Tag: product hunt

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The Fastest Way to Test a Startup Idea

Last week, I reconnected with Shuo, founding partner of IOVC, and one of the first people I reached out to when I began my career in venture. That day, I asked her a pretty stupid question, “Given the rise of solo capitalists, rolling funds, equity crowdfunding, and the democratization of capital, do you think now’s a good time to raise a fund?“

She replied, “I don’t know. It could be a good time now. It could be a good time five years from now. If you’re set on sticking around for the long term, it really doesn’t matter. ‘Cause whether it’s a good time or not, you’re going to be raising a fund regardless. So just do it.”

Not gonna lie, it was serious wake-up call. While I was initially looking for her perspective on the changing venture market, what she said was right. If you’re set on doing something, say starting a fund or a business, the “right time” to start is irrelevant. The world around us changes so much so frequently. We only know when’s the right time in hindsight. So focus on what we can control. Which is starting and doing.

So as an aspiring founder, which idea do you start with? And how do you test it?

Starting a business is scary

Starting a business is scary for most people. And well, the government doesn’t always make it easy to do so. Just like what WordPress and Squarespace did for websites, you have companies, like Stripe (and their Stripe Atlas), Square, Shopify, Kickstarter, just to name a few, streamlining the whole process for entrepreneurship. For an aspiring entrepreneur, not only is it taking that leap of faith, before you begin, there’s a slew of things you have to worry about:

  • Figure out how to incorporate your business (C-corp, LLC, or S-corp),
  • Assign directors and officers to your business,
  • Buy the stock, so you actually own your stock,
  • Learn to file your taxes (multiple forms, including your 83(b) election),
  • When you raise funding, get a 409A valuation,
  • And that’s just the beginning.

Of course for the above, do consult with your professional lawyer and accountant. It’s two of the few startup expenses I really recommend not skimping on. While the purpose of this post isn’t designed to solve all the documents you’ll have to go through in starting a business, hopefully, this will help with one front – taking that leap of faith. Specifically finding early validation for your idea.

The superpower of writing

I stumbled on Max Nussenbaum‘s, who’s leading On Deck‘s Writing Fellowship, provocative tweetstorm:

He boils it down to, effectively, four reasons:

  1. You can test the validity of an idea faster by writing than with code.
  2. Writing well trains your ability to sell.
  3. Publishing regularly gets you comfortable with shipping early and often.
    • To which he cited one of my favorite Reid-isms: “If you’re not embarrassed by the first version of your product, you’ve launched too late.” – Reid Hoffman
  4. Writing is easier for most people to pick up than coding.

There’s a “5th reason” as well, but I’ll let you uncover that yourself. Talk about creativity. Side note. Max created one of my favorite personal websites to date.

Much like Max, I write to think. And in sharing my raw thoughts outside of the world of startups via the #unfiltered series, often far from perfect, as well as my take in this fast-changing universe, my cadence of writing twice a week has forced my brain to be accustomed to the velocity of growth. In the sense, I better be learning and fact-checking my growth week over week. Over time, I’ve developed my own mental model of finding idea and content catalysts.

Of course, if you know me, I just had to reach out. Particularly around the third point in his tweetstorm.

What mental models or practices did he use to help him wrestle with his embarrassment from his own writing? And he replied with two loci that provided so much more context:

  1. “Reading other writers who open up way more than I do, which makes what I’m doing feel easy by comparison. Two favorites I’d recommend are Haley Nahman and Ava from Bookbear Express.”
    • And another I binged for an hour last night. Talk about counterintuitive lessons. My favorites so far are Stephen’s 12th and 16th issue. You might not agree with everything, but he really does challenge your thinking. Thank you Max for the rec.
  2. “Publicly committing to writing weekly and finding that the embarrassment of publishing was outweighed by the embarrassment I’d feel if I missed a week. Also, like all things, I’ve found it very much gets easier with practice.”

Why not both?

Then again, why not both? I go back to Guillaume‘s, founder of lemlist, recent LinkedIn post. He says:

And he’s completely right. If I were to analogize…

Writer = common
Writer + coder = uncommon
And… writer + coder + X = holy grail

You don’t have to own one unique skill. And in this day in age, there aren’t that many individually unique skills out there that haven’t been ‘discovered’ yet. Rather than search for the singularly unique skill that you can acquire, I’d place a larger bet on a combination of skill sets that can make you unique. As a founder, test your ideas early with writing. If there’s evidence of it sticking, build it with code. And it doesn’t just to be just writing and code, whatever set of skills you can acquire more quickly and deeper with the circumstances and experiences you have. Even better if there’s a positive flywheel effect between your skills.

