Two weeks ago, Ted Seides put out a great blogpost titled: The Investment Office Playbook – What Managers Don’t See. It’s the truth behind the veil of “It’s not you, it’s me” answer that LPs give. And that the best time for managers to be approaching CIOs at institutions happens to be:
1-2 years after they’re just sworn in (in other words, after they’ve figured out their strategy)
Up to 2-4 years after that period when they’re deploying against that strategy
And around years 11-13 where they’re now restructuring their portfolio after their previous portfolio has been optimized and reached maturity
Last week, Sequoia’s Jess Leeshared a fascinating product-market fit framework. Probably the best breakdown of solutions to problems mapping I’ve seen of late. It echoes much of what I’ve writtenbefore, but more eloquently put.
And the reason I bring this up is not to induce whiplash as you’re reading this blogpost. But that it relates back to when to raise from large LPs. As most of us know, there’s a strong correlation between fundraising as a founder and fundraising as a GP.
The first step is to have a product that large LPs can invest in. As a matter of fact, you need to have a specific product (aka fund strategy) for the LP you wish to court. For example, if a large LP’s minimum check size is $20M and their maximum ownership is 10%, and you’re a $50M fund, you don’t have what they’re looking for. That’s okay. You should never resize your fund purely on an LP’s check size and ownership.
The second is to understand their deployment timeline. In the case of large LPs, like endowments and pensions, that’s usually 2-4 years after a new CIO is sworn in. And years 11-13 when they’re rebalancing their portfolio. For other institutions, like some corporates, it’s actually in the bylaws that every three years, there’s a new Head of Investments. Hell, at Norges Bank Investment Management (NBIM) — the largest sovereign wealth fund, or at least one of the largest ones — a new CEO is sworn in every five years. So the clock is always ticking.
To the second point, for a large LP:
Years 1-2
When the new CIO is just sworn in, in many ways, that might be the best time to pitch a new paradigm. When the strategy has yet to fully shape up. Will you get many checks during that period? Likely not. Unless you’re a pre-existing trusted relationship of the CIO. But even if you do convince the CIO/team, they’re likely only allocating a very small percentage to that field, which for the most part, should work for you.
The goal of the value proposition, and subsequently the onboarding and tutorial, is to give people the activation energy needed to overcome the customer mindset. As such, it means one’s product can’t just be 10-20% better, but 10X better.
For instance, to get over the “yeah, right” and the “it is what it is” mindset, in the words of NFX’s Omri Drory, “the best way to manipulate energy, and get what you want, is to remove that ‘imagination barrier.'”
As such, the CIO must believe in the new paradigm. In all fairness, this takes more validation and big headlines for a tenured CIO to usually begin to believe these.
Years 2-4 (and 11-13)
They’re deploying against a top-down approach. And just as in years 11-13, they’re looking for the best in class solutions for each vertical. Meaning they’ll talk to hundreds of managers and look through thousands of pitches to pick just a few. Processes are long because they dig deep on these multi-fund relationships, but this is also an opportunity for them to increase the surface area for luck to stick.
While we all know past performance isn’t an indicator of future results, there is a reliance on metrics and the consistency of such metrics. For instance, if one were to take the top 2 investments in your portfolio and bottom 2 investments and throw them out, what does your remaining track record look like?
Or if some of your funds have yet to have meaningful distributions, graduation rates become rather important. Not just that on average, 30% of seed stage deals graduate to Series A. And 30% of Series A to B. But how many of your deals graduate past more than one subsequent round? For example, do more than 10% of your seed deals graduate to Series B? Although, to play my own devil’s advocate, vintages post-2019 have yet to really learn the true impact of loss ratios.
In closing
The truth is it’s hard to tell when the best time is. And oftentimes, it’s just a matter of luck. For one to have the right fund a specific LP is looking for at a time when liquidity is good.
But in many other ways, like Ted suggests in his blogpost, it’s the ability to think from the perspective of an LP that is invaluable and greatly appreciated as an LP.
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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.
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.
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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.
PMF is often nonobvious and guesswork in foresight, but incredibly obvious in hindsight. But the ability to foresee and measure an inflection point in the business is a common thread among the best founders in the world. For Rahul Vohra, that was when 40% or more of his customers responded with “very disappointed” to the survey question “How would you feel if you could no longer use Superhuman?” After all, the famous Peter Drucker did say, “You can’t manage what you can’t measure.”
Founders often find themselves pushing their product onto customers pre-PMF. But once they find PMF, they feel the pull of the market. In the words of David Sacks, when you find PMF, “the market is pulling product out of the startup.”
Much like PMF, for founders, there exhibits a similar level of pull. But its measurability is often not by quantitative metrics like PMF, but qualitative. At a virtual lunch last week, Founders Fund’s and Varda’s Delian Asparouhov shared his brutally candid remarks on living a fulfilling life.
