There was a fascinating episode on the Tim Ferriss Show recently, where we get the inside baseball on how David Maisel, founder of Marvel Studios, raised half a billion on a promise for a company who’s public market cap at the time was only a fifth of a billion. Naturally, not only was he against a lot of headwind externally, but internally as well. According to the board at the time, they would only greenlight the idea of producing their own films (as opposed to licensing their IP out) if “Marvel had no risk. Not little risk, but no risk.”
On the cusp of Captain America and Thor being licensed away, David asked the board to give him six months. The “zero risk” pitch then came in the form of external funding, huge financial upside (if things worked out), market timing, and a promise.
Financial upside for Marvel
As David puts it:
“First to my board, the argument, was if we own our own studio, it means we get the full financial upside that they understood very well.” As opposed to licensing, their traditional business model. Where Marvel only got five cents on every dollar of profit. As was the case with SONY and Spiderman.
“Number two, we decide on greenlight when the movies get made that they also understood because they only sold toys really at the time, and the toys were contingent on a movie, which they then control the timing. Now when you’re doing a public company and you’re giving guidance every year, how can you give guidance if you don’t even know what movies are going to get made? And so controlling greenlight was important, full creative control.”
Moreover, the team was able to take 5% of revenues as the producer fee AND keep all non-film revenues (i.e. toys, video games, etc.). And even if four out of the five films lost capital, they’d still make $25M in revenue each. In other words, $100M in sum. Half of Marvel’s public market cap at the time. Whose cap was only based on toy sales.
Market timing
“The bond bubble of 2004 was happening,” as David shared, “so it was a time where there was loans being made that shouldn’t have been made. And a lot of people were enamored with Hollywood as they get enamored every few years.”
Zero downside
Instead of funding the studio off balance sheet, David would go out to fundraise from others. So what was the external pitch?
“Give me four at bats, and if one of them hits, then every movie’s a sequel after that.”
On top of all the above, to me, there were some interesting terms for the investment that helped sweeten the deal:
Merrill Lynch got a 3% success fee upon the $525M closing.
David got a low interest rate loan from Merrill by getting it insured by MPAC, therefore the debt became AAA debt, which “was easy to sell to pensions and easy to sell to individual investors” in case things went awry.
Now I’m not sure if this is standard Hollywood practice. But I imagine it’s not, at least back in ’03 and ’04. I’m a venture guy after all. And as one, the above is news to me.
That said, the banks David went to fundraise from were not taking equity. It was “pure debt. So very low interest rate. And the only collateral were the film rights to ten Marvel characters of which we could make for the movies.” Which, to me, ten characters sounds like a lot for a company whose business is characters. I also imagine these were characters that had some level of historical fanbase, so they weren’t random ones from the archives.
But David clarifies. “A lot of people misunderstand that they think we pledged ten of our characters as collateral. It wasn’t that at all because in the worst case scenario, it only got collected if we lost money on those first four movies. And then those six characters, we owned all the rights besides film. And if a film was ever made by the bank, whoever collected this collateral, we got the same license fee that we get if we just license it that day to a party. So there was no opportunity cost.”
And the promise
This is history now, but at the time, was a bold claim. The idea was borne out of frustration as an entertainment investor. That:
Marvel couldn’t capture a large part of enterprise value through productions with just licensing
The first movie business was horrible. Sequels, on the other hand, were a lot more predictable. So, the focus after the first movie would not be on predicting profit, but maximizing profit margins.
So David had a thought. “What if after the first movie, every movie after that was a sequel or a quasi-sequel, which required all the characters, or a lot of the characters, to show up in multiple movies?”
The idea of sequel snowballed into what we now know as the MCU — the Marvel Cinematic Universe.
Bringing it back to venture
It’s a nice corollary to raising a Fund I, where you’re also selling a promise. A world vision. A painting of the future. Nothing’s proven yet. You’re sure as hell not selling a repeatable strategy yet, and definitely not any returns. Since there’s a good chance you haven’t returned capital to LPs before.
And this is true for not just funders, but also founders. In the words of Mike Maples, “Breakthrough builders are visitors from the future, telling us what’s coming. They seem crazy in the present but they are right about the future.
“Legendary builders, therefore, must stand in the future and pull the present from the current reality to the future of their design. People living in the present usually dislike breakthrough ideas when they first hear about them. They have no context for what will be radically different in the future. So an important additional job of the builder is to persuade early like-minded people to join a new movement.”
Dissent is a luxury
The truth is loads of people will disagree with you. You’re not looking for consensus. In fact, it’s better to be wrong and alone than right and with the crowd if you’re in the venture world. Either as a founder or an emerging GP. It’s something I recently learned from the one and only Chris Douvos. If you imagine a 2×2 matrix… On one axis, you have right and wrong. On the other, you have with the crowd and alone. You want to be in the right and alone quadrant for sure. That’s where “fortune and glory” exists. It’s where alpha exists. It is how you become an outlier and achieved outsized returns.
But the prerequisite to be there is to have the guts to start in the wrong and alone quadrant. If you start from being right and in the crowd, you’re one among many. And that doesn’t give you the liberty to have independent thinking. You’re constantly trapped in noise.
It’s as Abhiraj Bhal says. “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” You want people to question you. And as humans, we like to fit in. But to create something transcendent, external doubt is your best friend.
As such, your promise of the future must seem bizarre.
Don’t start with the product, start with your customers
When you have a promise, admittedly, the easiest way is to start engineering it right away. Without market validation. Without stress testing. Which pigeonholes a number of founders. I forgot the origination, but there’s a great line that says, “The only difference between a hallucination and a vision is that other people can see the latter.”
And in order to test that, you need to get in front of potential users and customers first. Max, someone I had the joy of working with, once wrote the below timeless tweet:
My hot take of the day:
Most aspiring startup founders who think they should learn to code would be better off learning to write well instead.
As Elizabeth once shared: “We decided that we’d start with no product. We would not build anything. And, we just started selling ads. We manually brokered deals with publishers and advertisers and took a cut in between. We got our customers by emailing people and setting up the copy and links ourselves. People would pay me through my personal PayPal account. It was only when we realized we were onto something that we started building technology to remove bottlenecks.”
On the investor side, it’s building a thesis where great investments fall into. It’s a way of looking at the world in a perspective that may seem foreign to others, but almost obvious in retrospect. The thesis should elicit the response, “Why didn’t I think of that first?” But no matter how obvious, you are the best positioned to bring the thesis to life. That doesn’t mean you need returns yet. Although good graduation rates certainly help as a leading indicator.
In that regard, it’s quite similar to how David Maisel foretold of the Universe to come. Obvious once explained, yet still met with resistance from legacy players.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
A friend trapped in his own tumultuous schedule recently reached out to ask how I seemingly effortlessly manage my bandwidth. For starters, I try, but even I get swamped. And I’m sure people I’ve worked with closely can corroborate. So if anyone has a better way, I’m all ears.
That said, as I mentioned, I do try. And naturally, that means I think about balancing my plate a lot. From shower thoughts to systems to keep me accountable. I’m going to share below the four things I shared with him, in hopes you’ll find some use for your own life here.
I have a whiteboard in my shower. (Although, you might remember I mentioned this before.) In a list format in the top right corner of the board, I write down everything I’m involved in, especially the ones that require my attention. This way, everything is always floating around somewhere in the back of head. And when I shower, I take the one I’m most excited about ideating and just let the kids run wild in the attic.
I like asking myself the question: What would I do if I knew I would fail? And subsequently… what skills, relationships, and experiences can I gain that would transcend the outcome of the project itself? With those two questions, it helps to take the emotion out of the equation and consider it rationally. Which helps in arriving at a decision that I won’t regret. And naturally since I have a pretty high bar with what I choose to embark on, that does mean I say no to a lot of things.
Work with people who are as passionate or more passionate than you are about the project or subject matter. You also want to work with people whose passion is independent of yours. For instance, if they’re only doing a project ’cause you’re excited about it, the lack of internal motivation, I’ve found, to be draining over time when I work with someone who isn’t intrinsically motivated to put in their all. It also ensures that if on an odd day out, I’m just 30% as motivated as I am usually, they come in with at least 70% of their motivation. And as long as the collective motivation at any given point in time is greater than 100%, we keep working on it.
