwhile in some form.
41/ LP diligence into VCs break down into two types: investment and operational DD.
Investment DD includes team, incentive alignment, strategy, performance, current market, and terms/fees.
Team: What does leadership look like? How diverse are you?
Alignment: Do you have performance-based compensation?
Strategy: What sectors are you investing into? What does your underwriting discipline look like?
Performance: What do your exits look like? Are you exits repeatable?
Market: What are the current industry valuations? Economies of scale?
Terms/fees: Are they LP friendly? Are the fees based on alphas or betas? Are they aligned with your value add?
Operational DD includes business model, operational controls, tech platforms, service providers, compliance and risk.
42/ If you’re pitching to other venture funds to be LPs, say for $250K checks, larger funds (i.e. $1B fund) typically have fund allocations because check size is negligible. And a value add as deal flow for them at the A. Whereas, smaller funds don’t because it is a meaningful size of their fund. So, GPs write personal checks.
43/ If you’re planning to raise a fund, think of it like raising 10 Series A rounds. For most Series A rounds, a founder talks to about 50 investors. So for a Fund I, you’re likely to talk to 500 LPs to close one.
44/ Send potential LPs quarterly LP updates, especially institutions. Institutions will most likely not invest in your Fund I or II, but keep them up to date on the latest deals you’re getting into, so you’re primed for Fund III.
45/ Family offices want to get in top funds but most can’t because top funds have huge waitlists. Yet they still want access to the same deals as top funds get access to. They’re in learning mode. Your best sell to family offices is, therefore, to have:
Tier 1 investors as your fund’s LPs
Tier 1 investors as co-investors
Deals that they wanted to get into anyway
46/ Your Fund I LPs are going to be mostly individual angels. They believe in you and your promise, and are less worried about financial returns.
47/ Institutional LPs are looking for returns and consistency. If you say you’ll do 70% core checks and 30% discovery checks, they’re checking to see if you stick to it. Institutions aren’t in learning mode, instead you as a fund manager fit into a very specific category in their portfolio. Subsequently, you’re competing with other funds with similar foci/theses as you do.
48/ Be transparent with your IRRs. If you know you have inflated IRRs due to massive markups that are annualized, let your (potential) LPs know. For early stage, that’s probably 25-30%+. Especially when you’re in today’s frothy market (timestamped Jan 2022). Or as Jason Calacanis says it for his first scout fund that had crazy IRRs, “It’s only down from here.”
49/ Don’t waste a disproportionate amount of time convincing potential LPs about the viability of your thesis. Shoot for folks who can already see your vision. If you manage to convince an LP that didn’t previously agree, they may or may not end up micromanaging you if your thesis doesn’t work out as “expected.” Inspired by Elizabeth Yin.
50/ “The irony for us was LPs asking about portfolio construction was a sign that the meeting was going poorly.” – Jarrid Tingle.
51/ Institutional LPs prefer you to have a concentrated startup portfolio – less than 30 companies. They already have diversification across funds, so they’re maximizing the chance that their portfolio has fund returners. That said, you’re probably not raising institutional capital until Fund III. Inspired by Jarrid Tingle.
52/ If you’re an emerging manager with a fund is less than 4 years old, boasting high IRR (i.e. 50%+) is meaningless to sophisticated and institutional LPs. Focus on real comparative advantages instead. – Samir Kaji.
53/ When raising early checks from LPs, ask for double the minimum check size. Some LPs will negotiate down, and when they only have to commit half of what they thought they had to, they leave feeling like they won.
54/ When potential LPs aren’t responding to your follow ups/LP updates, send one more follow up saying: “I am assuming you are not interested in investing into our fund. If I am wrong, please let me know or else this will be your last update.” Told to me by a Fund III manager who used this as her conversion strategy.
55/ It’s easier to have larger checkwriters ($500K+) commit than smaller checkwriters (<$100K). $500K is a much smaller proportion of larger checkwriters’ net worth than checkwriters who write $100K checks. And as such, smaller checkwriters write less checks, have less “disposable income”, and push back/negotiate a lot more with fund managers before committing. Told to me by a Fund III manager.
Fund strategy/management
56/ As an investor, if you want to maintain your ownership, you have to continue requesting pro-rata rights at each round.