One of the questions he answered was when did he know he just had to start Varda. Why didn’t he just stay a full-time VC? Delian called it the “mind virus.” When the problem hits you like a truck and you just can’t get rid of it. Once you get it, it infects your whole brain, and you can’t not think about it.
When you have more questions than answers. And each layer of questions gets more and more specific, and no longer generalist. In fact, the majority of questions that take up your mental real estate do not have membership in the:
First 500 questions about the topic in a generalist’s mind
First 100 questions in a specialist or expert’s mind space. In fact, one of the greatest litmus tests (not the only) you can administer is getting the “Oh f**k, how come I haven’t thought of that?” response.
Naivete matters
Paul Graham wrote an equally great piece on the topic. “Naive optimism can compensate for the bit rot that rapid change causes in established beliefs. You plunge into some problem saying ‘How hard can it be?’, and then after solving it you learn that it was till recently insoluble. Naivete is an obstacle for anyone who wants to seem sophisticated, and this is one reason would-be intellectuals find it so difficult to understand Silicon Valley.”
In the analogous words of Delian, “Just ask the technical experts, is this impossible? There’s a big difference between very, very difficult and impossible. Is it just a very technical religion where people say no or is it impossible?” There’s a superpower in knowing just enough to dream and reach for the “impossible”, but not enough to get trapped in the technical dogma of what is “possible.”
Great founders are armed with the ability to balance childlike wonder with optimistic pragmatism. Great founders dare to dream. It is neither thefirst, nor the last you’ll hear of James Stockdale on this blog. But nevertheless, I find his words to ring equally as true for the best founders who have graced this planet. “You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they may be.”
In closing
In sum, what is founder-market fit? It is when passion turns into obsession. When founders are married to the problem, as opposed to the solution. When curiously passionate founders cannot stop themselves from doing everything in their power to engineer the solution to a problem deeply personal to them.
Here’s a simple way to think about it, using an equation most scientists are familiar with.
F = ma
Or otherwise, known as Newton’s second law. Force is the product of mass and acceleration. Think of force as the gravitational pulling force a founder has. Mass as the first impression a founder makes in meeting number one. Some permutation of their insights, their background and experience, and their domain expertise. And acceleration as the multiplicative velocity in which the founder learns. Subsequently, we have an equation that looks more or less like this:
Founder-market fit = (initial impression) x (founder’s compounding rate of learning)
For investors, a good sign of that is when that passion is contagious in the first meeting. And founders learn incredibly quickly (as a function of action) in every consecutive one after. The gravitational pull a founder brings where you just want to put down everything to listen to them. As investors, we love paying for that world-class education.
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In the month before I started this blog in 2019, I had written 20 odd blogposts as a safety net in case I ran out of ideas in my weekly cadence. Most of which never had the chance to stand in the limelight, including my first one on intuition. Particularly, my one on intuition. Over the years, I’ve honed my own “intuition” – if I may be bold enough to call it that – on vetting startups. My intuition today is very different beast from my intuition 2.5 years back. This essay is a product of such constantly evolving self-discovery.
The spark of my intuition
When I first started my career in VC at Berkeley’s SkyDeck, I reached out to about 70-80 investors for a coffee chat, in which I posed one of my now favorite questions. What is the difference between a good and a great VC? Unsurprisingly, but frustratingly enough, most of the answers came in the form of “intuition.” Or its cousin, “pattern recognition.”
To me, who was still so new to venture, that was the best and worst non-answer I could get. Yet despite knowing that there was truth in their answer, I was still directionless. It wasn’t until an afternoon walk through San Francisco’s South Park with a very generous, but curt gentleman who carried quite the luggage beneath both of his eyes that I got the answer I wasn’t looking for.
“See a shitload of startups. When you see 10, pick your top 2. Then see 100, pick your top 2. Then see 1000, and again, pick your top 2. You’re going to notice that your podium will look quite different the more founders you meet with and the more startups you see.”
Recently, Plexo‘s Lo Toney told our fellows at DECODE the exact same thing:
And so, in hopes to guide someone in my shoes when I first started, here’s how I think about building intuition. Of course, I am a human and will always be a work in progress. It’s likely that next year I will see things differently than I see them today. Nevertheless this essay is a record of my thoughts today in early 2022.
Where to find a “shitload” of startups
There are multiple avenues these days for deal flow, including, but not limited to:
Accelerators and their respective demo days, like YC, ODX, Techstars, and what’s quite popular these days, Stonks
Hackathons, albeit most of these are ideas pre-incorporation
Classrooms
Pitch competitions
Events, like conferences and trade shows
Newsletters and publications
Podcasts
Twitter
Friends, family members, and former colleagues
When I first jumped into venture, I used to ask my friends who I knew were early adopters (a product of going to a school in the Bay Area, like Berkeley) of products to recommend me 3-5 startups/products every other week. When they did, I would treat them out to boba. And if they introduced me to the founders for those products that I’d be excited to talk to, I’d treat my friends out to a small meal – around $10-15. At the same time, at SkyDeck, I tried to sit in on as many meetings as I could, particularly the ones around deal evaluation at the beginning of every cohort.