Lastly, I categorize activities and projects by how often something requires my attention. Some things require my attention daily. Others weekly. A handful of others biweekly. Or monthly. Or quarterly. A few annually (like taxes, ughhh). And at any given point in time, I will have no more than two items/projects per bucket. For instance, I will have no more than two pressing things that require my attention daily. And so yes, I’m context switching. But not nearly as much as one might think. The caveat is that when an activity becomes muscle memory and requires very little thinking to execute (i.e. exercise, brushing your teeth, showering, journaling, or so on for me), then that activity/project no longer counts toward its respective bucket.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Voila, the fourth installation of 99 soundbites I’ve been fortunate enough to collect over the past year. The first four of what I imagine of many more to come. Each of which fall under one of the ten categories below, along with how many pieces of advice for each category:
You can also find the first three installments of 99 pieces of advice for both founders and investors here. Totaling us to a total of 396 pieces of advice.
But without further ado…
Fundraising
1/ If you’re an early stage startup, expect fundraising to take at least 3-4 months to raise <$1M. If you’re on the fast side, it may take only 2 weeks. – Elizabeth Yin*timestamped April 2022
2/ If you’re going to raise a round over 6-12 months, it often doesn’t seem fair that your first commits have the same terms as those who commit 6 months later, since you’ve grown and most likely have more traction at the time. As such, reward your early investors with preferred terms. Say you’re raising a $1M round. Break the round up to $300K and $700K. Offer a lower cap on SAFEs for the $300K. “Tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs. And that the cap will most likely go up after that.” Why? It lets you test demand and the pricing on the cap – to see if you’re cap is too high or too low on the first tranche. – Elizabeth Yin
3/ As a startup in recessionary times, you have to grow your revenue faster than valuations are falling to make sure you raise your next round on a mark up. Inspired by David Sacks and Garry Tan. *timestamped April/May 2022
4/ There’s only going to be 1/3 the amount of capital in the markets than in 2020 and 2021. So plan accordingly. If you’re not a top 0.1% startup, plan for longer runways. Fund deployments have been 1-1.3 years over the past 1.5 years, and it’s highly likely we’re going to see funds return back to the 3-year deployment period as markets tighten. *timestamped May 2022
5/ B2B startups that have the below disqualifiers will find it hard to raise funding in a correcting venture market:
No to little growth. Good growth is at least doubling year-over-year.
Negative or low gross margins. Good margins start at 50%.
CAC payback periods are longer than one year.
Burn multiples greater than 2 (i.e. You’re burning $2 for every dollar you bring in). A good burn multiple is 1 or less. – David Sacks
6/ Beware of “dirty term sheets.” Even though you’re able to get the valuation multiple you want, read the fine print for PIK dividends, simple “blocks” on IPO/M&A, and 2-3x liquidation preferences. Inspired by Bill Gurley.
7/ “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.” – Sabeer Bhatia in Founders at Work
8/ In a bear market, public market multiples are the reference points, not outlier private market multiples. Why? Public market multiples are their exit prices – how they return the fund. It matters less so in bull markets. – David Sacks
9/ Don’t trust the “why”, trust the “no.” Investors don’t always give the most honest responses when they turn down a company.
10/ If you inflate your projections, the only investors you’ll attract are dumb investors. They’ll be with you when things are going well and make your life a living nightmare when things aren’t, will offer little to no sound advice, and may distract you from building what the market needs. By inflating your projections, you will only be optimizing for the battle, and may lose the war if you can’t meet or beat your projections.
11/ VCs will always want you to do more than you are pitching. So if you’re overpromising, they’re raising their expectations even more down the road.
12/ Five questions you should answer in a pitch deck:
If you had billboard, what 10 words describe what you do?
What insight development have you had that others have not?
How you acquire customers in a way others can’t?
Why you?
What you need to prove/disprove to raise next round? – Harry Stebbings
13/ The longer you’re on the market, the greater the differential between expectations and reality, and the harder it is over time to close your round. Debug early on in the fundraising process (or even before the fundraising process) by setting and defining expectations through:
Leveraging market comparables. You don’t have to be good at everything, but you have be really really amazing at one thing your competitors aren’t. It’s okay if they’re better than you in other parts.
14/ You should reserve 10% of your round to allocate to your most helpful existing investors. Reward investors for their help. – Zach Coelius
15/ If your next round’s investor is willing to screw over your earlier investors out of pro rata or otherwise. After they leave, the only one left to screw over is you. – Jason Calacanis
16/ “Nobody’s funding anything that needs another round after them.” – Ben Narasin quoting Scott Sandell
17/ “When a VC turns you down for market size, what they are really saying is: I don’t believe you as the founder has what it takes to move into adjacent and ancillary markets well.” – Harry Stebbings
18/ When raising from corporates, be mindful of corporate incentives, which may limit your business and exit opportunities. “I’ve often seen the structure just simply be a SAFE with no information rights. No Board seats. Check sizes that are worth < 5% ownership. No access to trade secrets.” – Elizabeth Yin
19/ LOIs mean little to many investors, unless there’s a deposit attached to it. A customer must want the product so much they’re willing to take the risk of putting money down before they get it. 1-5% deposit would be interesting, but if they pay the product in full, you would turn investor heads. – Jason Calacanis
20/ “The most popular software for writing fiction isn’t Word. It’s Excel.” – Brian Alvey
21/ “Ask [prospective investors] about a recent investment loss, where the company picked someone else. See how they describe those founders, the process, and what they learned. This tells you what that investor is like when things don’t go their way.” – Nikhil Basu Trivedi
22/ “Founders, please hang onto at least 60% of the company’s equity through your seed raise. Series A or B is the first time founder equity should dip below 50%. I’ve seen cap tables recently where investors took too much equity early on, creating financing risk down the road.” – Gale Wilkinson
23/ “One of the worst things you can say to a VC is ‘we’re not growing because we’re fundraising.’ There are no excuses in fundraising.” – Jason Lemkin. Fundraising is a full-time job, but when you’re competing in a saturated market of attention, it’s you who’s fundraising, but not growing, versus another founder who’s also fundraising and is growing.
25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):
Pre-seed: $750K-1.5M round
Valuation: $5-10M post (*She would not go over $7M)
Traction:
A working MVP
Indications of customer demand = have interviewed hundreds of potential customers or users
2-5 “Design Partners” (non-paying customers or users)
Seed: $2-5M round
Valuation: $12-25M post (*She would not go over $15M)
Traction:
$10-15K MRR, growing 10% MoM
6-12 customers who have been paying for ~6 months or more, a few that would serve as case studies and references
Hired first technical AE
Series A: $8-15M round
Valuation: “anyone’s guess”
Traction:
$1.5M in ARR is good, more like $2M
3x YoY growth minimum, but more like 3.5x • 12-20 customers, indications of ACV growth
Sales team in place to implement the repeatable sales playbook
26/ Don’t take on venture debt unless you have revenue AND an experienced CFO. – Jason Calacanis
27/ When you are choosing lead investor term sheets:
For small VC teams (team <10ppl): Make sure your sponsoring partner is your champion. Why does investing in you align with their personal thesis? Their life thesis? Which other teams do they spend time with? How much time do they spend with them? When things don’t go according to plan, how do they react? How do they best relay expectations and feedback to their portfolio founders?
For larger platform teams (team >10ppl): Ask to talk to the 3-5 best people at the firm. And when the investor asks you to define “best”, ask to talk to their team members who best represent the firm’s culture and thesis. Why? a/ This helps you best understand the firm’s culture and if there’s investor-founder fit. b/ You get to know the best people on the team. And will be easier to hit them up in the future.
28/ “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” – Abhiraj Bhal
29/ “[Venture] debt typically has a 48-54 month term, as follows: 12 months of a draw period (ballooned to 18 months over the last few years), to which you can decide to use it or not 36 months to amortize it after that 12 months. The lender at this stage is primarily underwriting to venture risk, meaning they are relying on the venture investor syndicate to continue to fund through a subsequent round of financing.” This debt is likely to be paired with language that allow the fund to default if investors say they won’t fund anymore and/or just not to fund when asked. “They typically are getting 10bps-50bps of equity ownership through warrants. Loss rates must be <3-4% for the model to work.” If there’s less than 6 months of runway or cash dips below outstanding debt, then as a founder, expect a lot of distracting calls. – Samir Kaji
30/ The best way to ask for intros to investors is not by asking for intros, but by hosting an event and having friends invite investors to the event. There’s less friction in an event invite ask than an investor intro ask. The reality is that the biggest investors are inundated with intro requests all the time, if not just by cold email too.