In closing

There’s a Chinese proverb that goes something along the lines of, “The best time to plant a tree was 20 years ago. The second best time is now.” And it circles back to Reid’s quote that Max cited, “If you’re not embarrassed by the first version of your product, you’ve launched too late.” As an entrepreneur, or as an emerging fund manager, it’s a given you’re going to mess things up. But all the time fretting around at the starting line is time better spent stumbling and standing back up.

I followed up with Shuo after our call, and she elaborated a bit more, “In all honesty, you can argue now is a good time (a lot of capital available for good managers) or a bad time (valuations are frothy), but in the long-term, these variables even out and it’s how you add value as an investor that’s most important.”

If I were to liken that same insight to aspiring entrepreneurs… Yes, investors look for timing. And yes, understanding the timing of the market is important, when you’re launching a product that will revolutionize the way we live in a fundamental way. But that boils down to which idea you plan to pursue. But if you’re looking to be a founder, it’s finding that overlap in the 3-way Venn diagram between (1) what the market needs and (2) where you, as the founder, can provide the most value. And (3) where your competitors are not maximizing their potential in.

For many aspiring founders, that first step can be practicing the art of writing. Writing for clarity. Writing to practice selling. Learning to ship early and embracing imperfection. Frankly, it’s also something I need to get better at myself.

Though I’m not a religious fellow, I’m reminded of a quote from Jesus’ teaching, which I first found in Jerry Colonna’s book, Reboot. “If you bring forth what is in you, what is in you will save you. If you do not bring forth what is in you, what is in you will destroy you.” Writing is that act of bringing forth what is in you. And well, if you’re like me, I often find my greatest regrets come from a lack of action rather than in taking action.

If you’re looking for a place to start…

Top photo by Cathryn Lavery on Unsplash

Thank you Shuo and Max for reviewing early drafts of this essay.

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!

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Why Should the Investor NPS Score Exist?

I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?

As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?

Let’s look for a second from the investor side of the table…

Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.

On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.

Erik Torenberg of Village Global further elaborated in a tweet:

And, Jason M. Lemkin of SaaStr tweeted:

Why does a VC’s fund strategy matter to you as the founder?

A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.

I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.

If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.

While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:

  1. The uncommon – Differentiators
  2. The common – What everybody else is doing

The uncommon

Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:

  • Ability to build communities having built large followings
  • Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
  • Getting in’s to top executives at Fortune 500 companies
  • Closing government contracts
  • Access/domain expertise on international markets
  • In-house production teams
  • They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
  • Ability to get you on the front page of NY Times, WSJ, or TechCrunch
  • Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
  • Influencer network
  • Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
  • Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
  • Surprisingly, not as common as I thought, VCs that pick up your call “after hours”

The common

Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:

  • Money, maybe follow-on investments
  • Access to the VC’s network (i.e. potential customers, advisors, etc.)
  • Access to the partner(s) experience
  • Intros to downstream investors

That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.

Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.

Finding investor NPS

You can find CS:H, or investor NPS, out in a couple of ways:

  • The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
  • You find out by asking portfolio founders during your diligence.
  • Your founder friends are highly recommending said investor to you.

Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quoted Brett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”

In closing

“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:

If you were to start a new company tomorrow, would you still want this investor on your cap table?

With three options:

  • No
  • Yes
  • It’s a no-brainer.

And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.

Photo by Laurice Manaligod on Unsplash

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A Strategy to Win Versus A Strategy Not to Lose w/ Alex Sok

For a number of friends and founders I’ve chatted this with, I’ve been a big fan of the concept of “winning versus not losing”. Ever since I heard back in 2018. In an interview with Tim Ferriss, Ann Miura-Ko of Floodgate said, “This is probably the hardest piece – knowing the difference between a winning strategy versus a strategy not to lose. […] Not losing often involves a lot of hedging. And when you feel that urge to hedge, you need to focus. You need to be offensive.”

There are a few great examples of what differentiates winning and not losing from both Tim and Ann in that interview. For instance, a lack of focus by going after two different market segments is a strategy not to lose. “The reason why that’s really hedging is you have two completely different ways of selling to those organizations and you’re afraid to pick one because maybe you have some revenue in both.”

My college friend recently connected me with entrepreneur, designer, angel investor, Alex Sok. Both of us found unlikely common ground in using sports analogies to relate to building a company. Me, swimming (e.g. here and here). Alex, football. Specifically, American football. Having been a quarterback for his school’s football team back in the day, he said something quite fascinating, “You can’t win in the first quarter, but you can lose in the first quarter.” And you know me, I had to double click on that.

I was previously under the assumption that you only needed a strategy to win, but not to lose. But as all generalizations that start with the word “only”, I was wrong. And Alex contextualized it for me – that sometimes you do need to think about how not to “lose”.

Winning versus not losing

“You can’t win in the first quarter, but you can lose in the first quarter.”