While I do recommend all of the above, the best training grounds for developing intuition is when you talk to founders yourself.
The five senses
Google defines intuition as “the ability to understand something immediately, without the need for conscious reasoning.”
Source: Google
So, by definition, intuition is subconscious – built upon the brain’s natural ability to recognize patterns. An apt synonym, according to the trillion-plus dollar company… “sixth sense.” A sixth sense birthed from the intense neural processing of the five other senses. So, it was only logical for me to understand the sixth sense by first fully comprehending my five others. That said, I use the five-sense nomenclature loosely, but it nevertheless has become my guiding framework for venture decisions over the years.
Smell
“I invested based on my sense of smell.” These are the very words Softbank’s Masayoshi Son shared about his early investment in Alibaba. And he said the same about his investment into Yahoo! In fairness, his words make for good PR. And may just seem like smokes and mirrors. But for Son to have chosen Jack Ma out of the 20 prospective Chinese entrepreneurs he met with to invest in, he must be onto something.
There are two ways to develop an acute sense of smell as an investor, which you can develop in tandem.
Spending a lot of time looking into the market
Talking to many founders
On the former, we’ve been seeing a number of funds incubate their own startup ideas as a result of investors becoming deep subject-matter experts, but are discontent with the current ideas or teams on the market right now. Two examples include General Catalyst and Founders Fund. Draw market maps. Write research reports. Follow the experts on socials or on their blogs. Even better, talk to them as well. As a general warning, it’s hard being a generalist here. I would pick a few industries and/or functions you’re excited about or knowledgeable in already. Go deep before you go wide.
A few questions that have served me well include:
What kind of inflection points are we at in the market? In what areas have headwinds become tailwinds?
What are the technological, political, and/or socio-economic trends to be aware of right now? And where do these trends set up the world tomorrow to be?
I really encourage investors here to dream a little bit. To envision a world given these trends in which you’d be excited to have future generations live in.
On the latter, while Masayoshi talked to only 20, you can assume you he went through at least ten times that number of decks and business ideas. There’s no better practice than being in the field. Assuming you’ve taken step one (i.e. researching the market), one of the best litmus tests I’ve used to gauge a founder is their ability to riff on adjacent subjects to the business with me. Are they capable of going on tangents that really demonstrate domain expertise? Or are they caught up in the myopia of just their business?
Taste
There’s two kinds of tastes in which I look for, almost subconsciously, now.
Have they tasted excellence?
Have they tasted blood?
On excellence, many investors out there look for prior success in the field. For instance, previously founder of a unicorn exit, early employee or key executive at a now-successful company, or former big-time investor. Admittedly, there are only a small handful of these individuals out there. But I knew in my early days of scouting, I was at a massive disadvantage here for two major reasons.
I didn’t have strong connections with most of this subset of the entrepreneurial market.
This was also a founder persona I didn’t have unique insight to. In fact, it was general consensus to always take first meetings with these individuals in the venture industry. And as I learned early in my venture career, you make money either if you’re right on consensus or right on non-consensus. The latter of which is counted in multiples instead of percentages, which I’ve written about here and here.
In knowing so, I look for excellence, period. Have they tasted earned glory in any discipline? Do they know what it’s like to succeed in their field? And do they know what it takes to get there? On the flip side, do they know how hard it was to get there?
On the other hand, for blood, I want to know a founder’s propensity for conflict resolution. When was the last time they fundamentally disagreed with their co-founders? And how did they resolve it? Conflicts are inevitable. They’re bound to arise when you’re putting so much at stake for a common goal. I care less about the fact that they do come up, but more about that when they do, the team doesn’t just fall apart.
Every once in a while, I might disagree with the founder as well. And hear I look for the founder’s knee-jerk reaction and their ability to engage in thoughtful discussion. That does not mean they cannot disagree. Neither am I looking for another yes-person. But are they capable of helping me, and themselves, explore new horizons? Are they open-minded enough to entertain new possibilities, but still hold a remarkable level of focus to their 12-month horizon?
Touch
How high-touch or low-touch is this business? How much legwork does an investor need to do for this business to 10x its KPIs (within the next 12 months)?
For me, during my first meeting with the founder, ideally before, I try to answer two very simple questions:
What is the biggest risk of this business?
And is the person who can solve this risk on the team slide/in the room?
99% of the time, the person who can solve the biggest risk of the business has to be in the room. For instance, if it’s a machine-learning (ML) product, it’s a technical risk. So at least one of the co-founders must be a technical genius, not three MBAs. If it’s a B2B SaaS product, it’s a distribution risk. Meaning someone on the team must have deep connections to key decision makers to their target customers. In the early days, that’s really just at least one to two big-name customers. And ten other referenceable businesses. The second biggest risk is sales, and that I count on the founders’ ability to hustle.
1% of the time, and this is probably an exaggeration, you just have to really believe in the founder AND the product or market.
