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99 Pieces of Unsolicited, (Possibly) Ungooglable Startup Advice

flower, winter

“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”

“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”

“I don’t think we’ll make it, David. How do we break it to our team?”

It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.

Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.

Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.

I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:

Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.

Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!

To preface, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.

On fundraising…

1/ Some useful benchmarks and goals for stages of funding:

  • <$1M: pre-seed
    • Find what PMF looks like and how to measure it
  • $1-5M: seed
    • $2-4M – you found PMF already and you’re gearing up to scale
    • $5M – you’re ready for the A
  • $5-20: Series A
    *timestamped mid-2021, your mileage may vary in different fundraising climates

2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly.
*timestamped mid-2021, your mileage may vary in different fundraising climates

3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.

4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.

5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.

6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys
*Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.

7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?

  • Pitch deck + appendix slides
  • Current round investment docs
  • Use of funds
  • Current and proforma cap table
  • Pilot usage data, if any
  • References + links to everyone’s LinkedIn:
    • Key members of management
    • 1-2 customers, if any
    • 1-2 investors, if any
  • Financials: annual + YTD P&L + projections
    • Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
  • List of all FAQ investor questions throughout the fundraising process
  • Press, if any
  • Legal stuff: Patents, trademarks, IP assignments, articles of incorporation

8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.

9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.

10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.

11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.

12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“

13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.

Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.

It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.

14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.

15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitor slides.

16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.

17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.

18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”

19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.

20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.

21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.

22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.

23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.

24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.

25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.

26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky

27/ If you want money, ask for advice. If you want advice, ask for money.

28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.

29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.

30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.

31/ A good distribution of your company’s early angel investors include:

  • 2-3 Connectors, for intros and fundraising
  • 1-2 Brand Names, for the announcement
  • 1-2 Buddies, for mental support
  • +3 Operators, for any process
  • Optional: Corporate, depending on the individual

– Beata Klein

32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.

33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao

On managing team/culture…

34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)

35/ Please pay yourself as a founder. Some useful founder salary benchmarks:

  • Seed stage – lowest paid employee
  • Series A or when you find product-market fit (PMF) – lowest paid engineer
  • When you hit scale – mid-level engineer
  • When you’ve reached market dominance – market rate pay for CEOs
  • If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again

36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.

One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eater interview, time-stamped at the start of the pandemic.

37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.

38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libin before, when he said, “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.

39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.

40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.

41/ James Currier has a great list of ways to compensate your team and/or community.

  1. Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
  2. Cash (e.g. USD, EUR)
  3. Equity shares (traditional)
  4. Discounted fees
  5. Premier placement and traffic/attention
  6. Status symbols
  7. Early access
  8. Some voting and/or decision making, ability to edit/change
  9. Premier software features
  10. Membership to a valuable clique of other nodes
  11. Real world perks like dinner/tickets to the ball game
  12. Belief in the mission (right-brain, intrinsic)
  13. Commitment to a set of human relationships (right-brain, intrinsic)
  14. Tokens (fungible)
  15. Non-Fungible Tokens

42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.

43/ “Outliers create bad mental models for founders.” – Founder Collective

44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.

45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.

46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.

47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.

48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.

49/ “The founder’s job is to make the receptionist rich.” – Doug Leone

50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.

51/ “Every organization sucks, but you get to choose the ways in which your organization sucks.” – Mark Zuckerberg quoting Dan Rosensweig.

On hiring…

52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.

53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.

54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.

55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.

56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.

57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.

58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.

59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.

On governance…

60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.

61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.

62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.

63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.

64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:

(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation)

*based on what you believe their salary would be
**typically 1-2 years

65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.

66/ Monthly/quarterly investor updates should include, and probably in the below order:

  • Your ask
  • Brief summary of what you do
  • Key metrics, cash flow, revenue
  • Key hires
  • New product features/offerings (if applicable)

67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”

68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.

69/ “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.

70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman

71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.

72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.

73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”

74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham

On building communities…

75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.

76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”

77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.

On pricing…

78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?

  1. Customers will try to negotiate for earlier renewal, longer contract periods.
  2. When you waive the price increases, customers feel like they’re winning.
  3. You can upsell them more easily to more features.

79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.

80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.

On product/strategy…

81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:

  1. Product discipline, through priorities, where company leaders have to think months in advance for, and
  2. Expectations and motivates team members to help showcase a new product.

82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.

83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.

84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.

85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”

86/ Good founders are great product builders. Great founders are great company builders.

87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.

88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani

89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.

90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.

91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”

92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.

93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.

For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.

94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.

On market insight and competitive analysis…

95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.

96/ Have a contrarian point of view. Traits of a top-tier contrarian view:

  • People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
  • Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
  • It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
  • Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
  • It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
  • Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
  • It’s iterative. Be willing to change your mind when the facts change.

Inspired by Balaji Srinivasan, Chris Dixon, Wes Kao, and a sprinkle of Peter Thiel (in Zero to One).

97/ Falling in love with the problem is more powerful than falling in love with the solution.

98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.

99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).

Photo by Andrea Windolph on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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

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How to Get Investors to Just Ask One Question: “How Can I Invest?”