Cash flow levers
31/ The bigger your customers’ checks are (i.e. enterprise vs. SMB vs consumer), the longer the sales pipeline. The longer the sales pipeline, the longer you, the founder, has to stay the Head of Sales. For enterprise, the best founders stay VP of Sales until $10M ARR. For SMB, that’s about $1-2M ARR, before you hire a VP of Sales. Inspired by Jason Lemkin.
32/ “‘I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.'” The sales playbook of David Beirne of Benchmark Capital fame, cited in eBoys.
33/ “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” – Bill Gurley
34/ If you were to double or triple the price of your product, what percent of customers would churn? If the answer is anything south of 50%, why aren’t you doing it?
35/ Getting big customers and raising capital is often a chicken-and-egg game. Sometimes, you need brand name customers, before you can raise. And other times, you need capital before you can build at the scale for brand name customers. So, when I read about Vinod Khosla’s advice for Joe Kraus: “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, ‘How do we bid $3 million? We only have $1 million in the bank.’ And he said, ‘Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.'”
36/ “Your ability to raise money is your strategy. If you’re great at it, build any business with network effects. If you’re bad at fundraising, it’s strategically better to build a subscription business with no network effects.” – Elizabeth Yin
37/ Be willing to fire certain customers (when things get tough or in an economic downturn). If they aren’t critical strategic partners or are loss making, figure out how to make them profitable. If you can, renegotiate contracts, like cheaper contracts for longer durations. If not, let them go. Make it easy to offboard.
38/ An average SaaS business, that doesn’t have product-led growth, is spending about 50% of revenue on sales and marketing. Those that are in hyper growth are spending 60%. – Jason Lemkin
39/ “The only thing worse than selling nothing is selling a few. If you sell nothing, you stick a bullet in it and move on. When you sell a few, you get hope. People keep funding even though it’s really not viable.” – Frank Slootman
40/ If your customer wants to cancel their auto-renew subscription to your product, you should refund them a 100% of their cost. – Jason Lemkin
41/ “Your price isn’t too high. Your perceived value is too low.” – Codie Sanchez
42/ “15-20% of IT spend is in the cloud.” And it’s likely to go up. – Alex Kayyal
43/ If your customers are willing to pay you way ahead of when your service is executed, you have an unfair and unparalleled cashflow advantage. – Harry Stebbings
44/ If you’re in the CPG business, it’s better to negotiate down the contract. “You buy 75, and you sell 60, they’re going to go, ‘Ah, I got 15,000 in inventory, it’s not a success.’ If you give them 40, and then they have to buy another 20, and they sell 60, they go, ‘Wow, we ordered 50 [(I think he meant 20)] more than our original order.’ You’re still at 60, but one, they’re disappointed, and one, they’re not. You’re still playing some weird mind games a little bit so that they feel good about whatever number was there.” – Todd McFarlane
45/ “If you are under 100 customer/users, get 20 of them in a Whatsapp Group. You will:
Get much higher quality feedback, faster, on the current product.
They will be WAY more proactive in suggesting future product ideas and helping you shape the product roadmap.
It will create a closer relationship between you and them and they will become champions of the product and company. People like to feel they had a hand in the creation process.” – Harry Stebbings
46/ Create multiple bank accounts with different banks to keep your cash, to hedge against the risk of a bank run. The risk is very unlikely to occur, but non-zero, especially in a recessionary market. Inspired by SVB on March 10, 2023. More context here, and what happened after here. Breakdowns here, here and here.
47/ “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for “excess cash” to be invested in safe, liquid options to generate slightly more income.” – A bunch of firms
48/ “Maintain an emergency line of credit. Obtain a line of credit from one of your core banks that can fund the company for 6 months. Do not touch it unless necessary.” – A bunch of firms
49/ In case of a bank run: “1/ Freeze outgoing payments, let vendors know you need 60 days, 2/ Figure out payroll & let your investors know exactly when cash out, 3/ Attempt emergency bridge with existing investors; hopefully reasonable terms or senior debt (but given valuation reset this is a HARD discussion for many), 4/ Figure out who can take deferred salary on management team, which will extend runway, 5/ Make sure you communicate reality to team honestly so they can make similar plan for their household, 6/ Make sure you talk to HR about legal issues around payroll shortfall — which hopefully this doesn’t come to, 7/ In future, keep cash in 3 different banks.” – Jason Calacanis
50/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff
51/ General reference points for ACV and time to close are: $1K in 1 week. $10K in 1 month. $100K in 3 months. $300K in 6 months. And $1M in 12 months. – Brian Murray
52/ A B2B salesperson’s script from Seth Godin. “Look, you’ve told me you have this big problem you need to solve. You have a five million assembly line that’s letting you down, blah blah. If we can solve this problem together, are you ready to install our system? Because if it’s not real, let’s not play. Don’t waste my time, I won’t waste yours. You’re not going to buy from me because I’m going to take you to the golf course. You’re not going to buy from me because our RFP is going to come in cheaper than somebody else’s. You want my valuable time? I’m going to engage with you, and tell you the truth and you’ll tell me the truth. You’re going to draw your org chart for me. You’re going to tell me other complicated products you’ve bought and why your company bought them. And I’m going to get you promoted by teaching you how to buy the thing that’s going to save your assembly line. Let’s get real or let’s not play.” – Seth Godin
53/ “The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.” – Charles Hudson
Culture
54/ Deliver (bad) news promptly. Keep to a schedule. The longer you delay, the more you lose your team’s confidence in you. For example, if your updates come out every other Friday, and you miss a few days, your team members notice. Your team is capable of taking the tough news. This is what they signed up for. Explain a stumble before it materially impacts your bottom line – revenue. Inspired by Jason Lemkin.
56/ “It’s easier, even fun, to do something hard when you believe you’re doing something that no one else can. It’s really hard to go to work every day to build the same thing, or an even worse version, of what others are already building. As a result, there was a huge talent drain from the company.” – Packy McCormick
57/ Lead your team with authenticity and transparency. “Employees have a ridiculously high bullshit detector, more so than anyone externally, because they know you better. They know the internal brand better.” So you have to be honest with them. “Here’s what we’re going to tell you. Here’s what we won’t, and here’s why.” Set clear expectations and leave nothing to doubt. – Nairi Hourdajian
58/ When someone ask Jeff Bezos, when does an internal experiment get killed? He says, “When the last person with good judgment gives up.” – Bill Gurley citing Jeff Bezos
59/ “Getting too high on a ‘yes’ can prepare you for an even bigger fall at the next ‘no.’ Maintaining your composure in the high moments can be just as important as not getting too down in the low moments.” – Amber Illig
60/ “Most have an unlimited policy paired with a results-driven culture. This means it’s up to the employee to manage their time appropriately. For example, no one bats an eye when the top performing sales person takes a 3 week vacation. But if someone is not pulling their weight and vacationing all the time, the perception is that they’re not cut out for a startup.” – Amber Illig
61/ “Whenever we’re dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we’re not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we’re taking, but it’s not going to be what we’re currently doing.” – Tobi Lutke
62/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan
63/ “Leadership is disappointing people at a rate they can absorb.” – Claire Hughes Johnson
64/ Page 19 Thinking: If you were to crowdsource the writing of a book, someone has to start inking the 19th page. And it’s gotta be good, but you can’t make it great on the first try. So you have to ask someone else to make it better, and they have to ask another to make their edits even better. And so on. Until page 19 looks like a real page 19. “Once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.” – Seth Godin
Hiring
65/ Hiring when your valuation is insanely high is really hard. Their options could very much be valueless, since they would depend on the next valuation being even higher, which either means you grow faster than valuations fall (market falls in a bear market) or you extend your runway before you need to fundraise again.
66/ It’s easier to retain great talent in a recession, but much harder to retain them during an expansionary market. Talent in a boom market have too many options. There’s more demand than there is supply of talent in a boom market.