Hearing
Do founders spend more time talking, or more importantly, listening to their customers than they do in Rapunzel’s tower?
While I don’t ask all of them (since we’re guaranteed to run out of time before we run out of topics), here are the questions I consider when assessing how boots-on-the-ground a founder is:
What are customers saying about their product? The good? And the bad?
How did they acquire their first users/customers outside of their existing first degree network? Where from? What messaging do they use?
What is their customer win rate? In knowing so, what worked and what didn’t? At what point in the onboarding process do customers churn? What are their assumptions for why churn happens?
Do they know the numbers of their business (and ideally the market) like the back of their hand? For numbers of the market, are they able to recall the sources of most important numbers? For product metrics, how well do they know the main ones, like engagement, churn, monthly growth rates (over the past 3 months), net retention, and so on? Every so often, there’s a number or two, the founders are not aware of. And it’s fine. The test is once they realize their blind spot, how quickly do they move to patch it up? Subsequently, report back to me about their updated data measurements.
Of course, my job is not to distract founders. And I really try my best not to, so I don’t ask they measure superfluous metrics, unless I really do believe they’re crucial to the business.
Because I usually talk with founders who are pre-product-market fit, I usually lead with the question, “what does product-market fit look like to you?” Are they able to arrive at an actionable and measurable metric to optimize for? And can they back up why that metric is a good proxy for product-market fit?
(In)Sight
Can this founder teach me something new? Something that I never thought of or heard before, but makes complete sense. Is it a preposterous idea but backed by logic? Or does the founder have an original (and money-making) angle to what is already unoriginal? As an investor, especially as you see more startup ideas, the latter question is likely to surface more than the former.
Once the original insight is uncovered, it is then up to me to figure out the potential energy of the insight. How far can this insight take this team? Is it likely that this insight will uncover more insights down the road?
As an investor, you want to be right on the insight and team, not one or the other. Mike Maples Jr. articulates it best when he said, “We realize, oh no, this team doesn’t have the stuff to bend the arc of the present to that different future. Because I like to say, it’s not enough. […] I’d say that’s the first mistake we’ve made is we were right about the insight, but we were wrong about the team.”
“I’d say the reverse mistake we’ve made is the team just seems awesome, and we just can’t look past the fact that they didn’t articulate good inflections, and they can’t articulate a radically different future. They end up executing to a local maximum, and we have an okay, but not great outcome.”
In closing
Seedscout’s Mat Sherman wrote a great Twitter thread last month to help founders who are outsiders raise venture funding.
The no bullshit guide to raising angel funding/venture capital as an outsider.
The fact of the matter is that despite the venture industry being a rather well-connected circle of individuals and firms, most entrepreneurs – both currently and aspiring – are outsiders. If you can’t hit up a close friend to write you a couple million dollars, you’re an outsider. This essay, while written for new investors, hopefully, is equally useful as a guide for founders looking for some insight as to how investors think. Or at the very minimum, how I think.
Any thoughts here are mine and mine alone. 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.
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In the past decade or two, there have been a surplus of talent coming into Silicon Valley. In large part, due to the opportunities that the Bay had to offer. If you wanted to work in tech, the SF Bay Area was the number one destination. If you wanted to raise venture money, being next door neighbors to your investors on Sand Hill Road yielded astounding benefits. Barring the past few months where there have been massive exoduses leaving the Bay to Miami or NYC, there’ve been this common thread that if you want to be in:
Entertainment, go to LA
Finance and fashion, go to NYC
Tech/startup ecosystem, go to the Valley.
While great, your early audience – the innovators on your product adoption curve – should not be overly concentrated there. All these markets carry anomalous traits and aren’t often representative of the wider population. Instead, your beachhead markets should be representative of the distribution of demographics and customer habits in your TAM (total addressable market).
Strategically boring markets aren’t limited to just physical geographies. They’re equally applicable to underestimated virtual real estate. You don’t have to build a mansion on a new plot of land. Rent an Airbnb and see if you like the weather and people there first.
As Rupa Health‘s Tara Viswanathan said in a First Round interview, “Stripping the product down to the bare bones and getting it out in front of people for their reactions is critical. It’s rare for a product not to work because it was too minimal of an MVP — it’s because the idea wasn’t strong to begin with.”
As she goes on, “If you have to ask if you’re in love, you’re probably not in love. The same goes with product/market fit — if you have to ask if you have it, you probably don’t.”
Test your market first with the minimum lovable product, as Jiaona Zhang says. You don’t have to build the sexiest app out there. It could be a blog or a spreadsheet. For example, here are a few incredible companies that started as nothing more than a…
The greatest incumbents to most businesses out there really happen to be some of the simplest things. Spreadsheets. Blogs. Facebook groups. And now probably, Discord and Slack groups. There are a wealth of no-code tools out there today – Notion, Airtable, Webflow, Zapier, just to name a few. So building something quick without coding experience just to test the market has been easier than ever. Use that to your advantage.