After recently tuning into an incredible founder’s most recent investor update, I stumbled across a shoutout once again to Silicon Valley storytelling legend Siqi Chen. It wasn’t the first and surely won’t be the last time I find such kudos from a mutual friend. I’ve been a huge fan since his 2019 presentation on presentations, and there’ve been multiple times his name has surfaced in a conversation with friends. I’ve also publicly written about just how amazing he is. That day, I felt the cosmos telling me today was the day. Something just felt right. A swig of that Felix Felicis, if you know what I mean. In hindsight, I guess I could have asked for a warm intro. But my enthusiasm just couldn’t wait.

My question was simple:

“What do you think sets a top 0.1% story from a top 5%er? What sets a timeless story apart from a box office hit?”

“Hm, it’s a good question. Maybe two things: ‘proof of work’. In other words, founder-market fit. Authenticity can be faked so ‘proof of work’, in terms of background, experience, expertise for your authenticity, is valuable. The second thing is just sheer effort, finesse, and practice.”

He ended his answer with a quote you might find quite familiar from his storytelling presentation:

“Magic is just spending more time on a trick that anyone would ever expect to be worth it.” – Penn & Teller

And naturally, I had to follow up. “What are the top 1-2 questions you ask yourself to help you stress test if you’re telling epic stories? Or if it’s more applicable, questions you ask others to see if your story resonated with them?”

To which, he left me with a rather curious statement:

“The stress test for me is when, after the story, there are no questions other than ‘How can I invest?’ This is probably the biggest hack I have for a pitch, which is that contrary to popular belief that questions are an expression of interest, all questions are bad.”

I paused. All. Questions. Are. Bad. To a person who makes a living out of asking questions, you can damn well be sure that whatever I was thinking, whatever I was doing, whatever I was going to say disappeared in a moment’s grace, like a midsummer night’s dream. He already had my attention, but now, he had my curiosity.

He goes on: “The correct way to look at questions is that they are akin to a compiler error in your pitch: It is the tell tale sign of objections politely withheld until you were done talking. It should be your goal to adjust your pitch such that those questions never come up in the first place.”

Needless to say, as all contrarian sayings went, I found Siqi’s words quite provocative. I hadn’t yet come to terms with his permutation of punctuated words strung into sentences. His words, while in plain English, arrived at my ears in a manner that was quite foreign. But the more he elaborated, the more sense it made.

“You know how when a salesperson is trying to sell you something, whether it’s a SaaS product or a set of steak knives, and you don’t want to buy it, but you’re listening politely?” explains Siqi. “You already have an objection and you have already decided to not buy it. And that objection you’re just holding in your head until they’re done talking.

“The first question you ask after they’re done talking is basically that objection. Once you’ve thought about that objection as the listener, you’re no longer paying attention. That objection is all you’re thinking about.

“Here’s a concrete example. Let’s say the first question you think of is ‘it’s a competitive space, how do you think about competition?’

“That means they were thinking about competition for some unknown period of time while you were pitching, probably from the minute you started. And they already decided to not buy.”

His next few words are worth underscoring. If words carried weight, shine, and could be worn on your fourth finger after an elaborate ceremony, this was it. “The way you debug it is by preventing that question in the first place, for example, by inserting a slide at the beginning explaining: ‘This is a really competitive space, but here’s why we’re doing what we’re doing’. Then you defuse the question and it doesn’t come up in the first place.

“A good pitch removes those objects in your head so that you end up buying. One way to improve your pitch is to systematically remove questions until you’re left with just one: ‘How can I invest?’”

In the deck he shared back in 2019, on slide 19, he has another two lines that are equally as powerful and read: “We unconsciously try as hard as we can to fit new facts into existing opinions. Based on existing opinions we make decisions that make us feel good, or the least bad.”

Unfortunately, Siqi’s right.

How often have you brought up a new fact that contradicts with what your mom/dad/grandma/grandpa believes and they respond with “Don’t believe everything you read online?” And then, read a “fact” from an unconfirmed source that affirms their beliefs and they respond with “I told you so?”

Investors, like any other human, are no different. Questions, therefore, are implicit personal opinions reworded explicitly, with the expectation that the facts you bring up fit in their existing mental models. And if the facts don’t match up, “You’re too early for us”. Or as they tell themselves, “The founders have not given us the facts we look for to fit in the frameworks we have.”

Then again, as founders, you may not be looking to fall into a pre-ordained mold. In fact, the most world-shattering businesses never fit into the mold. So neither should you. Steve Jobs famously said:

“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”

So, if you only have facts, stick with the facts that reaffirm an investor’s opinion of a great startup. Admittedly, that can only be true for the top 0.1% of businesses out there. The vast majority of startups don’t have numbers that fit such a high benchmark honed from years of pattern recognition. A benchmark investors have high conviction in. Certainty, one might say. The great writer Charlie Kaufman once said, “Because when you’re certain, you stop being curious. And here’s the one thing I know about the thing you’re certain about. You’re wrong.”

The best thing about this business – about being an investor – is that it keeps people humble. A fact, unfortunately, many investors forget. So stay curious. And tell us a story so compelling we can imagine no other.