67/ If you’re a company with low employee churn, you can afford to wait a while longer to find someone who is 20% better in the role. – Luis von Ahn
68/ “[Fractional CMOs and CROs often] want to be strategists. Tell you where to focus, and what to do better. But the thing is, what you almost always just need is a great full-time leader to implement all the ideas.” – Jason Lemkin. The only time it works is when the fractional exec owns the KPI and the function, where they work at least 60% of the time OR they work part-time and help you hire a full-time VP.
69/ Hire your first full-time comms person after you hit product-market fit, when you are no longer finding your first customers, but looking to grow your customer base. – Nairi Hourdajian
70/ “Ask [a high-performing hire] if there’s someone senior in her career that’s been a great manager, and if so, bring them on as an equity-compensated advisor to your company. If there’s someone in industry she really admires but doesn’t yet know, reach out to them on her behalf.” Give her an advisor equity budget, so they can bring on a mentor or someone they really respect in the industry. As a founder, create a safe space for both of them. Monthly 1:1s and as-needed tactical advice, introductions, and so on. And don’t ask that mentor to give performance feedback “because if so it’s less likely they’ll have honest, open conversations.” – Hunter Walk
71/ Hire talent over experience for marketing and product. “In marketing and product I prefer people with less experience and a lot of talent so we can teach them how we do things. They don’t have to unlearn anything about how they already work. We teach them how we work. For developers it might be different because it takes a lot of time to be a really good developer, and it’s relatively easy moving from one environment to another.” – Avishai Abrahami
72/ If you’re going to use an executive search firm to hire an exec, ask the firm three questions: “1/ Walk me through your hardest search? 2/ Walk me through a failed search? 3/ Why did it fail? 4/ How do you assess whether an exec is a good fit?” You should be interviewing the firm as much as the candidate. Watch out for “a firm with a history of candidates leaving in a short timeframe. Avoid firms that recycle the same execs.” – Yin Wu
73/ Before signing with any recruiting agency, ask “What happens if the person hired is a bad fit? (Many firms will restart the search to align incentives.) Is there a time limit for the search? (Some firms cap the search at 6 months. We’ve worked with firms without caps.)” – Yin Wu
Governance
74/ “The higher the frequency and quality of a young startup’s investor update, the more likely they are to succeed in the long run.” – Niko Bonatsos
75/ Five metrics you should include in your monthly investor updates:
Monthly revenue and burn, in a chart, for the whole year
Cash in the bank, at a specific date, and runway based on that
Quarterly performance for the past 8 quarters, in a chart
Target for the quarter AND year and how you are trending toward it
76/ Another reason to send great, consistent investor updates is that when prospective investors backchannel, you want to set your earlier investors up for success on how they pitch you.
77/ If you don’t have a board yet, still have an “investor meeting.” “Create investor meetings where you invite all your investors to do an in-person + Google Hangout’ed review every 60 days. They don’t have to come. But they can.” – Jason Lemkin
78/ “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” – Bob Iger
79/ “Entrepreneurs have control when things work; VCs have control when they don’t.” – Fred Wilson
80/ If an investor really wants their money back (usually when VCs have buyer’s remorse), there are times when they force you to sell or shut down your companies. Instead, ask them, “What would it take to get you off my cap table?” – Chris Neumann
Product
81/ “The ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” – Bruce Dunlevie, cited in eBoys
82/ Once you launch, you’re going to be measured against how quickly you can ramp up to $1M ARR. One year is good. Nine months is great.
83/ The more layers of friction in the onboarding process (i.e. SSN, email address, phone number, survey questions), the better you know your user, but the higher the dropoff rate. For PayPal, for every step a user had to take to sign up, there was a dropoff rate of 30%. – Max Levchin in Founders at Work
84/ “Product-market fit can be thought of as progressively eliminating all Herbies until there are no more Herbies. Then, you’re in a mode where you can invest in growth because it’s frictionless.” – Mike Maples Jr. (In the book, The Goal, the trek is often delayed by a large kid called Herbie. As you can imagine, the group only moves as quickly as their weakest link.)
85/ “There’s a ruthlessness in the way Dylan finds sources, uses them and moves on.” – No Direction Home. Be ruthless about how knowledgeable you can be about your customers, about your problem space, and about your product. The knowledge compounds.
Competition
86/ “If you patent [software], you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.” – Max Levchin in Founders at Work
87/ If you know you’re building in a hot space, and your competitors are being bought by private equity firms, share that with your (prospective) investors. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
88/ “As a startup, you always want to compete against someone who has ‘managed dissatisfaction at the heart of their business model.” – Marc Randolph
89/ “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” – Ayrton Senna. It’s easier to overtake your competitors in tough markets than great markets.
90/ “Having a real, large competitor is better than having none at all!” – Anna Khan
Brand/Marketing/GTM
91/ If you’re a consumer product, your goal should be to become next year’s hottest Halloween costume. Your goal shouldn’t be fit into a social trend, but to define one.
92/ Don’t be married to the name of your company. 40% of NFX‘s early stage investments change their names after they invest in the seed.
93/ The viral factor doesn’t take into account the time factor of virality. In other words, how long it takes for users to bring on non-users. Might be better instead to use an exponential formula. “Think of a basic exponential equation: X to the Y power. X is the branching factor, in each cycle how many new people do you spread to. Y is the number of cycles you can execute in a given time period. The path to success is typically the combination of a high branching factor combined with a fast cycle time.” – Adam Nash
94/ In a down market, you may not need as big of a marketing budget as you thought. Your competitors are likely not spending as much, if at all, to win the same keywords as before.
Legal
95/ “Nothing is more expensive than a cheap lawyer.” – Nolan Church
The hard questions
96/ “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.” – Andy Rachleff, cited in eBoys
97/ “Inexperienced founders are usually too slow to fire bad people. Here’s a trick that may help. Have all the cofounders separately think of someone who should probably be fired, then compare notes. If they all thought of the same person…” – Paul Graham
98/ When you’re in crisis, find your OAR. Overcorrect, action, retreat. Overcorrect, do more than you think you need to. For instance, lay off more than you think you need to. Actions can’t only be with words. Words are cheap after all. And retreat, know when it’s time to take a step back. “Sometimes you just have to do your time in the barrel. When you’re in the barrel, you stay in the barrel. And then you slowly come out of it.” – Nairi Hourdajian
99/ “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.” – Tom Loverro
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
A while back, I stumbled across this question by Siqi Chen while doomscrolling through Twitter, and I couldn’t help but do a double take on it. It’s something I often worry that I miss when founders or GPs pitch me, but also when I hostfireside chats. I worry in my myopia with hitting an agenda of questions, I may miss the most important part about the person sitting across from me. In any interview setting, interviewers always have a pre-destination in mind. And often it’s the onus of the interviewee to alter that flow if a dam is restricting the power of the torrent. In other words, your strength. It’s why I ask, “Are there any questions you have yet to be asked, but wish someone were to ask you?” But I like Siqi’s way of asking it a lot more.
After 20 years of interviewing candidates, I've found this to be the single most useful interview question:
"What is your greatest strength … that you are most worried about not coming across in an interview setting?"
Take ambition as a strength, for example. Really hard to tell by just looking at a resume, especially one who says they are and someone who actually is.
At the same time, there’s a beautiful line that the late Ingvar Kamprad, best known for founding IKEA, once wrote. “Making mistakes is the privilege of the active — of those who can correct their mistakes and put them right.” And that’s okay, in fact heavily encouraged for anyone who has ambitions. Because in order to achieve the extraordinary, you cannot pursue the ordinary. You have to tread where no one has treaded before. And a lagging indicator of that is the number of mistakes and scar tissue you’ve collected over the years. So, in an interview, to best illustrate your ambition, you have to talk about the lessons you’ve learned to get here. The greater the mistake, the more risk you took. And often times, the greater the ambition.
Kevin Kellyalso said recently, “I’d like to give a little story of a car, and you need to have brakes on the car to steer the car. But the engine is actually the more important element, and so there are people and there are organizations, and there are methods that are going to be doing the braking, and I think they’re essential. I want brakes in the car, but I just feel that the brake can overwhelm and cause stagnation, and that we also wanted to remember to focus on making the engine even stronger, and so I emphasized the engine.”
In an interview, it’s the difference between promotion and prevention questions. As Dana Kanzeonce shared, ““A promotion focus is concerned with gains and emphasizes hopes, accomplishments, and advancement needs, while a prevention focus is concern with losses and emphasizes safety, responsibility, and security needs.” As such, in an interview, you want to channel your energy to being asked at least one promotion question that highlights your strength.