58/ “Opportunity funds are pre-established blind pool vehicles that eliminate the timing issues that come with deal-by-deal SPVs. Opportunity funds sometimes have reduced economics from traditional 2/20 structures, including management fees that are sometimes charged on deployed, not committed capital. Unlike individual SPVs, losses from one portfolio company in an opportunity fund offset gains from another when factoring in carried interest.” – Samir Kaji. See the full breakdown of pros and cons of opportunity funds here.
59/ There are two ways to generate alphas.
Get in early.
Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.
60/ Sometimes being right is more important than being in the non-consensus. Inspired by Kanyi Maqubela.
Market risk as a function of ownership – What is the financial upside if exit happens? Is it meaningful enough to the fund size?
Judgment risk – Are you picking the right companies?
Win rate risk – How can you help your portfolio companies win? What is your value add?
62/ By Fund III, you should start having institutional capital in your investor base.
63/ The closer you get to investing in growth or startups post-product-market fit, the closer your capital is to optimization capital. Founders will likely succeed with or without you, but your name on the cap table will hopefully get them there faster and more efficiently.
64/ If you’re a traditional venture fund, you have to invest in venture-qualifying opportunities, like direct startup investments. But you can invest up to 20% of your fund’s capital in non-venture-qualifying opportunities, like tokens/SAFTs (simple agreement for future tokens), real estate, secondaries, and so on.
65/ If increased multiples coming out of various vintage funds, feel free to deviate from the normal 2-20. Many funds have 25 or 30% carry now, or accelerators where 20% scales with multiples (and often with a catch-up back to 1.0x at higher carry). – Samir Kaji
66/ Normally, fund managers take 2% management fees, usually over 10 years, totaling 20% over the lifetime of the fund. These days, I’m seeing a number of emerging managers take larger management fees over less years. For example, 10% as a one-off. Or 5% over 2-3 years.
67/ “The razor I apply to investing and startups is that every decision that increases your probability of wild outlier success should also increase your probability of total failure. If you want to be a shot at being a 10x returning fund? You’ll have to take on the higher likelihood of being a 1x. If you think you’re going to build the next Stripe? You’re going to have to run the risk of going nowhere.” – Finn Murphy
69/ The longer you delay/deprioritize having diverse partners, the harder it’ll be to hire your first one.
Advising founders/executives
70/ A founder’s greatest weakness is his/her/their distraction. Don’t contribute to the noise.
71/ It’s far more powerful to ask good questions to founders than give “good answers”. The founders have a larger dataset about the business than you do. Let them connect the dots, but help them reframe problems through questions.
72/ You are not in the driver’s seat. The founder is.
73/ A great reason for not taking a board seat is that if you disagree with the founders, disagree privately. Heard from a prolific late-stage VC.
74/ Advice is cheap. Differentiate between being a mentor and an ally. Mentors give free advice when founders ask. Allies go out of their way to help you. Be an ally.
75/ The best way to be recognized for your value-add is to be consistent. What is one thing you can help with? And stick to it.
76/ Productize your answers. Every time a founder asks you a question, it’s likely others have the same one. Build an FAQ. Ideally publicly.
77/ If you have the choice, always opt to be kind rather than to be nice. You will help founders so much more by telling them the truth (i.e. why you’re not excited about their business) than defaulting on an excuse outside of their control (i.e. I need to talk with my partners or I’ve already deployed all the capital in this fund). While the latter may be true, if you’re truly excited about a founder and their product, you’ll make it happen.
78/ Help founders with their firsts. It doesn’t have to be their first check, but could also be their first hire, engineer, office space, sale, co-founder, team dispute, and so on.
79/ There are four big ways you can help founders: fundraising, hiring, sales pipeline, and strategy. Figure out what you’re good at and double down on that.
80/ Focus on your check-size to helpfulness ratio (CS:H). What is your unique value add to founders that’ll help them get to their destination faster? Optimize for 5x as a VC. 10x as an angel.
81/ “The job of a board is to hire and fire the CEO. If you think I’m doing a bad job, you should fire me. Otherwise, I’m gonna have to ask you to stay out of my way.” – Frank Slootman to Doug Leone after he was hired as CEO of ServiceNow.
SPVs and syndicates
82/ The top syndicates out there all have 3 traits:
Great team
Great traction
Tier 1 VC
If your deal has all of the above, and if you raise on AngelList, your deal is shared with the Private Capital Network (PCN), which AngelList’s own community of LPs and investors, a lot of which are family offices, who allocate at lest $500K of capital per year.