Or as Siqi puts it, “The goal of a great presentation is to create emotions that persuade people to take action.” The founders don’t just share their passion. Their passion is contagious. It spreads like a virus. And whoever is infected shares it with the people around them, which if your story is compelling enough, those people share it with their friends. In a vast game of telephone, the more relatable and inspiring your story is, the longer the game of telephone. Facts become stories. Stories become tales. Tales become legends.

The best stories don’t just share facts. They inspire. They weave facts together in a way so compelling that there are no more questions. The world is filled with limitless amounts of data – most of which are seemingly disparate and meaningless. The best storytellers give the chaos of data meaning. They give data purpose.

In reality, you’re not going to get the pitch down in v1. Practice it, especially with people who have a critical eye with words. They don’t have to be investors. Probably not just with your co-founders and team members because they’re biased. They’ll make lapses in judgment because they already understand the problem space well enough. So well, they won’t have realized you skipped steps in your logic. Practice it with writers, lawyers, speechwriters, marketers, influencers, that Redditor that deconstructs every single presidential speech, and video editors, especially those who edit meme videos. Then when you pitch it to investors, the goal is that they don’t withhold objections because they simply don’t have any.

I can’t help but recall a great line by Robert McKee, “At story climax, you must deliver a scene beyond which the audience can imagine no other.” Equally so, by the end of your pitch, you must deliver a solution beyond which the audience can imagine no other.

Photo by Aaron Burden on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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

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How Much Should You Bootstrap?

I had a founder ask me yesterday, “How much money does an investor expect you to bootstrap with?”

The short answer I gave him, “It depends.”

The longer answer… well, there is no one number or specific range that investors look at. It’s a case-by-case scenario. Of course that’s not the answer he, nor you my reader, were hoping to hear. If I left you on that alone, I’d imagine this essay would be the single greatest contributor to my unsubscribe rate.

The real answer is that capital is not the unit of measurement. It can be, and may seem to be in today’s ever-increasing pace of development. Rather, it starts from a question. What is your minimum viable assumption? Something I’ve also alluded to before.

What is the minimum viable assumption? The big assumption you must prove in order to catalyze your startup’s growth. Or as Gagan Biyani, founder of Maven, puts it in the frame of minimum viable tests – “a specific test of an assumption that must be true for the business to succeed.”

Oftentimes, that assumption is synonymous to your the biggest risks of your business. Or in other cases, your biggest barriers to entry.

One of the questions we investors try to answer when we meet with a founder is: What is the biggest risk of this business? And is the person who can solve this risk in the room (or on the team slide)? It is one of a handful of risks we must underwrite to move forward with an investment.

Your ability to raise capital is directly correlated with your ability to inspire confidence in your investors that you will need little to no help getting to your next milestone. An unfortunate, but true paradox.

Circling back to the question that catalyzed this essay, how much money does an investor expect you to bootstrap with? The answer, as much as you need to prove your minimum viable assumption. Can you conquer the biggest risk of your business on your own capital? If you can, you’re halfway there. That may take $50K. Or maybe $10K. Or $100. Airbnb had to go through three different launches, and selling Obama O’s and Cap’n McCains for $40 per box, before Paul Graham noticed their traction. On the other hand, you have Mailchimp that’s 100% bootstrapped till the day they exited. Each business is different and unique in its own way.

The only addendum I would add here is that this same calculus will most likely not apply if you’re building something in deep tech – be it biotech or general AI or otherwise.

Photo by Minh Tran on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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

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When Should You Sell Your Shares As An Investor?

options, comparison, relative selection, when to sell

Recently, I stumbled across a captivating perspective on aphorisms via Tim Ferriss’ 5-Bullet Fridays. The Procrustean Bed. To be fair, before reading it on Tim’s newlsetter, I haven’t even heard of the concept. In one of his newsletters, he cites two incredible sources:

” ‘Something designed to produce conformity by unnatural or violent means. In Greek mythology, Procrustes was a robber who tied his victims to a bed, either stretching or cutting off their legs in order to make them fit it.’ (Source: Oxford Dictionary of English Idioms).

“Nassim Taleb has a related book of aphorisms titled The Bed of Procrustes. He explains the title thusly: ‘Every aphorism here is about a Procrustean bed of sorts—we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve tension by squeezing life and the world into crisp commoditized ideas, reductive categories, specific vocabularies, and prepackaged narratives, which, on the occasion, has explosive consequences.’ “

Down the investing rabbithole

There exist a number of aphorisms in the investing world. Chief of which reads “buy low, sell high.” Public market assets are quite liquid. Hypothetically, you can cash out whenever you want. Such liquidity has paved way for psychological inconsistencies to maximize gratification. In language with unnecessary jargon redacted, the option to sell is less motivated by rational thinking but more by fear of losing money – loss aversion. If you invest $100 into the public market, you can choose if you want to cash out at $95, $90, or $120 or $200. While there is a non-zero chance of you losing your entire principal, chances are you’ll liquidate your positions before that happens.

On the other hand, private market investments are illiquid. Upon investment, there is no liquid market in which you can sell immediately. At best, you have to wait 3-5 years before a rapidly marked-up investment creates opportunities for distributions in the secondary market. In other words, cash money while companies are still private. In the private markets, your principal either appreciates in multiples, rather than percentages, or bottoms out. Any in-betweens will neither make or break your investment strategy, and are often out of your immediate control. So in this case, illiquidity is a feature, not a bug.