Conversely, as I’m writing this right after reading Chris Neumann‘s most recent post on fake FOMO, creating a fake sense of urgency is one of the best ways to ensure your greatest strength won’t come out during the interview.
Today’s just a short blogpost. Just to say I’m a fan of Siqi, one of the greatest masters of storytelling, and this question. In case, you’re looking for more Siqi content, check out here and here.
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.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
It’s not every day one gets to sit down and experience a Chinese tea ceremony under a late afternoon Los Altos sun. Sitting across from me was a gentleman in a white tee who moonlighted as a tea connoisseur. As such, he was in the middle of passionately describing to me what was some of the best tea I’ve had to date.
“David, smell this blend three times. You’ll realize that each breath you take will smell completely different from the last.”
To my bewilderment, he was right.
As I handed the teapot back to him, he continued, “Now the first pour you always pour out. Here, we are just washing the tea leaves. But we use this opportunity to also coat the insides of your teacup with the flavors of this next tea.”
True to his word, he awakened the inner mold of my cup with the smoky liquid infused by leaves that had been aged longer than I’ve been alive. Then poured the first pour back onto the teapot with the lid on, creating a wet seal around the teapot. As a result, the leaves were washed. The aromas are concentrated in the pot. And the cup has been given time to get to know the tea.
When, finally, the teacup landed back in my hands, I could taste the unfiltered, rich, smoky, yet mellow aroma of a Wu Yi Shui Xian tea.
If I didn’t know any better, I’d never have guessed his “day” job was being an investor. Specifically, a pre-seed and seed deep tech investor.
Of course, you’re smart. Given the title of this blogpost, you didn’t come here to read about the intricacies of drinking tea. But about the intricacies of deep tech, which in the process of editing this piece, I realize deep tech happens to have the same initials as drinking tea. But that’s not only stretching it, but I digress.
The fine gentleman who sat across from me in a white tee, his name is Arkady Kulik, Co-Founding Partner of rpv, a fund dedicated to backing early-stage scientifically intensive teams. In other words, deep tech. Currently, the industry itself is highly fragmented. In Arkady’s words, “it’s like investing in IT in the 80s. But they’re all ventures that can completely reshape the landscape.”
As Arkady continued, he shared something else quite fascinating. “In software, you’re looking at a high market risk and low technological risk. In deep tech, it’s the exact opposite. We have a low market risk and high technological risk. The problem is not whether they can sell this to people, but rather whether they can build it.”
Naturally, as someone who spends little time looking into the deep tech world week to week, I had to double click on that. What followed was a conversation where I found myself wishing I could take notes faster.
Smelling the tea leaves
As a non-technical person, the biggest question for me has always been: How do you evaluate a deep tech deal?
To Arkady, it’s the entry point in price as a function of Technology Readiness Level. TRL, for short.
Source: rpv’s Investor Deck (and yes, Arkady gave me permission to share this)
“TRL is actually something that the team at NASA came up with. NASA has always had a lot of internal projects, and they needed some internal tool to evaluate the readiness of those projects.
“It was developed in the 1970s, but was formalized in the decade after. One through three on the TRL scale is all theory. They’re largely funded by the government through grants and such. Seven through nine on the scale is commercial, and covered by generalist VCs. Everything in between is in some form of a product development process. That’s where we come in.
Source: rpv’s Deck, citing NASA TRL levels
“To get the graph above, we take TRL levels on the X-axis and the historical round size data on the Y-axis. Then we looked at every single company, took the lowest and highest round in each vertical within deep tech, and mapped it out.”
While every firm’s “blue box” is different — and after learning about this, I do encourage every deep tech firm to go through such an exercise, rpv’s sweet spot is companies leveraging technologies TRL 3-6 whose round is shy of $1.5 million.
The first pour: Tea meets cup
After passing through the smell test, the first question Arkady tries to answer is always: Is it BS? “I look at every deck myself. No analyst. No associate.”
After Arkady looks at the deck, he then sends it to his team. “They give me one of three scores: green, yellow, or red. If it’s positive — meaning either green or yellow, I take the first meeting. We have 12 deal breakers, ranging everything from lack of ability to protect IP (it’s why we don’t do software deals) to tech, finance, or team conflicts of interest. If any of us in diligence raise a flag, we don’t continue. If not, we ask specific questions to the team.”
When meeting with the team, the question of founder resilience always comes up. Of course, every investor measures grit differently. I ask about excellence and scar tissue, but I was deeply curious as to what Arkady asks for.
“I try to gauge it from learning about founders’ past experiences (not necessarily professional ones),” he goes on, “I dig deeper on tough situations a founder has faced. Also proposing hypothetical scenarios about their fundraising or team dynamics help a lot in understanding that facet.”
Without a beat, I follow up, “For that, do you have any go-to questions?”
“Nothing formal. I try to find an experience in someone’s past that could be good grounds for showing resilience: competitive sports, PhD, previous startups, complicated and long-term projects in the corporation or something like that.
“For the hypothetical scenarios, I ask things like ‘What if you won’t gather the round?’ Or ‘What if your co-founder absolutely had to resign, what’s your action plan in the bus factor case?’
“It’s an area where you look at how they react, not just what they say. How does their body language change when they’re answering the question. It’s about the non-verbal signals. ‘Tell us an experience in the past and things didn’t go your way, and things were dragging.’ Was it when you applied to college? Or went for your PhD? Or when you were trying to go on a date with someone you liked?’
“Resilient people usually have some kind of Plan B. People who don’t have another plan and still try the same thing again and again are stubborn. We don’t seek stubbornness in entrepreneurs. We look for their ability to be honest with themselves and other people.”
The second pour: Tasting the depth
“If there are no red flags after meeting the founders, then we move into scientific due diligence. We ask everything from deep scientific questions (on isotopes or wavelengths) to the feasibility of the product — essentially a peer review on a paper by our internal, but also external scientists and advisors. The latter to get a truly unbiased opinion.
“Then we do a deeper diligence process with a scorecard of 35 items from team composition to their stage of development to their ability to protect IP to the availability of competition, each rated twice. Once by myself, and another by our advisors and venture partners. Then we average the points out for each of the 35 items and compare against our thresholds. If it’s a green light, we make an investment decision. If yellow, we follow up with the target venture’s team to see if they have a good answer to our concerns. And if not, then we say no. If red, well, we also say no. Though we have yet to give a red final score after using the scorecard since they’ve all died during the extensive due diligence process.”
In our conversation, which eventually migrated to Zoom (with some people, you just never run out of things to ask), I postulated about the variability in venture firms using scorecards. There are strong reasons why you should or shouldn’t from both sides of the aisle. Both of which have generated great returns for their LPs.
Today, many of the top tier venture firms make outlier decisions based on gut. It’s the same reason why generational or succession planning at these top firms are so hard. Once the GP leaves or retires, the next generation have a hard time making the same investment decisions as the previous generations.
On the scorecard end of the spectrum, hedge funds are, by definition, firms who employ algorithmic discipline to generate alpha. On the venture side, you have Correlation Ventures, SignalFire, just to name a few. Seven years back, Social Capital’s Capital-as-a-Service, just to name a few. The last of which seemed to have been deprecated due to the inability to scale support for a portfolio of 500 startups, rather than the inefficacy of their “scorecard.” As you might suspect, a topic I’m quite fascinated about.
“We make our decisions based on scorecards,” Arkady reaffirmed, “And if you were to look at each one we’ve done, you’ll see that it’s rare that our team sees eye to eye. We disagree a lot. It’s an individual decision and we take it. And we never try to convince the other to change their score. We trust each other to give a score we believe in. For advisors, since we have many, we take the average of all their opinions. We also ask different advisors for each item on the scorecard. Some advisors are excellent in one area, but might not be fluent in another.
“The final thing I’ll say is that when something feels off, we say no. Even if the data shows green, but we’re unsure about the validity of the data, we still pass. One of the best pieces of advice I got around hiring is if you’re not sure about a hire, pass. It’s the same with investing.”
For Arkady, that is the weapon of their choice.