83/ If you’re raising an AngelList syndicate, you need to raise a minimum of $80K or else the economics don’t really make sense. AL charges an $8K fee.
84/ If you want to include Canadian investors in your syndicate, for regulation purposes, you need to invest 2% of the allocation size or $10K.
85/ Investing a sizeable check as a syndicate lead (e.g. $10K+) is good signal for conviction in the deal, and often gets more attention.
86/ 99% of LPs in syndicates want to be passive capital because they’re investing in 50 other syndicates. You can build relationships individually with them over time, but don’t count on their strategic value.
87/ Historically, smaller checkwriters take up 99% of your time. Conversely, your biggest checkwriters will often take up almost no time. Even more true for syndicates.
88/ LPs don’t care for deals where syndicate leads have time commitment without cash commitment.
89/ Don’t give LPs time to take founders’ time. Most of the time LPs don’t ask good questions, so it’s not worth the effort to set up time for each to meet with founders individually. On the other hand, a good LP update would be to host a webinar or live Q&A session. One to many is better than one to one.
90/ There’s a lot of cannibalism in the syndicate market. The same LPs are in different syndicates.
91/ Choose whether you will or will not send LP updates. Set clear expectations on LP updates. And if you do, stick to that cadence. The people who write you the $1-5K checks are often the loudest and demand monthly updates. If you choose not to, one of my favorite syndicate leads says this to their LPs, “We won’t give any LP updates. I’ve done my diligence, and I won’t give information rights. I have a portfolio of hundreds of deals, and I can’t be expected to give deal-by-deal updates every month or every quarter. So if you are investing, just know you’re along for the ride.” Some LPs won’t like that and won’t invest, but mentioning that upfront will save you from a whole lot of headaches down the road.
92/ If you’re setting up an SPV to solely invest in a fund (or where more than 40% of the SPV is going into the fund), all your SPVs can’t against the 249 LPs cap on a fund <$10M and a 99 cap on a fund >$10. But you can invest in funds if you’re setting up an SPV to invest in more than one fund. Context from Samir Kaji and Mac Conwell.
Evergreen/Rolling funds
93/ Just like vintage years/funds are important for traditional funds, vintage quarters matter to your LPs. If they didn’t give you capital during, say Q2 of 2021, when you invested in the hottest startup on the market, your Q1 and your Q3 LPs don’t have access to those returns.
94/ Whereas GPs typically make capital calls to their LPs every 6 months, AngelList’s Rolling Funds just institutionalized the process by forcing GPs to make capital calls every 3 months.
Angel investing
95/ “The best way to get deal access isn’t to be great with founders—it’s to have other investors think you’re great with founders. Build a high NPS with investors, since they have meaningfully more reach than an operator. But of course, fight hard to be great with founders too or else this will all crash down.” – Aaron Schwartz
96/ Make most of your personal mistakes on your own money as an angel (before you raise a fund).
97/ When you’re starting off, be really good at one thing. Could be GTM, growth, product, sales hires, etc. Make sure the world knows the one thing you’re good at. From there, founders and investors will think of you when they think of that one thing. Unless you’re Sequoia or a16z, it’s far better to be a specialist than a generalist if you want to be top of mind for other investors sharing deal flow.
98/ “As an angel investor, it’s more important to be swimming in a pool of good potential investments than to be an exceptionally good picker. Obviously if you’re able to be both, it’s better 🙂 but if you had to choose between being in a position to see great deals and then picking randomly, or coming across average deals and picking expertly, choose the former.” – Jack Altman
99/ “Just like the only way to get good at wine is to drink a lot of wine. The only way to get good at investing is to see a lot of deals.” – Lo Toney.
Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”
“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”
“I don’t think we’ll make it, David. How do we break it to our team?”
It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.
Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.
Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.
I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:
Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.
Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!
To preface, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
On fundraising…
1/ Some useful benchmarks and goals for stages of funding:
<$1M: pre-seed
Find what PMF looks like and how to measure it
$1-5M: seed
$2-4M – you found PMF already and you’re gearing up to scale
$5M – you’re ready for the A
$5-20: Series A *timestamped mid-2021, your mileage may vary in different fundraising climates
2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly. *timestamped mid-2021, your mileage may vary in different fundraising climates
3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.
4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.
5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.
6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys *Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.
7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?