The notion of exiting positions as a private market investor, therefore, gravitates towards a singularity – when you make a damn good investment. The only time you really have an option to choose whether you can sell or not, when otherwise, it becomes a tax write-off or a small exit outside of your immediate control.

When should you sell?

Should you ever sell?

And if you sell, how much should you sell?

To answer all the above questions…

With the help of Shawn and Ratan, I wrote a blogpost on how to think about exiting positions at the beginning of this year. A topic of which I am still very much a rookie at, which may be quite apparent in this essay as well. Nevertheless I’m going to try to elaborate more on the notion of selling positions as an early-stage investor.

In a memo earlier this year, Howard Marks wrote that there are two main reasons people choose to sell: “because they’re up and because they’re down.”

When “they’re down”

Let’s start with the latter. When “they’re down.” Like I mentioned before, there are often very few options to sell when things are down. While I’m not proud that these investors exist in the early-stage private markets, I’ve seen and heard of some investors who try to make a last ditch effort to regain some of their principal when the startup goes south. Selling off IP. As well as assets. Or forcing the founders to make a modest exit, so that the investors cap their downside. Maybe at best, this returns them 2x on their capital (rarely the case).

But let’s say that’s the “best” case scenario. And let’s say it’s a $25M Fund I, writing $250K checks. A 2x net return means they got back $750K. $750K is far from returning the $25M fund. Not even close to doing so. You need over 30 of those “exits” to just break even for your fund. So, if you’re an investor penny pinching here, you’re in the wrong game AND you’re going to lose out on the relationships with the founding team.

Why the wrong game?

Venture is a hit-driven business. It’s not about your batting average but about the magnitude of the home runs you hit. We bat for 100x returns, which also increases the probability of misses, determined by ability to return the fund or not. If you’re optimizing for local maximums, you’d probably do better as a public market investor.

And why do relationships matter?

One, the startup world is a smaller world than you think. People gossip.

Two, statistically, first swings at bat rarely work out. In research done by Cowboy Ventures, they found 80% of unicorns had at least one co-founder with previous founding experience. Paris Innovation Review also found that “86% started their project with a partner, after having created other companies.” Two of many other studies. So, even though this venture didn’t achieve financial success for an investor, the next might. Or the one after that. Assuming you bet on the right people, it’ll just take a couple iterations before timing, market, and product also match up. If you leave on bad terms on this deal, you won’t be able to get in when things do work out.

Three, what makes early-stage investing incredible is the relationships you build along the way. The ability to learn and grow with really smart people.

When “they’re up”

The question of if to sell often leads to controversial debate. I know of some investors who never sell any of their stock. And that if they sell, to them, it is a measure of their lack of faith in a founder. And they would never want to feel that they’re betting against the founders. That’s okay if you’re an angel. But if you’re a VC, you have a fiduciary responsibility to your investors, which means you’ll eventually have to sell.

The question of when to sell is often answered in broad strokes with laws around QSBS, which states that if you hold a qualified small business stock for longer than five years, you’re not subject to capital gains taxes in the US. But should you sell in the 6th year or 10th year? And under what market conditions? Do you sell in a boom market or on the precipice of a bust market? For a company you believe in the long-term potential, regardless of short-term fluctuations, I’m a big fan of what Bill Miller said in his Q3 2021 Market Letter. “We believe time, not timing, is the key to building wealth in the [market].”

But when things are going really, really, really well, it’s okay to take money off the table, even ahead of the end of the fund’s 10-year lifespan. In fact, Union Square Ventures generally sells 15-30% of their position in their top portfolio companies to distribute back to their LPs. Fred Wilson‘s personal framework lies around “[selling] one third of the position immediately, put one third away for a long term hold, and actively manage the other third.”

To most, including myself, the goalposts for selling how much seem arbitrary. USV sold 30% of their position in Twitter to return twice the entire fund. Menlo Ventures sold almost half of their stake in Uber when Softbank offered to buy. Whereas, Benchmark sold 15% of its Uber shares. I also have really smart friends who liquidate 50% of their stake in a token if a single cryptocurrency reaches double digit percentages of their net worth.

It’s all about the opportunity cost

In a game where arbitrage matters, and the “why” matter more than the “what”, it was love at first sight when Howard Marks shared his mental model on selling. He boils it down to the simple economic concept of opportunity cost:

  1. “If your investment thesis seems less valid than it did previously and/or the probability that it will prove accurate has declined, selling some or all of the holding is probably appropriate.
  2. “Likewise, if another investment comes along that appears to have more promise – to offer a superior risk-adjusted prospective return – it’s reasonable to reduce or eliminate existing holdings to make room for it.”

In sum, the option to sell is not an isolated decision, but rather one which considers the other investment opportunities you have available to you. For a number of VCs, this breaks into the calculus of recycling carry and what to use early distributions to invest in next. If you’re a VC with consistent AND high-quality deal flow, you’d probably want to reinvest. If you’re a VC without either of the two (i.e. only consistency or quality) or an emerging angel, your goal is to get both. In having both, you then have access to relative selection.