In closing
Between three calls and a tea ceremony, even then, we only touched the tip of the iceberg. One I’m likely to have many more questions for Arkady and my other friends who live and breathe in this space. It’s an exciting space. To be fair, even calling it all just one space is an understatement. It’s a permutation of many that’ll be segmented when the broader investment community starts to understand them all better. Myself included.
Looking forward to it all, and appreciate you, Arkady, for all the back and forth edits, lessons, and the tea!
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
As those close to me know, over the past few weeks, I’ve been knee-deep in some new projects. Projects I haven’t been this excited to produce in a long while. One of which is around experiences.
At the same time, as friends and long-time readers of this humble blog know, I am no stranger to the world of socialexperimentsandexperiences. I still don’t have a great catch-all term for it. They’re not just another set of “events.” Events just remind me of the same conference, fireside chat, or happy hour playbook. But I try to take my events a step further. So, naturally, given my fascination around building experiences, I walk hand-in-hand with both psychological research and game design. The former of which I share a bit more in previous blogposts than the latter.
So, I’m going to dedicate this essay to three of the lessons I picked up in the latter.
Create experiences that optimize for people who know no one else there.
Don’t confuse complexity with depth.
A great event is great not due to the event itself, but because of the story one gets to tell again and again.
1. Create experiences that optimize for people who know no one else there.
I had always had this somewhere in the back of my head. To design experiences where no one was ever left out. But when I caught up with a friend recently in New York, he codified it into what it is today. As someone who runs a design studio that builds immersive experiences in New York, he spends most of his time building experiences for strangers. And while friends may visit his exhibits together, the vast majority of his attendees do not know anyone else.
Take, for example, happy hours. Most happy hours aren’t designed for the person who knows no one. Usually the event itself is fairly laissez-faire. Most of which, the hosts don’t actively try to connect attendees. And so if you show up at a happy hour and the host is too busy to intro you to anyone, unless you’re an outgoing person, you’re likely standing near the edges, hoping to jump into a conversation if any group will let you. This often leads to events where people leave early and form cliques. It also optimizes for early birds, rather than the fashionably late.
Tactically, it’s creating excuses for people to jump in conversation. While not a problem for outgoing individuals, I need to empower everyone, including shy introverts, with tools to start conversations, where I and/or the experience shoulder the initial responsibility and blame to start conversations. That could be with customized fortune cookies where one is supposed to read their fortune to someone else. Or empowering people with a mission or an ask greater than themselves. For instance, to over-simplify it a bit, “I’m trying to put together a small group of everyone who’s wearing glasses tonight. Do you mind helping me find out all the names of the guests who are wearing glasses?” Or “I’m trying to resolve a debate with my co-host. Pineapples or no pineapples on pizza. I’m all for pineapples, but she isn’t. Can you help me find more allies?”
2. Don’t confuse complexity with depth.
This is unfortunately a fallacy I often find myself spiraling down the longer I’m given to ponder. And I lose myself in intellectual complexity.
Many years ago when a couple friend and I first decided to host an escape room in a mansion over three days and two nights, the greatest question we had was: How do we create an immersive experience over multiple days? And retain that level of immersion throughout? I thought, hell, what if we created a brand new language for the event. One that all guests would have to learn and practice throughout the event. We’d ease them in slowly, but the biggest puzzle could only be solved through adequate mastery in this new language. This easily gave me the greatest injection of dopamine when planning for the event. And I went deep, talking with linguistic professors, studying how Tolkien created Quenya, and how Cameron and Paul Frommer created the Na’vi language.
It was truly interesting to me and to many of my friends. But unfortunately, through user testing, to most others, while interesting to hear its backstory, was not fun to practice. I had ended up developing it to a level to where it departed from its English roots to resembling language of Scandinavian origin. Because of its complexity and how there were more guests who were English speakers than speakers of this new language, immersion broke almost instantaneously.
The great Mark Rosewateronce definedinteresting as intellectual stimulation and fun as emotional stimulation. While they’re not mutually exclusive, it’s important to not confuse the two.
There’s a great Maya Angelou line that I, like many others, like to reference. “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.” And it is no less true for gamified designs. Emotional satisfaction often runs deeper and longer than intellectual satisfaction. The former has a greater chance of becoming a “core memory,” to borrow from the brilliant minds behind Pixar’s Inside Out, than the latter.
I was lucky to learn this lesson from one of the greatest designers of card games alive today. It was on a call earlier this year, where I was telling him about all the awesome bells and whistles I was planning on implementing for an upcoming experience. And I asked what he thought. To which, he responded: “Kill all complexity. Complexity is not a substitute for depth. Rely on your audience for depth. The more borders, the harder it is enjoy. Too few, it’s chaotic. Find the absolute minimum number of borders.”
The goal of creating systems is to create opportunities for serendipity. To create opportunities where people can dive deep. Not to force people to take the plunge when they may not be ready.
His advice just happens to rhyme with a quote I’ve always kept somewhere in the back of my mind, but now sits on the wall above my PC.
“Your ability to solve problems with magic in a satisfying way is directly proportional to how well the reader understands said magic.” — Sanderson’s First Law of Magic
3. A great event is great not due to the event itself, but because of the story one gets to tell again and again.
Under the ambiance of MarieBelle, which I still so fondly remember the moment my friend told me this, she said, “A great event is great not due to the event itself, but because of the story one gets to tell again and again.” It’s the truest definition of surprising and delighting. She was someone who used to work on the Dreamweavers team at Eleven Madison Park when Will Guidara was still there. As such the above lesson was a page out of Will Guidara‘s book Unreasonable Hospitality, whose best known for how intentionally he took front of the house hospitality at 11 Madison Park, one of the greatest restaurants in the world. 4 stars on New York Times, and 3 Michelin stars. He also happened to be the person who conceived the Dreamweavers team there. Just to give you an idea of how seriously they take their roles…
First off, the core of the event itself — the meat, the protein — has to be great. If it’s a tofu burger, it better be a damn well-marinated fat slice of egg tofu, double-fried to perfection. To Malcolm Gladwell, that’s the meal.
And only once you have it all, what’s the cherry on top? What’s the candy? Why would people want to talk about it? For events, that’s:
Delivering surprises — gifts and/or experiences they do not expect
Transferrable pieces of knowledge — insights, frameworks, or trivia knowledge that are useful even after the event
Meeting great people WITH great stories — “Did you know that [so-and-so] did X?” And for this to happen not just opportunistically but at scale, finding ways to help people share stories of vulnerability or of adventures that have yet to grace any public media is key. The easiest way is through questions. The slightly harder way is through a set of triggers where it makes sharing such a story natural.
In closing
I am, as always, a work-in-progress. And with the events I’ll continue to host this year, I’m going to learn more. And in time, be able to share more of my lessons, trials, and tribulations in this journey. In hopes, this will aid or inspire you on your path.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Earlier this week, I grabbed coffee with a founder. Let’s call him “Elijah.” He recently lost a key exec he’d been working with for two years to their incumbent competitor. The competitor’s offer happened to be too good to turn down. Triple the exec’s salary. As that exec had a family to feed and children’s education that didn’t come cheap, he made the hard decision to leave. Needless to say, Elijah was devastated. And he asked,
“David, what should I have done?”
I initially thought it was rhetorical. It seemed that way. But he paused, looked at me, and waited.
So I responded.
My response
I’ll preface by saying that the advice I shared with him was a collection of insights I learned from mentors over the years — some a lot more recently than others. I don’t hold all the keys to the castle. And every situation is, well, situational. So the last thing I wanted was for the founder to take my advice as the word of god (nor anyone reading this blogpost now). Merely a tool in the toolkit. At times, useful. Other times, just something that acts as décor in the shed.
“Elijah, it’s probably too late for that exec… for now. He’s made his decision and walked. That said, I think there are two things to be aware of here:
The fact you didn’t know about this until it happened, and
The decision itself.”
Pre-empting the ultimatum
For the former, here’s how I think about pre-empting your team’s career inflections.
In their first week, have everyone put together their personal manifesto. What is their 6 month goal? 1 year? 5 years? 10 years? Lifetime goal? What motivates them? How do they like to give and receive feedback? Of course, it’s helpful to share your own first, so they have a reference point. Don’t expect anything you’re not willing to share first. So, naturally, this requires a level of transparency, and more importantly, vulnerability.