Patrick Campbell once wrote, quoting Brian Balfour, CEO of Reforge, “It’s much easier to evolve with the market if your product is shaped to fit the market. That’s why you’ll achieve much better fit between these two components if you think market first, product second.”
Think like a designer, not like an artist
The biggest alphas are generated in non-obvious markets. Markets that are overlooked and underestimated. At the end of the day, in a market teeming with information and capital and starved of attention, think like a designer, not like an artist. Start from your audience, rather than from yourself. Start from what your audience needs, rather than what you want.
As ed-tech investor John Danner of Dunce Capital and board member at Lambda School, once wrote, “[the founders’] job is to find the absolute maximum demand in the space they are exploring. The best cadence is to run a new uncorrelated experiment every day. While demanding, the likelihood that you miss the point of highest demand with this approach is quite small. It is incredibly easy to abandon this kind of rigor and delayed gratification, eat the marshmallow and take a good idea and execute on it. Great founders resist that, and great investors do too.”
Spend more time researching and talking to your potential market, rather than focusing on where, how, and what you want your platform to look like. Obsess over split testing. Be scrappy.
Don’t fail the marshmallow test
We’re in a hype cycle now. Speed is the name of the game. And it’s become harder to differentiate signal from noise. Many founders instantly jump to geographically sexy markets. Anomalous markets like Silicon Valley and LA. But I believe what’ll set the winners from the losers in the long run is founder discipline. Discipline to spend time discovering signs of early virality, rather than scale.
For instance, if you’re operating a marketplace, your startup is more likely than not supply-constrained. To cite Brian Rothenberg, former VP of Growth at Eventbrite, focus on early growth loops where demand converts to supply. Ask your supply, “How did you hear about our product?” And watch for references of them being on the demand side before.
Don’t spend money to increase the rate of conversion until you see early signs of this growth dynamic. It doesn’t matter if it’s 5% or even 0.5%. Have the discipline to wait for organic conversion. It’s far easier to spend money to grow than to discover. Which is why startup life cycles are often broken down into two phases:
Zero to one, and
One to infinity
Nail the zero to one.
In an increasingly competitive world of ideas, many founders have failed the marshmallow test to rush to scale. As Patrick Campbell shared in the same afore-mentioned essay, “Product first, market second mentality meant that they had a solution, and then they were searching for the problem. This made it much, much more difficult to identify the market that really needed a solution and was willing to pay for the product.”
The more time you spend finding maximum demand for a big problem, the greater your TAM will be. The greater your market, the greater the value your company can provide. So, while building in anomalous markets with sexy apps will help you achieve quick early growth, it’s, unfortunately, unsustainable as you reach the early majority and the late majority of the adoption curve.
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As I am co-leading a VC fellowship with DECODE (and here’s another shameless plug), a few fellows asked me if I had a repository of questions to ask founders. Unfortunately, I didn’t. But it got me thinking.
There’s a certain element of “Gotcha!” when an investor asks a founder a question they don’t expect. A question out of left field that tests how well the founders know their product, team or market. In a way, that’s the sadist inside of me. But it’s not my job, nor the job of any investor, to force founders to stumble. It’s my job to help founders change the world for the better. By reducing friction and barriers to entry where I can, but still preparing them as best as I can for the challenges to come.
I’m going to spare you the usual questions you can find via a quick Google search, like:
What is your product? And who is your target audience?
How big is your market? What is your CAGR?
What is your traction so far?
How are you making money? What is your revenue model?
And many more where those come from.
Below are the nine questions I find the most insightful answers to. As well as my rationale behind each. Some are tried and true. Others reframe the perspective, but better help me reach a conclusion. I do want to note that the below questions are described in compartmentalized incidents, so your mileage may vary.
Here’s to forcing myself into obsolescence, but hopefully, empowering the founders reading this humble blog of mine to go further and faster.
The questions
I categorize each of the below questions into three categories:
The market (Why Now)
The product (Why This)
And, the team (Why You)
Together, they form my NTY thesis. The three letters ordered in such a way that it helps me recall my own thesis, in an unfortunate case of Alzheimer’s.
Why Now
What are your competitors doing right?
This is the lesser-known cousin of “What are your product’s differentiators?” and “Why and how do you offer a better solution than your competitors?”. Founders are usually prepared to answer both of the above questions. I love this question because it tests for market awareness. Too often are founders trapped in the narratives they create from their reality distortion fields. If you really understand your market, you’ll know where your weaknesses are, as well as where your competitors’ strengths are.
There have been a few times I’ve asked this question to founders, and they’d have an “A-ha!” moment when replying. “My competitors are killing it in X and Y-… Oh wait, Y is our value proposition. Maybe I should be prioritizing our company’s resources for Z.”
Why is now the perfect time for your product to enter the market?
As great as some ideas are, if the market isn’t ripe for disruption, there’s really no business to be made here… at least, not yet. What are the underlying political, technological, socio-economical trends that can catapult this idea into mass adoption?