Photo by Sina Asgari on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

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

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What Does Signal Mean For An Early-Stage Investor?

signal, lighthouse

When winds and waves a mutual contest wage,
These foaming anger, those impelling rage;
Thy blissful light can cheer the dismal gloom,
And foster hopes beyond a wat’ry doom.

– John William Smith, “The Lighthouse,” 1814

Marc Andreessen answered a few weeks back to a question that has been ringing in many founders’ minds. What product do founders want to buy from investors? For the past few years, the natural answer rose as operational expertise. A notion that still holds true for the earliest stages of starting a business when you bring on strategic angels as small checks to help you find product-market fit. As you continue down the path and start raising institutional capital, the answer becomes more and more amorphous.

On a similar note, Bryce Roberts the exact same question last year:

To which, he responded:

Why do investors look for signal in the first place? A means to de-risk a very early, and very risky bet. A product of asymmetric information. Investors invest in lines not dots, but the truth is, most investors don’t have the time – luxury or ability – to see all lines. So what they must do instead is look for specific dots – be it traction, co-investors, or founding team “legitimacy” – that would help them trace out of a line of best fit. As Precursor’s Charles Hudson wrote earlier this week,

By definition, signal should be a leading indicator of long-term business value. Yet, for most investors in the world, what they look for are lagging indicators of conviction.

The signal paradox

In the investing world, there’s a paradoxical notion of signal. Through many conversations with syndicate leads, data teams of investing platforms, and LPs, I realized a common thread. For the majority of investors in the world, at the early stages, signal comes not from the founder, but from other funders.

In a syndicate, there are three things that make a deal move fast:

  1. Great co-investors
  2. Great traction
  3. And, great team

Arguably in that order. Synonymously, as an emerging fund manager, the best way to raise from family offices* (I’ll explain below why FO’s are my reference point here) who are notoriously closed off to cold emails, you need:

  1. Tier 1 VCs as your co-investors
  2. Tier 1 GPs as your fund’s LPs
  3. Or, deals that family offices wanted to get into anyway (which isn’t mutually exclusive from the above as well)

Quite noticeably, for many investors out there, signal comes in the form of people with a proven track record already. Or to break it down even more. Signal comes in the form of familiarity. Familiarity in the form of warm intros or college classmates or pattern recognition. The easiest pattern to follow for any investor without needing to do too much diligence or requiring too much personal conviction (I know, it’s funny), but to be able to write fast checks, is other top-tier investors. If you’re a founder who’ve fundraised before, you’re probably very familiar with this notion. Consciously or subconsciously. I’m gonna bet money that you’ve been asked, “Which other investors are you talking to? And how far along the process are you with them?” Or simply, “Do you have a lead investor?”

While there are some nuances to the last question, like the inability for smaller investors to pay for legal counsel fees, to have the resources to completely diligence a startup, or just that the check size required to lead/fill the round is just too large for them, generally speaking, my argument still stands. Put nicely, for many investors, they’re looking for external validation of the product. Put harshly, that question is a band-aid approach to their inability to get to conviction.

As a founder, you have to realize that capital has become a commodity. Investors are in the business of selling money. And subsequently, making $1 become $2. Or for a great early-stage investor, $1 becomes $5. There are many ways to underwrite risk. The one that requires the least amount of new thinking, or thought leadership, is following firms who have proven their investing acumen already and consistently.

*Additional context on family offices

I specifically mention family offices above since most LPs in Fund I’s are individuals and angels. Mostly small checks. And can quickly fill up the limit the SEC has set for how many accredited investors you can have investing in your fund. And their reason to invest is based on the founding GPs – very similar to why investors would back startups at the pre-seed stage.

While some GPs do pitch to institutional LPs (i.e. endowments, pension funds, fund of funds, etc.), very, very little institutional capital goes to Fund I’s and II’s – very similar to the fact that Tiger or Coatue very rarely invest before the A. You have yet to have a track record where they can fit into their financial model. They’re underwriting a very different type of risk. And so, if you’re a Fund I GP looking for larger checks, you’re looking to generational wealth in the form of family offices, who are surprisingly closed off to cold emails. But I digress.

The surplus of “signal” in 2021

In the last year, we’ve seen some record-breaking numbers. We’ve been in an exciting boom market. There have never been more venture dollars poured into the ecosystem. In fact, there were 1,148 concurrent unicorns in 2021. Half of which were new. In comparison, 2020 minted just 167 unicorns. Just looking at the two charts from Crunchbase below, we see just how crazy 2021 was.

Source: Crunchbase
Source: Crunchbase

And quite reflectively, there have never been as many “experts” in the market. To be fair, when everyone’s portfolio and/or startup is raising consecutive rounds of funding and mark ups are a dime a dozen, psychologically, I would also feel good about myself too. Everyone’s an “expert” in a boom market, especially if a16z or Tiger is leading the round. And a16z’s done double the number of deals they did in 2020. And Tiger’s invested 4 out of every 5 business days. In full disclosure, I did feel quite proud of myself as well. Nevertheless, I do my best to stay humble in this business.