Then within the first two weeks, you and their direct manager should review their manifesto with them for at least 30 minutes live. Really get to know them. Taking a page out of Steven Rosenblatt’s book, what drives them? What haven’t they achieved that they want to achieve? How do they do their best work? When do they feel the most motivated? Why did they want to work here? Why are they excited to do so? How does working at your company fit in their broader goal?
Then every quarter, allow every team member one day of mindfulness away from their work to revisit their manifesto. I usually recommend a Friday. What’s changed? What’s stayed the same? Does their current role still fit in their broader goal? If not, why not?
The week after, take time to sync again and be incredibly candid.
Of course, the above is easier to do if you have a company of less than 50. At some point, when your company scales past that, it’s at least helpful to do it with your direct reports and their direct reports.
Helping with the decision
For the latter, you can’t stop a river. Even if you build a dam, the flow will always find a way around. You can’t change what motivates someone else. But you can help them channel it. The best thing you can do is equip that person with the tools to make a decision they will not regret, and wish them the best.
I like to sit people down and first help them figure out why they’re considering a new role. People often conflate the three traits of a job — compensation, scope, and title — together when making a career move. But in truth, they’re similar, but all a bit different. And I want people to know that just because they’re getting paid more doesn’t necessarily mean an increase in responsibility. Just because they’re getting a new title doesn’t mean that they’ll get more money. Then I have them stack rank the three traits. From most to least important.
If they still rank compensation first, that’s fine. Maybe they’re saving to buy a new house or to pay for their child’s higher education. And there’s nothing you nor I can do there. But if it’s one of the other two that come out on top, there’s room to create a new position or set of responsibilities where the individual feels empowered. And if it’s not at your company, they’ll be equipped to think through it at their next company. If they don’t have one lined up yet, help them through your network find one that’ll fit the criteria.
The wonderful irony
The funny thing about helping people achieve their dreams — sometimes that’s actively helping them leave your company — is that the karma usually comes back in one way or another. In this case, and I’ve seen it and experienced it before, even if you lose this person at this time and place, they’ll remember the help you gave them. To which, one day, when they have an all-star friend looking for their next opportunity, they will think of you.
There’s a saying I love. ‘The best compliment an investor can get is to get deal flow from someone they passed on.’ And here, the best compliment you can get is to get talent from someone who left your team.
In closing
Shake Shack’s Danny Meyer recently said something that echoes this notion. While he uses the word “volunteering,” he defines “volunteering” as:
“I basically, to this day, treat all of our employees as if they are volunteers, which not in the real sense. You’re going to get paid. But if you’re working for me, it means you’re probably good enough to have gotten another 25 job offers at least. And so, as far as I’m concerned, you’re volunteering to share your gifts with us.”
He goes on to say, “I didn’t have any way to motivate them with money. I couldn’t give them a raise, couldn’t dock them their pay. So I learned such a crucial lesson, which is that, if someone’s volunteering, the only way to motivate them is to have a higher purpose.”
Of course, there’s more than one way to make a team member feel like they are valued and that they value their work here. Another way is to give your prospective team member a “love bomb”, as Pulley’s Yin Wucalls it.
Give the candidate a love bomb once you're in sell mode.
Offer chats with investors. Get your team to reach out.
Send cake.
Talk to the candidate's partner, sister, kid, etc. Everyone wants to feel appreciated. Do whatever you can to show the person you want them on the team. pic.twitter.com/4pgnOQIO5S
Now I’m not saying that if Elijah did all the above, he’s guaranteed to retain the exec. Who knows? He might have. Might not. For a man with a family and financial needs, it’s a hard ask. But at the minimum, this career move wouldn’t have blind-sided him. And better, he could’ve supported that exec in making that career move.
Just like with your product, your goal with your team is also to catch lightning in a bottle. How do you attract the best talent to work with you? And then, once you are able to, how do you keep them?
With the latter, a big part of it is showing you care.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
The thing is this is the first real recession I’m working in. I entered the workforce something in the midst of one of the longest bull markets in modern history. So, naturally, I had a lot of questions. One of which I asked one of my mentors in VC who’s been through a few cycles late last year. “Are there any leading indicators that foretell when we’re going to get out of a recession? Or when we truly hit rock bottom in a recession?”
And he said something that made complete sense. “When the frequency of mass layoffs, especially from some of America’s largest employers, slows to a halt.”
Since then, every month or so, I check in the number of WARN notices that come in which require companies doing a mass layoff to publicly report a layoff 60 days in advance. For instance, you can find California’s here.
As Chamath Palihapitiya puts it in his 2022 annual letter, “while we believe that most of the multiple contractions in these markets have largely worked their way through the system, we suspect there is still some more room to fall — particularly if the U.S. enters a recession in the coming year.” Since it seems layoff season is yet to pass, it seems wise to buckle in for the longer run.
While friends have asked me when the recession will end, I responded with a simple “I don’t know.” No one does. And while many may make conjectures on the timing, the one thing we can use this free fall for is to build a heat shield.
I really like this one line in Chris Neumann‘s recent blogpost on antifragility. “As great as it sounds for a startup to get stronger when unexpected events occur, I don’t actually think that’s a realistic goal for most companies (it certainly isn’t the case for VC firms). Rather, I think the goal in making antifragile startups should be to minimize the risk and distraction when unexpected events occur, such that the company can continue to make progress while its competitors are panicking and reacting.” One thing’s for sure. The world is host to a plethora of distractions. Something we won’t be in shortage of. With each black swan event, we will only be left with a surplus of attention stealers.
And I’d be presumptuous to say that the best do not get distracted. Rather the best realize when they are and have ways to get back to a focused flow state. Simply put, it’s helpful to play a game of What if? What if this unexpected shock happens? How will I react when my servers get hacked? How do I react when my cash flow is constrained due to an unpredictable event? And in each broad category of What if’s, do you have a way to hedge the risk?
Sometimes, it’s preparing for the unexpected black swan event.
That’s why code is redundant to prevent the fragility of storing it only on one server.
It’s why you should have your cash in multiple bank accounts, with at least one of them being a big 4. A few top firms, including General Catalyst, Greylock, and Redpoint, have also said, “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for ‘excess cash’ to be invested in safe, liquid options to generate slightly more income.” All to protect against the downside risk of losing all your money when you put your eggs in one basket.
But when the black swan does hit, prioritization matters even more. When the pandemic hit and Airbnb was between a rock and a hard place, Brian Cheskydescribed it, “We realized not everything mattered. And it was like if you have to go into a house — your house is burning — and if you could only take half the things in your house, what would you take?”
Chamath went on to write in the same letter. “The most alarming consequence in startup-land has been the divide it has created between the management teams who have ‘found religion’ (i.e. made the tough decisions and managed their businesses smartly) and the rest who are trying their best to avoid reality.” And those tough decisions include, “cutting non-core projects, lowering costs, and vastly reducing G&A while getting to profitability [which] is now mandatory — otherwise you will have to face the consequences.” Those same tough decisions set teams up for success in bad times and bear markets.
In closing
Recently on the Tim Ferriss Show, David Deutsch said, “wealth is not a number. […] It is the set of all transformations that you are capable of bringing about.” Similarly, a company’s revenue is not just another number. It is a product of all the miracles that the company willed into existence. Crossing the chasm. Leaping over hurdles.
To take a line out of Nassim Taleb‘s book, “Crucially, if antifragility is the property of all those natural (and complex) systems that have survived, depriving these systems of volatility, randomness, and stressors will harm them. They will weaken, die, or blow up.” We need black swan events to create miracles. And we need miracles to create stronger, more resilient companies.
Trauma strengthens us. You need to bleed to grow scars. You need to feel pain before you grow calluses. The product of each makes one more resilient to pain and injury in the future.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Whenever I host fireside chats, I always ask three questions before the talk begins, usually a week in advance.
What would make this interview the most memorable one you’ve been a guest for even two years from now?
Are there any topics you don’t want to talk about? Or are sick of talking about?
Are there any questions you have yet to be asked, but wish someone were to ask you?
On top of the above three questions , occasionally, I ask a fourth. Do you have a home run story that has gotten you a standing ovation in the past — privately or publicly?
The goal is simple. Despite hours of research and asking mutuals, sometimes I still can’t find anything that’s humanizing about my guest. And I know for a fact that all humans are imperfect. And that imperfection makes each person relatable. Just like when Neil Gaiman met Neil Armstrong. But recently, I’ve fallen in love with a new way to phrase the fourth question.