For Uber, it was the smartphone and GPS. For WordPress and Squarespace, it was the dotcom boom. And, for Shopify, it was the gig economy. For many others, it could be user habits coming out of this pandemic that may have started during this black swan event, but will only proliferate in the future. As Winston Churchill once said, “Never let a good crisis go to waste.”
A great way to show this is with numbers. Especially your own product’s adoption and retention metrics. Numbers don’t lie.
What did your customers do/use before your product?
What are the incumbent solutions? Have those solutions become habitual practices already? How much time did/do they spend on such problems? What are your incumbents’ NPS scores? In answering the above questions, you’re measuring indirectly how willing they are to pay for such a product. If at all. Is it a need or a nice-to-have? A 10x better solution on a hypothetical problem won’t motivate anyone to pay for it. A 10x on an existing solution means there’s money to be made.
Before we can paint the picture of a Hawaiian paradise, there must have been several formative volcanic eruptions. It’s rare for companies to create new habits where there weren’t any before, or at least a breadcrumb trail that might lead to “new” habits. As Mark Twain says, “History doesn’t repeat itself, but it often rhymes.”
Why This
What does product-market fit look like to you?
Most founders I talk to are pre-product-market fit (PMF). The funny thing about PMF is that when you don’t have it, you know. People aren’t sticking around, and retention falls. Deals fall through. You feel you’re constantly trying to force the product into your users’ hands. It feels as if you’re the only person/team in the world who believes in your vision.
On the flip side, when you do have PMF, you also know it. Users are downloading your product left and right. People can’t stop using and talking about you. Reporters are calling in. Bigger players want to acquire you. The market pulls you. As Marc Andreessen, the namesake for a16z, wrote, “the market pulls product out of the startup.”
The problem is it’s often hard to define that cliff when pre- becomes post-PMF. While PMF is an art, it is also a science. Through this question, I try to figure out what metrics they are using to track their growth, and inevitably what could be the pull that draws customers in. What metric(s) are you optimizing for? I wouldn’t go for anything more than 2-3 metrics. If you’re focusing on everything, you’re focusing on nothing. And of these 1-3 metrics, what benchmark are you looking at that will illustrate PMF to you?
For example, Rahul Vohra of Superhuman defines PMF with a fresh take on the NPS score, which he borrows from Sean Ellis. In feedback forms, his team asks: “How would you feel if you could no longer use the product?” Users would have three choices: “very disappointed”, “somewhat disappointed”, and “not disappointed”. If 40% or more of the users said “very disappointed”, then you’ve got your PMF.
Founders don’t have to be 100% accurate in their forecasts. But you have to be able to explain why and how you are measuring these metrics. As well as how fluctuations in these metrics describe user habits. If founders are starting from first principles and measuring their value metric(s), they’ll have their priorities down for execution. Can you connect quantitative and qualitative data to tell a compelling narrative? How does your ability to recognize patterns rank against the best founders I’ve met?
If in 18 months, this product fails. What is the most likely reason why?
This isn’t exactly an original one. I don’t remember exactly where I stumbled across this question, but I remember it clicking right away. There are a million and one risks in starting a business. But as a founder, your greatest weakness is your distraction – a line in which the attribution goes to Tim Ferriss. Knowing how to prioritize your time and your resources is one of the greatest superpowers you can have. Not all risks are made equal.
As Alex Soktold me a while back, “You can’t win in the first quarter, but you can lose in the first quarter.” The inability to prioritize has been and will continue to be one of the key reasons a startup folds. Sometimes, I also walk down the second and third most likely reason as well, just to build some context and see if there are direct parallels as to what the potential investment will be used for.
On the flip side, one of my favorite follow-ups is: If in 18 months, this product wildly succeeds. What were its greatest contributing factors?
Similar to the former assessing the biggest threats to the business, the latter assesses the greatest strengths and opportunities of this business. Is there something here that I missed from just reading the pitch deck?
What has been some of the customer feedback? And when did you last iterate on them?
I’m zeroing in on two world-class traits:
Open-mindedness and a willingness to iterate based on your market’s feedback. As I mentioned earlier with Marc Andreessen’s line, “the market pulls product out of the startup.” Your product is rarely ever perfect from the get-go, but is an evolving beast that becomes more robust the better you can address your customer’s needs.
Product velocity. How fast are your iteration cycles? The shorter and faster the feedback loop the better. One of the greatest strengths to any startup is its speed. Your incumbents are juggernauts. They’ll need a massive push for them to even get the ball rolling. And almost all will be quite risk-averse. They won’t jump until they see where they can land. Use that to your advantage. Can you reach critical mass and product love before your incumbents double down with their seemingly endless supply of resources?
Why You
What do you know that everyone else doesn’t know, is underestimating, or is overlooking?
Are you a critical thinker? Do you have contrarian viewpoints that make sense? Here, I’m betting on the non-consensus – the non-obvious. While it’s usually too early to tell if it’s right or not, I love founders who break down how they arrived at that conclusion. But if it’s already commonly accepted wisdom, while they may be right, it may be too late to make a meaningful financial return from that insight.