Interestingly enough, while there were more seed, pre-seed and angel dollars going into startups, progressively, less startups were getting funded. Effectively, while the overall number of dollars invested look great, less founders come to bat. A smaller top of funnel means a more concentrated funnel in consecutive rounds.

Source: Crunchbase

The truth is fundraising will get harder over the next year and valuations won’t be as high. You can expect the current market correction in the public markets to soon be reflected in the private ones. So you may need to spend 12 months longer growing into your next round’s target valuation.

So where should investors look for signal?

In fairness, I am ill-equipped to answer this question for the masses. And most likely will never be fully equipped to make generalist statements. That said, I have and will continue to share what signal looks like for me. And if you’re a founder, here’s my template to conviction.

Two weeks ago, I broke down my sense of intuition around startup investing. I won’t go too deep in this essay, but I do share a more detailed internal calculus there. To put it simply, I look for different signals across the spectrum of idea plausibility and stages.

Signal by idea plausibility

Idea PlausibilityKey QuestionContext
PlausibleWhy this?Most people can see why this idea should exist. Because of the consensus, you’re competing in a saturated market of similar, if not the same ideas. Therefore, to stand out, you must show traction.
PossibleWhy now?It makes sense that this idea should exist, but it’s unclear whether there’s a market for this. To stand out, you have to convince investors on the market, and subsequently the market timing.
PreposterousWhy you?Hands down, this is just crazy. You’re clearly in the non-consensus. Now the only way you can redeem yourself is if you have incredible insight and foresight. What’s the future you see and why does that make sense given the information we have today? If an investor doesn’t walk out of that meeting having been mind-blown on your lesson from the future, you’ve got no chance.

Signals by stage

Stage of investmentKey QuestionContext
Pre-seedWhy you?The earlier you go, the less quantitative data you have to support your bet. And therefore, your bet is largely on the founder. For me, it matters less their XX years of experience, but more so their expertise. In other words, insight. Can I learn something new in my first meeting (and consecutive ones too) with them?

At the pre-seed, there is also one more key signal I look for in founders – their level of focus. Rather than wanting to do everything, can they streamline their resources to tackle one thing? What is their minimum viable assumption they have to prove before they can build their MVP (or MLP – minimum lovable product)? Startups often die of indigestion, not starvation.
SeedWhy now?By the seed stage these days, you’ve either found your product-market fit or really close to finding it. The larger your round, the more you’re feeling the pull of the market. Whereas pull can come be measured (i.e. daily organic sign ups, demand converting to supply in a marketplace, etc.), sometimes when you’re at the cusp of it, there’s a level of foresight that is required. Some leading indicator for the business often comes as a lagging indicator from industry trends. What is the inflection point(s) (political, socio-economic, technological, cultural) we are at today that is going to have compounding effects on the business?
Series AWhy this?By the time you get to the A, you’re ready to scale. In other words, what you mainly need is to add fuel to the fire. I place a larger emphasis on traction here. Admittedly for me, compared to the two earlier stages, this is more of a numbers conversation. The best founders here have a very clear picture of what worked and didn’t work for the business. They’re already familiar with their main GTM channel, but are exploring new opportunities for channel-market fit where they need capital to test.

Not incredibly pertinent yet, but founders will have started thinking about their Act II. What’s the next product they’re going to offer to secure their immortality in the market?

In closing

A simple litmus test I often share with founders on signal is:

Your ability to raise capital is directly correlated with your ability to inspire confidence in your investor that you will get straight A’s with little to no help.

This isn’t just true for myself, but also most investors out there. While the best investors out there will always be there for you in your time of need, before they decide to jump aboard the same ship with you, you need to convince them that you’re a top 10% founder. Or a top 1% in-the-making.

While I dislike using the dating analogy, it’s an apt comparison in this case. You’re not going to share your deepest, least desirable secrets on your first date. You’re also not going around saying you’re the perfect – and I underscore perfect – partner without any flaws. ‘Cause that’s as much baloney as an unknown African prince in your inbox telling you to help him secure $5 million in gold bars by helping him set up a Swiss bank account with a deposit of $10K. It’s too good to be true. In reality, you’re most likely going to share that you have a number of great qualities, but you’re still growing in many ways.

Admit what you don’t know or don’t have. As long as it’s not mission critical or the biggest risk in your business (and if it is, figure that out before you raise VC funding), the investors who truly believe in you will understand. Always err on the side of honesty, but not bravado.

‘Cause you yourself are a signal. If you’ve got your bases covered and still have to go out of your way to convince an investor or try to flip their “no”, they’re probably not worth your time.

Cover photo by Michael Denning on Unsplash

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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal 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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The Gravitational Force of Founder-Market Fit

wildfire, founder market fit

There’s a question I love asking founders. What does product-market fit look like to you?

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.”

For further reading here, I highly recommend reading Lenny Rachitsky’s essay on the topic.

But, what is founder-market fit?

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:

  1. First 500 questions about the topic in a generalist’s mind
  2. 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 the first, 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.

Photo by Tobias Seidl on Unsplash

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How to Develop Intuition as a Rookie Startup Investor

intuition, how to develop intuition

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:

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.

  1. Spending a lot of time looking into the market
  2. 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:

  1. What kind of inflection points are we at in the market? In what areas have headwinds become tailwinds?
  2. 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.