Throwing the ball deep for your running back to make the touchdown is a strategy to win. On the flip side, if you don’t convert on the third down, you’re going to lose. You may not win, but if you don’t, you could very much lose. Not all mistakes carry the same gravitas. Some mistakes can be detrimental; most mistakes aren’t. Just because you’re making sure that you convert on the third down does not mean you can’t still swing for the fences.

For founders, losing in the first quarter is akin to:

  • Burning through your seed funding in six months;
  • Hiring four professional executives before you get to product-market fit;
  • Not talking to your customers;
  • There is no one in the room who can tackle the biggest risk of the business (i.e. no engineer when you’re building an AI solution, or no one who can do sales when you’re an enterprise tech company)

You’re still aiming high, but that doesn’t mean you should burden yourself with an astronomical burn rate.

“Game plans will have to vary depending on your market or product. Key fundamental traits that increase the probability of failure will always be present. It’s important to identify which ones matter most in relation to the game plan,” says Alex. “A tough defense or go-to-market means being more focused on identifying which channels to pursue and then doubling down if it works out.”

On the flip side, “an aggressive defense or burgeoning industry might mean taking more chances but setting up plays wisely to take advantage of their aggressive, risk-taking nature. This will force the defense to settle down and play you more honestly. In startup terms, that might mean steady progress and growth with a few deep shots to achieve escape velocity from your competitors.”

Not to get forget about winning

You’ve probably heard of the saying, “If you want your company to truly scale, you have to do things that don’t scale.” Especially in the zero to one phase. From idea to product-market fit. Many of us in venture break down the early life cycle of a company by zero-to-one and one-to-infinity. The first “half” is doing things that don’t scale. Figuring out what frustrations your customers are going through. Getting that pedometer up on the street yourself. Daniel Kahneman wrote in his book Thinking, Fast and Slow, “Acquisition of skills requires a regular environment, an adequate opportunity to practice, and rapid and unequivocal feedback about the correctness of thoughts and actions.”

Here are a few examples:

In the early days of Airbnb, Brian, Joe, and Nathan used to visit early Airbnb hosts with a rented DSLR to photograph their houses.

For Stripe, the founders manually onboarded every merchant to deliver “instant” merchant accounts. Of course, the Collison brothers took it a step further to mint the term “Collison installation”. Usually when founders ask early leads “Will you try our beta?”, if people say yes, then they say, “Great, we’ll send you a link.” Rather, Patrick and John said, “Right then, give me your laptop” and set it up for them right then and there.

At Doordash, they found restaurant menu PDFs online, created landing pages, put their personal number out there for people to call, and personally executed deliveries within the day.

To get his first 2000 users, Ryan at Product Hunt wrote handcrafted emails to early users and reporters to grow what started off as an email list.

Similarly, in football, teams often spend the first half of the game feeling out their opponents. Their strengths, their weaknesses. And the back half, doubling down on where your opponents fall short on. While not your opponents, founders should be spending the first half feeling out their market. Be scrappy. Nothing that’ll make you lose in the first quarter, but make mistakes. Give your team and yourself a 10-20% error rate. One of your greatest superpowers as a small team is your ability to move fast. Use it to your advantage.

Paul Graham once wrote, “Tim Cook doesn’t send you a hand-written note after you buy a laptop. He can’t. But you can. That’s one advantage of being small: you can provide a level of service no big company can.”

In closing

Alex said, “In order to be a dominant offense, you have to force the defense to cover every inch of the field.” If you only throw long, then your opponents will only need to cover long. If you only throw to the left, they only have to cover left. But if you have a diversified strategy, your opponents will have to cover every inch of the field. And to win, all you need is for your opponents to hesitate for half a second. And with a laser-focused strategy, that’s all you need to break through against your incumbents. Your incumbents often have bigger teams, can attract more talent, have deeper pockets, and the list goes on.

As a small team, you’re on offense. You can’t cover every inch of the field, and neither do you need to. You just need to be a single running back who makes it past a wall of linebackers. To do that, you need focus. As Tim Ferriss recently said on the Starting Greatness podcast, “the biggest risk to your startup is your distraction.” And it’s not just you and your team, but also the investors you bring on. Sammy Abdullah of Blossom Street Ventures wrote that the question you need to be asking yourself about your investors is: “Are you going to distract me from running the business and will you be candid with me when I have a problem?”

Focus. If you’re focusing on everything, you’re focusing on nothing. You have no room to hesitate, but it’s exactly what you want your competitors to do. That half a second on the field is about two years in the venture world. Or until you can find your product-market fit. Until you reach scale. Until you reach the “one” in zero-to-one. ‘Cause once you’re there, you just need to put your head down and run. And it’s the beginning of something defensible. Of something you can win with.

If you’re curious about taking a deeper dive on product-market fit, I recommend checking out some of my other essays:

Photo by Joe Calomeni from Pexels

Thank you Alex for helping me with early drafts of this essay!

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