Pitch deck + appendix slides
Current round investment docs
Use of funds
Current and proforma cap table
Pilot usage data, if any
References + links to everyone’s LinkedIn:
Key members of management
1-2 customers, if any
1-2 investors, if any
Financials: annual + YTD P&L + projections
Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
List of all FAQ investor questions throughout the fundraising process
Press, if any
Legal stuff: Patents, trademarks, IP assignments, articles of incorporation
8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.
9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.
10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.
11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.
12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“
13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.
Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.
It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.
14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.
15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitorslides.
16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.
17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.
18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”
19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.
20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.
21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.
22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.
23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.
24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.
25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.
26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky
27/ If you want money, ask for advice. If you want advice, ask for money.
28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.
29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.
30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.
31/ A good distribution of your company’s early angel investors include:
32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.
33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao
On managing team/culture…
34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)
35/ Please pay yourself as a founder. Some useful founder salary benchmarks:
Seed stage – lowest paid employee
Series A or when you find product-market fit (PMF) – lowest paid engineer
When you hit scale – mid-level engineer
When you’ve reached market dominance – market rate pay for CEOs
If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again
36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.
One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eaterinterview, time-stamped at the start of the pandemic.
37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.
38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libinbefore, when he said, “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.
39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.
40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.
41/ James Currier has a great list of ways to compensate your team and/or community.
Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
Cash (e.g. USD, EUR)
Equity shares (traditional)
Discounted fees
Premier placement and traffic/attention
Status symbols
Early access
Some voting and/or decision making, ability to edit/change
Premier software features
Membership to a valuable clique of other nodes
Real world perks like dinner/tickets to the ball game
Belief in the mission (right-brain, intrinsic)
Commitment to a set of human relationships (right-brain, intrinsic)
Tokens (fungible)
Non-Fungible Tokens
42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.
43/ “Outliers create bad mental models for founders.” – Founder Collective
44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.
45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.
46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.
47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.
48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.
49/ “The founder’s job is to make the receptionist rich.” – Doug Leone
50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.
52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.
53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.
54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.
55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.
56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.
57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.
58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.
59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.
On governance…
60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.
61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.
62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.
63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.
64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:
(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation) *based on what you believe their salary would be **typically 1-2 years
65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.
66/ Monthly/quarterly investor updates should include, and probably in the below order:
Your ask
Brief summary of what you do
Key metrics, cash flow, revenue
Key hires
New product features/offerings (if applicable)
67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.
69/ “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.
70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman
71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.
72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.
73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”
74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham
On building communities…
75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.
76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”
77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.
On pricing…
78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?
Customers will try to negotiate for earlier renewal, longer contract periods.
When you waive the price increases, customers feel like they’re winning.
You can upsell them more easily to more features.
79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.
80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.
On product/strategy…
81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:
Product discipline, through priorities, where company leaders have to think months in advance for, and
Expectations and motivates team members to help showcase a new product.
82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.
83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.
84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.
85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
86/ Good founders are great product builders. Great founders are great company builders.
87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.
88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani
89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.
90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.
91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”
92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.
93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.
For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.
94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.
On market insight and competitive analysis…
95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.
96/ Have a contrarian point of view. Traits of a top-tier contrarian view:
People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
It’s iterative. Be willing to change your mind when the facts change.
97/ Falling in love with the problem is more powerful than falling in love with the solution.
98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.
99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).
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 or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Earlier this week, Zach Coelius shared his path to running a fund with the On Deck Angels community. And near the end of the session, one of our fellows asked something along the lines of: How do you pick great founders? To which, Zach responded, and I’m paraphrasing: I look for really smart people I want to be around. And every person has something different that makes them smart.
I’ve heard many variations of Zach’s closing comment over the years. “I look for someone I want to work for.” “I look for someone who gets me excited about a space I didn’t I’d get excited about.” “A really sharp individual who teaches me something new almost every time we talk.” The common thread, in all these statements, is that the thing that drives early-stage investors to conviction is not quantitative, but qualitative in nature. Moreover, given that the next Steve Jobs or Elon Musk will look nothing like either of the afore-mentioned, it’s hard to build the search for outliers into a reliable mental model, other than the openness to be amazed.
Fred Wilson wrote a great piece at the beginning of this week about his rationale for investing in Coinbase, Twitter, and Dapper. His title, which sums it all up really well, is: Keeping It Simple. His lesson: “That’s keeping it simple. It doesn’t always work. We get more wrong than we get right. But when we get it right, amazing things can happen.”