  1. Have they tasted excellence?
  2. 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.

  1. I didn’t have strong connections with most of this subset of the entrepreneurial market.
  2. 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:

  1. What is the biggest risk of this business?
  2. 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 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.

Photo by Liam Shaw on Unsplash

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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DGQ 12: What is play to you but work to everyone else?

children playing, not work

What is play to you but work to everyone else? Or said differently, what do you love doing that many others would hate or get bored of quickly?

This isn’t an original self-query. I want to say I heard it years ago on one of Tim Ferriss’ episodes, but the exact one escapes me. Yet, recently, my friends and colleagues remind me of this more and more. In the ultimate shortage of labor, more than ever before, people are rethinking what career means to them and what a meaningful career means. I’ve had friends become full-time live streamers, NFT creators, inventors, fiction novelists, artisans… you name it, and I bet you someone that I know – hell someone you know – has dabbled or jumped head-first into it. It truly is the era of the Great Resignation.

Now this question isn’t a call to arms to leave whatever you’re doing. Rather a direction of clarity that may help you live a more enriching life. Something to pursue in your down time. Until you can find a way to get paid to do so – unless you happen to have 20-30 years of runway from previous riches. The same is true if you’re an aspiring founder. Work on your project part-time, until you are ready to take it full-time either with investment capital or revenue.

For me, the answer to the above question is:

  • Writing (to think)
  • Meeting, and more specifically, learning from passionately curious and curiously passionate people (what can I say, I’m a glutton for inspiration)
  • Becoming a world-class questioner (you’ve probably guessed this one from the DGQ series)
  • Collecting quotes and phrasings that resonate (a few of which are repeat offenders on my blog)
  • Helping people realize their dreams (something that was much easier when I only had 20 friends, but much harder when I’m adding zeros to the right)

Many of the above have become synonymous with my job description over the years. Did I predict I would fall into venture capital? No. Frankly, it was a result of serendipity and staying open-minded to suggestions from people I really respect.

While this may come off as virtue signaling, to me, I’m willing to, did lose, and continue to lose sleep over each and every one of the above activities. And if I know anything about myself, my goalposts are likely to change over time. Not drastically, but fine-tuned over time.

Photo by Robert Collins on Unsplash

The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.

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How Do Investors Think About Early Dilution On The Cap Table?

dilution water investment

A founder recently asked me how investors would perceive her going through two different accelerator programs. Specifically, what would investors think if she took dilutive capital from two investors who care about ownership targets, yet have similar, if not the same, value adds to her business?

How each type of investor thinks about dilution

It’s a great question. Unsurprisingly, a nuanced one as well.

Honestly, a “messy” cap table or early dilution is an excuse investors give when they’re not sold on you or the business. Investors regress to the “why this”, or otherwise known as, traction, when you haven’t convinced them on “why you.”

Investors want to be excited about you. They want to brag about you to their partnership, colleagues and friends. But if you don’t give them a strong reason to, they’re going to regress to what they know will return them capital. Predictability. And that comes in the form of traction. But I digress.

If Max Levchin or Phil Libin or Elon Musk or Justin Kan – pick your favorite serial entrepreneur with unicorn exits under their belt – wanted to raise for a new startup, no matter what it is or how early, people are gonna jump on the opportunity to regardless of how saturated the cap table is.

Let’s stand in the shoes of an investor for a second. Of which there are three main kinds of early investors.

  1. Angels
  2. Non-lead VCs and syndicate leads
  3. VCs who lead rounds

For individual angels, ownership targets don’t matter. They just want a piece of the action. In fact, multiple sources of signal and validation give them more confidence to invest. Especially if you’ve taken previous or current checks from your small handful of top tier VCs. These angels’ check sizes are negligible on the cap table, so they won’t end up crowding anyone else out.

On the other hand, notice how I bucketed non-lead VCs and syndicate leads into the same category. Why? These investors are writing bigger checks. They won’t price the round. And they move a lot faster if someone with a great track record is leading the round. Once again, ownership also doesn’t matter, but great co-investors do. As long as ownership targets don’t matter, the excuse of dilution is merely lip service. The story here is “I just need to get in the best deals, so I can raise my next fund from LPs.” Or “I need build my track record as an investor, so I can raise a fund one day.” I’m going to generalize here really quickly. While it doesn’t apply to every non-lead investor, it does apply to the vast majority. I dare say, 90% of them. These investors move on the combination of three levers:

  1. Great traction
  2. Great team,
  3. And great co-investors – the last of which is often the most important.

The more of the above levers you have as a founder, the faster you’ll get a check from the above individuals and institutions. Why do great co-investors matter so much? Outside of branding and social rapport, their investors – their LPs – also want to invest in these top deals led by these funds, but often can’t invest into these top-tier funds since everyone wants to get into a16z or Sequoia. In fact, for many of these top-tier funds, there’s a massive waitlist of LPs.

Finally, lead VCs. Ownership does matter. Really, this is the only audience you need to worry about when it comes to the topic of early dilution. While you as a founder should be dilution-preserving, sometimes, taking the capital (and subsequently, the dilution) is the best option. Maybe you really need something from an accelerator or an early investor that would be hard to get for you yourself. At that point, their capital becomes optimization capital. Early checks can get you from A to B faster, with less burn potentially, and with less detours.