But if you do have something contrarian, how did you learn that? I’m not looking for X years of experience, while that would be nice, but not necessary. What I’m looking for is how deep founders have gone into the idea maze and what goodies they’ve emerged with.
Why did you start this business?
Here, unsurprisingly, I’m looking for two traits:
Your motivation. I’m measuring not just for passion, but for obsession and the likelihood of long-term grit. In other words, if there is founder-market fit. Do you have a chip on your shoulder? What are you trying to prove? And to whom? Do you have any regrets that you’re looking to undo?
Most people underestimate how bad it’s going to get, while overestimating the upside. The latter is fine since you are manifesting the upside that the wider population does not see yet. But when the going gets tough, you need something to that’ll still give you a line of sight to the light at the end of the tunnel. Selfless motivations keep you going on your best days. Selfish motivations keep you going on your worst days.
Your ability to tell stories. Before I even attempt to be sold by your product or your market, I want to be sold on you. I want to be your biggest champion, but I need a reason to believe in the product of you. You are the product I’m investing in. You’re constantly going to be selling – to customers, to potential hires, and to investors. As the leader of a business, you’re going to be the first and most important salesperson of the business.
What do you and your co-founders fundamentally disagree on?
No matter how similar you and your co-founders are, you all aren’t the same person. While many of your priorities will align, not all will. My greatest fear is when founders say they’ve never disagreed (because they agree on everything). To me, that sounds like a fragile relationship. Or a ticking time bomb. You might not have disagreed yet, but having a mental calculus of how you’ll reach a conclusion is important for your sanity, as well as the that of your team members. Do you default on the pecking order? Does the largest stakeholder in the project get the final say after listening to everyone’s thoughts?
Co-founder and CEO of Twilio, Jeff Lawson, once said: “If your exec team isn’t arguing, you’re not prioritizing.”
I find First Round’s recent interview with Dennis Yu, Chime’s VP of Program Management, useful. While his advice centers around high-impact managers, it’s equally as prescient for founding teams. Provide an onboarding guide to your co-founders as to what kind of person are you, as well as what kind of manager/leader you are. What does your work style look like? What motivates you? As well as, what are your values and expectations for the company? What feedback are you working through right now?
In closing
Whether you’re a founder or investor, I hope these questions and their respective rationale serve as insightful for you as they did for me. Godspeed!
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I was introduced to a founder of an e-commerce marketplace recently trying to figure out what product-market fit looks like. Specifically what might be some early tells of PMF. And I told him, “If your users are sticking around long enough to try to game your system, you have something they want. While it might not be in the most efficient format, you’re close to PMF. Subsequently, solving that frictional point that users are trying to ‘hack’ will delight them.”
Last year, I wrote that one of the tells of a great unicorn idea is frustration with the status quo. And the lagging indicators of frustration are complaints, but even better, “hacks”. Life hacks. Career hacks. Cold email hacks. Any time a forum or community comes together to share best practices is a potential market opportunity. As Jeff Bezos once said, “Your margin is my opportunity.”
Similarly, if some of your users converge around circumventing your platform, they’re hacking their way to find a better solution. But the fact they’re sticking around on your platform means you have something they want. And while it could be more elegant, you’ve solved the rocks of the “rocks, sand, and water” framework. What’s left are the “sand” and the “water”. And they come disguised as a user hack.
Sarah Tavel of Benchmark once wrote: “You must create an offering that is so compelling, it stands by itself in the consumer’s mind.” Solving all the frictional points in the user journey will get you to that compelling offering – a lovable product.
A reader reached out to me last year and said, “Thank you… [But] you have no idea how long I spend reading your blogposts with a dictionary next to me.” While it wasn’t necessarily a hack, to know there was a reader out there willing to weather through my idiosyncratic vocabulary in my earlier essays meant a million to me. But at the same time, it was a sign I was too caught up in my own wordsmithing. So, I dialed it back. While there will still be some esoteric jargon from time to time, I try to make my writing more relatable when editing. And to that reader… if you’re still reading this essay, thank you.
Back in 2007, Marc Andreessenwrote: “The market pulls product out of the startup.” In this case, that pull becomes a race between you and your users’ frustration. Can you release an update that addresses your users’ pain point before they become so frustrated they pack up and go? Either to build their own version or try a competitor’s.
I love Max Nussenbaum of On Deck’s analogy here. “If the market is indeed pulling the product out of you, you sometimes feel less like a creator and more like a mere conduit.” You, as the team behind the product, are a conduit to satisfying your users’ needs. As Mike Maples Jr.says, “Getting storytelling right means the founder is the mentor of the story (ie Yoda), rather than the hero (ie Luke.).” Your customers are the heroes of the story. Of their story. And your story. How they spend their time should offer you brilliant product insights.