Along a similar vein, I jumped on a call with a buddy of mine who’s raising his first fund after having an enviable track record as an angel. On this said call, we talked about how junior investors, the bottom 75% of investors, late-stage investors, and investors that have yet to find their own way to get to conviction, spend more time on the quantitative. A very analytical, repeatable, quantifiable approach. For better or for worse, cerebral. On the flip side, the best early-stage investors out there, by track record of consistent top-notch returns, don’t spend nearly as much time obsessing over the numbers. Or evidence. In fact, before you invest at the A, for most businesses, there really isn’t any hard metric that is going to get you from 50 to 90% conviction.
Even in my own personal journey, when I started off, I found myself sticking to the “tried and true” questions:
What are your unit economics?
How many customers do you have? How are they using your product?
What percent of your customers are coming back to use the product on the second day?
What do your retention curves look like?
Your monthly growth rate for the past three months?
All of which, you may notice, are quantitative in nature. In fact, this best part of this blog is that you can literally track my thinking over the past few years. I went from writing about metrics (morehere, just to name a few) I look for in startups to writing about intuition. In fact, even my attempt to codify intuition is, by definition, using my frontal lobe.
All I need to worry about are moments when a founder teaches me something new that I didn’t know I would love. A simple, but surprisingly rare happenstance. I see a lot of good startup ideas and teams, even some great ones. But it’s rare I meet an “Oh sh*t!” one. Subsequently, that probably also means, at my current stage, I’d make a poor fund manager, since I don’t have enough consistently high-quality deal flow. Consistent, yes. High-quality, in my humble opinion, yes. But consistently high-quality, I’m still too early. At least in the scope of “Oh sh*t!”
One of the greatest sobering facts about venture is that it’s a business that’s designed to keep you humble. Like Fred mentioned, I am wrong way more often than I’m right. And the times I trusted my head over my gut are times I find most regretful. To better illustrate this, let me share an anecdote.
Back in 2018, one of my good friends introduced me to a set of co-founders. Scratch that. Even before they started working on the business idea. And I’m going to abstract the name of the startup. But if you’re a frequent reader of this blog, you’ve probably already seen the trail of cookie crumbs.
I met them for the first time at their beautiful, well-furnished SF apartment with Scandinavian furniture that definitely warranted a pretty price tag. Out of curiosity, I asked how much it cost to live there. And for four bedrooms and three baths, they shared a ridiculously low number. A third of the price I imagined they’d be paying. Then of course, I had to ask how much the furniture cost. “$100, just to ship them over. Otherwise, they’re all free.”
Apparently, they networked their way into a community of office managers. They learned that so many venture-backed startups in the Bay, upon receiving funding, want to look like Airbnb. Founders buy the most expensive furniture – modern layouts, quirky chairs, rustic-looking tables. They also bring the creme de la creme of interior designers to help them set it all up.
But as statistics show, most of these fold every year. When they do, the last thing they want to worry about is their reminder of frivolous spending. As such, office managers end up with so many pieces of high-end furniture they just need to get rid of. Those same pieces of artisanal furniture now sat in these three founders’ living room. And it’s even crazier to know that they weren’t from the Bay. They didn’t have connections coming here, nor jobs lined up initially.
The stories didn’t stop there. In subsequent catchups, I learned of their previous hustles. Each blew my mind more than the last.
When it finally came down to it, and I had the chance to invest, I fell into the comfort of the shackles of borrowed mental models, demand for traction, metrics, the whole nine yards of what made me sound like a really smart, possibly high-browed, VC. And I said no. Today, they’re worth over nine figures, with 8-figure revenue numbers at their last funding round.
I amassed a massive anti-portfolio in my early days trusting my brain over my gut. A brain, like most, was and continues to be incapable of fully understanding the effects of the power law.
To borrow a Pat Grady lesson, any person with a head above two shoulders – in other words, a recurring practitioner of logic and reasoning – is capable of figuring out what’s wrong. But as an early-stage investor, one of the biggest mental hurdles you have to overcome, is spending more time imagining what can go really, really right. And not its counterpart.
As an investor before product-market fit, you invest belief capital, not optimization capital. You’re not putting fuel on the fire. You’re putting faith in a person – in a team – and in an insight.
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 or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