So, the question you have to figure out if you take subsequent capital injections is that each time you dilute the cap table, did you reach an important milestone? What’s worrying is if you keep diluting your cap table without making meaningful progress each time. Think in the framework of milestone-based financing. Raise what you need, while giving you and your team an appropriate margin of error.

In closing

As a footnote, it’s also important to consider how much equity you as the founder will have left upon exit. If you’re going through large amounts of early dilution, you’re going to have very little upside unless you go through a massive exit. Unlike investors who invest in many businesses and have diversified their risk appetite, you, the founder, have put all your eggs in one basket. So if you care about the upside, you want to reduce dilution unless there is an absolute necessity to raise capital.

Photo by Lucas Benjamin on Unsplash

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DGQ 11: Was the David from a month ago laughably stupid?

laugh fox smile

Was the David from a month ago laughably stupid?

I’m a big fan of self-deprecating humor, but this isn’t one of those moments. Rather it’s a learning moment. While the above question is a lagging indicator for personal growth, it nevertheless deserves to be measured. After all, as the great Peter Drucker would say, you cannot manage what you cannot measure.

The timeframe of evaluation

Why a month? Why not a week? Or not a year?

In the business world, there’s a concept called the rule of 72. Effectively, 72 divided by the growth rate is the time it takes to double. For instance, if you’re growing 30% month-over-month, 72 divided by 30 is 2.4. So, if you’re growing revenue at 30% every month, you’re going to double your revenue in roughly two and a half months.

It is equally as analogous for personal growth.

time it takes to shock yourself = 72 / rate of learning

Let’s say you’re a first-time founder, and you only knew 10 things about how to start a business. But every day, you learn one more thing – via podcasts, articles, blogs, classes, you name it. Give or take a 10% growth rate. You will double your knowledge in about a week. Hopefully enough to shock the you from a week prior. Or take another example, many self-help books ask you to commit to getting 1% better every day. Assuming you consistently do that, you would have doubled your experience in about 2.5 months.

That goes to say, the faster you want to grow, the shorter the timeframe should be for you to look back and reflect on your “stupidity.” For me, it is in my nature to be hungry for knowledge, and I really love learning about things I thought I knew and what I didn’t know. For now, as learning is a top priority for me, a month sounds like a reasonable timeframe to shock myself. I also use the term “stupidity” lightly and with notes of self-deprecating love.

The shock factor

But how do you measure personal growth? Something rather intangible. It isn’t a number like revenue or user acquisition. Some people might have a set of resolutions or goals that is tangible and quantitative – say read two books a month or exercise an hour four days a week. Great goals, but they are often based on the assumption that movement is progress. The two aren’t mutually exclusive, but neither are they synonymous. The former – movement – lacks retrospection.

There were, are, and will be days, weeks, and months, we may just be busy. Our schedule is packed. We’re a duck paddling furiously underwater. And we’re gasping for air. And while our body and mind are exhausted, our body and mind have not expanded. I know I’m not alone when I think to myself, “Wow, I did a lot, but I still feel like I’m not moving anywhere.”

Our brains are unfortunately also poor predictors of the future. We use past progress as indicators of future progress. But while history often rhymes, it does not repeat. Our predictions end up being guesstimates at best.

So I look into the past. I measure my own personal growth emotionally – by shock, very similar to how Tim Urban measures progress of the human race (which I included at the end of a previous essay). I don’t know what the future will hold and neither will I make many predictions of what the future will hold for me. If I knew, I’d have made a fortune on the stock market already, in startups, or on crypto already. What I can commit to is my relentless pursuit of taking risks, making mistakes, and trying things that scare the bejesus out of me. Since only by making new mistakes will I grow as a person. What I am equipped with now can be mapped out by the scar tissue I’ve accumulated.

Coming full circle, what’ll make me realize and appreciate my mistakes and failures more is knowing that as a greenhorn I was laughably stupid.

But if, in retrospect, David from a month ago sounds like quite the sensible person, my growth will have gone from exponential to linear. Or worse, flatlined.

For founders

And now that I’m thinking aloud – or rather, writing aloud (which may deserve its indictment into the #unfiltered series), this might be a great line of questions to ask founders as well.

As a founder, what was the last dumb thing you did? When was that?

And before that, what was the second most recent dumb thing you did?

And the third most recent?

There’s the commonly repeated saying in the venture world. Investors invest in lines, not dots. Two’s a line. Three’s a curve. I want to see how fast you’ve been growing and learning.

Why such a question?

  1. If we’re in it for the long run, I wanna assess how candid and self-aware you are. Pitch meetings often depict a portrait of perfection. But founders, like all humans, aren’t perfect. For that matter, neither are investors.
  2. Venture capital is impatient capital. We demand aggressive timelines, and honestly, quite toxic to most people in the world. Given that, if you’re going to learn how to hustle after investors invest, you’re going to have a tough time convincing investors. But if the hustle is already in your DNA, that bias to action lends much better to the venture model.

Photo by Peter Lloyd on Unsplash

Thank you to V. who inspired this blogpost.

The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.

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