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Founders often ask me what’s the best way to cold email an investor. *in my best TV announcer voice* Do you want to know the one trick to get replies for your cold email startup pitches that investors don’t want you to know? Ok, I lied. No investor ever said they don’t want founders to know this, but how else am I going to get a clickbait-y question? Time and time again, I recommend them to start with the one (at most two) metrics they are slaying with. Even better if that’s in the subject line. Like “Consumer social startup with 50% MoM Growth”. Or “Bottom-up SaaS startup with 125% NDR”. Before you even intro what your startup does, start with the metric that’ll light up an investor’s eyes.
Why? It’s a sales game. The goal of a cold email is to get that first meeting. Investors get hundreds of emails a week. And if you imagine their inbox is the shelf at the airport bookstore, your goal is to be that book on display. Travelers only spend minutes in the store before they have to go to their departure gate. Similarly, investors scroll through their inbox looking for that book with the cover art that fascinates them. The more well-known the investor, the less time they will spend skimming. And if you ask any investor what’s the number one thing they look for in an investment, 9 out of 10 VCs will say traction, traction, traction. So if you have it, make it easy for them to find.
That said, in terms of traction, most likely around the A, what growth metrics would be the attention grabber in that subject line?
Strictly annual growth
A while back, my friend, Christen of TikTok fame, sent me this tweetstorm by Sam Parr, founder of one of my favorite newsletters out there, The Hustle. In it, he shares five lessons on how to be a great angel investor from Andrew Chen, one of the greatest thought leaders on growth. Two lessons in particular stand out:
2. Run towards the heat.
If a company has tons of hype and seems overvalued, don't run away. Run towards it. Hype is good. Means they'll raise, exit at higher valuation. And the price likely won't feel overpriced after the startup exits.
3. Look for stuff that's growing at least 3x a year.
A business can grow slowly and still be great. But if you want a huge exit as an angel, you need at 3x annual growth for users, revenue, or something else important in order to get a multi-billion outcome.
Why 3x? If you’re growing fast in the beginning, you’re more likely to continue growing later on. Making you very attractive to investors’ eyes – be it angels, VCs, growth and onwards. Neeraj Agrawal of Battery Ventures calls it the T2D3 rule. Admittedly, it’s not R2-D2’s cousin. Rather, once your get to $2M ARR (annual recurring revenue), if you triple your revenue each year 2 years in a row, then double every year the next 3 years, you’ll get to $100M ARR and an IPO. More specifically, you go from 2 to 6, then 18, 36, 72, and finally $144M ARR. More or less that puts you in the billion dollar valuation, aka unicorn status. And if you so choose, an IPO is in your toolkit.
Source: Neeraj Agrawal’s analysis on public SaaS companies that follow the T2D3 path
For context, tripling annually is about a 10% MoM (month-over-month) growth rate. And depending on your business, it doesn’t have to be revenue. It could be users if you’re a social app. Or GMV if you’re a marketplace for goods. As you hit scale, the SaaS Rule of 40 is a nice rule of thumb to go by. An approach often used by growth investors and private equity, where, ideally, your annual growth rate plus your profit margin is equal to or greater than 40%. And at the minimum, your growth rate is over 30%.
For viral growth, many consumer and marketplace startups have defaulted to influencer marketing, on top of Google/FB ads. And if that’s what you’re doing as well, Facebook’s Brand Collabs Manager might help you get started, which I found via my buddy Nate’s weekly marketing newsletter. Free, and helps you identify which influencers you should be working with.
But what if you haven’t gotten to $2M ARR? Or you’ve just gotten there, what other metrics should you prepare in your data room?
I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?
As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?
Let’s look for a second from the investor side of the table…
Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.
On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.
Up to a $20m fund, there are are many ways to do 3x+
Up to a $60m fund, there are several ways
After $150m fund, there is probably 1 way
— Jason ✨Be Kind✨ Lemkin 🇮🇱 (@jasonlk) April 5, 2017
Why does a VC’s fund strategy matter to you as the founder?
A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.
I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.
If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.
While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:
The uncommon – Differentiators
The common – What everybody else is doing
The uncommon
Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:
Ability to build communities having built large followings
Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
Getting in’s to top executives at Fortune 500 companies
Closing government contracts
Access/domain expertise on international markets
In-house production teams
They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
Ability to get you on the front page of NY Times, WSJ, or TechCrunch
Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
Influencer network
Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
Surprisingly, not as common as I thought, VCs that pick up your call “after hours”
The common
Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:
Money, maybe follow-on investments
Access to the VC’s network (i.e. potential customers, advisors, etc.)
Access to the partner(s) experience
Intros to downstream investors
That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.
Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.
Finding investor NPS
You can find CS:H, or investor NPS, out in a couple of ways:
The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
You find out by asking portfolio founders during your diligence.
Your founder friends are highly recommending said investor to you.
Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quotedBrett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
In closing
“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:
If you were to start a new company tomorrow, would you still want this investor on your cap table?
With three options:
No
Yes
It’s a no-brainer.
And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.
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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:
Thank you Alex for helping me with early drafts of this essay!
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