What is a story that you’ve told or have yet to tell where you either fight to hold back tears or fight to hold back giggles?
On my flight to New York recently, I watched a movie starring one of my favorite actors in the world, Tom Hanks, which inspired this question. And, subsequently this blogpost. A Man Called Otto. Inspired by Fredrick Backman’s A Man Called Ove. And I’m not ashamed to say, I cried during that movie. While Rotten Tomatoes may not give it the score I think it deserves, it was well-written and well-produced. Through it, I realized that powerful stories are powerful not because of how awesome the protagonist is. But by how relatable their weaknesses are. Their limitations. I’ll give an example… to avoid spoiling the afore-mentioned movie.
Spiderman isn’t awesome because he has mutant powers. He’s awesome because he’s prone to all the emotions and struggles, be it love, bullies at school, a horrible boss, and how he acts out against all of that. Spiderman’s much more relatable than a super billionaire who owns all the gadgets in the world or an alien from another planet. He’s just a kid from Brooklyn. Or Queens, depending on which Spiderman suits your fancy. And as Brandon Sandersononce said, limitations are more interesting than powers. Limitations make us human. And characters who exhibit humanness and still somehow overcome impossible odds are stories that are passed from generation to generation.
That said, storytelling, outside the realm of superpowers, is equally as true. In a world where appearance and social capital goes a long way, trying to be perfect, to look perfect, and to act perfect is a fallacy in the modern era. While we know we’re not perfect, as a society, we continue to strive for perfection.
After watching a lot of movies, and in my free time, watching acting lessons (FYI, would fail as an actor, but still find the craft fascinating.), I’ve learned we don’t cry when watching movies because the characters cry easily. We cry because the character is trying to hold back their tears. And we don’t laugh during a show or a movie because the comedian laughs easily. We laugh even more because they’re trying to hold back their own laughter. The narrators and characters we see are a reflection of who we truly are.
In many ways, if someone cries easily, it relieves the audience of the ability, some artists may call it responsibility, to cry. Someone, the actor or actress or character has diffused the tension already. But if they fight to hold back their tears, holding back the floodgates, we as the audience are more likely to cry in their stead.
Now I say all of this because I find most fireside chats and interviews unrelatable. Now it’s a product of many things. And I genuinely believe a plethora of individuals do have something powerful and insightful to share, but the stage needs to be ready for them. It’s rare for guests to drop some head-turning advice in the first 10 minutes. Which means… it’s up to both the host and the guest to hold the audience’s attention long enough, as well as create enough opportunities for the guest to shine. The above question, in my opinion, does both.
So all in all, going forward, rather than asking for a home run story, I will ask for stories where people are just people. And for stories that mean a tremendous amount to the people telling them. That they have no choice but to let even a little bit of themselves out emotionally.
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.
Subscribe to more of my shenaniganery. Warning: Not all of it will be worth the subscription. But hey, it’s free. But even if you don’t, you can always come back at your own pace.
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
In an industry that is heavily apprenticeship-driven, the more tactical advice one gets, the faster they grow. Historically, that meant a senior partner taking you under their wing. Or maybe 2-3. While I’ve been lucky to work and learn alongside some of the world’s most exceptional minds in the funding landscape, I’ve always found it helpful to have multiple teachers. Some in the form of books. Others in the form of shorter form content. Tweets. Social posts. Podcasts. And of course, from the insightful conversations that I have weekly. At the same time, in hopes of supporting the growth of others in this industry (such a small world, but it just isn’t helpful enough), this blog has been and will continue to be my vehicle for stewarding information and insights from the best.
Just like in both of my initial pieces of 99 pieces of advice for investors and founders I wrote in April 2022, this will be a continuation and an evolution of the last. While this will cover more of the same topics as last time, like startup investing, pitching to LPs, and fund strategy, I’m personally really excited about the some new categories, like succession planning, tax, and how to think about exiting positions.
And while I do write long form posts most of the time, and have been guilty of well… longerrrrrr form essays (and maybe one day with even more r’s), like this or this… I digress. While I do enjoy long form expositions, some things are best shared without superfluousness.
Most of the advice below captures the essence of a TikTok or Instagram Reel or a YouTube short. Choose your fancy. Many of which answers the age-old podcast question: “If you were to share one piece of advice with your [insert age]-year old self, what would it be?” Or “What advice would you give someone starting their first fund today?“
And now with “new and improved UI” (don’t get too excited, just number count of soundbites in each category), each fall in one of ten categories:
1/ You can’t be in every good deal, but every deal you’re in better be good.
2/ “You’re not defined by your worst investment. All angels will have failures in their portfolio. It’s part of the process.” – Brian Rumao
3/ “The weird thing is when late stage went from the hardest part of venture to the easiest. And that should have been the flag to everybody.” – Jason Lemkin*timestamped May 2022
4/ “The older you get, the younger your mentors should be.” – Samir Kaji
5/ “Your brand is what people say about you when you’re not in the room. It’s their first reaction when they see an email from you in their inbox. You build that brand — or not — with every interaction.” – Chris Fralic
6/ “Never let a good crisis go to waste.” – Winston Churchill
7/ When there’s risk involved, don’t let the outcome determine the quality of your decision. – Andy Rachleff
Investing — Deal flow, theses, diligence
8/ When assessing startups against their incumbents, consider their incumbents’ ability to hire top talent. For instance, if the incumbents are banks that are known for slower logistical and bureaucratic procedures, it’s easy to hire the best talent out there. On the other hand, if the incumbents are Coinbase, that’s still a fairly young, sexy company that’s innovating quickly, hiring top (technical) talent is more challenging. Shared by a former executive and founder with 2 exits, turned fund manager with 2 funds.
9/ If you’re not getting a call from a founder when they’re in trouble, you’re probably not getting a call from a founder when they’re raising their next big round. – Zach Coelius
10/ Pick great market inflection points to bet on. “The founder is the surfer. The product is the surfboard. The market is the wave. The wave matters most.” If you bet on a good surfer on a bad wave, they’re not going to get you the returns you want. Some Sequoia partner.
11/ Ask for investor updates (before investing). Before you invest, ask for the most recent investor updates. Helps you understand how founders think and communicate. – Brian Rumao
12/ Align with the founders, but also employees on valuations and dilution. – Nikhil Basu Trivedi
13/ The earlier you invest and the more you care about ownership, the more active role you’re expected to take in your portfolio company. You can’t expect to take large ownerships, and not actively help anymore. If you want to be a hands-off investor, you don’t have a right to fight for ownership. In a bull market, founders get picky about who’s on their cap table (as they should be). Focus on your check size to helpfulness (CS:H) ratio. Inspired by Jason Lemkin.
14/ “We have no fear. If we could find God’s phone number, we’d call him.” – David Beirne of Benchmark Capital fame, cited in eBoys. You are never too good to cold-call.
15/ Create a list of your favorite builders (i.e. engineers, community managers, executives, etc.). Then scrape Delaware incorporation docs regularly to see if any on the former list pop up in the search. If so, reach out to them early.
16/ Ask the founders to see different versions of the pitch deck. While we always say, “investors invest in lines, not dots”, oftentimes it’s hard to measure the slope (rather than y-intercept) when you’re meeting only with a founder at the beginning of their fundraise and not sooner. But one way to see is watch how much the pitch decks changed over time (and how quickly the founders incorporated feedback).
17/ Invest in companies that will be timeless. Where there will still be customers in a recession.
18/ If the competitors of the startup are being bought by private equity firms, then it may be a lucrative space to invest into. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
19/ There is a superpower to be speaking the same native language as the founders you back (and for them to their customers). Try to understand them for their position of strength.
20/ “The market you’re exiting in is not the one you’re funding now.” – Ben Narasin
21/ “There’s another phenomenon that happens in a time like this: Google’s not hiring. Facebook’s not hiring. People are clamping down. Guess what happens to their most advanced projects? They go. And guess who are the best people in any large company? The best people are working on the most advanced projects. They are the ones who want to do visionary things. They’re the fodder entrepreneur for venture capitalists. So I think many more of the best people — not because they’re not getting paid huge raises in compensation — but because they’re working on less interesting projects — will leave to follow their vision.” – Vinod Khosla (timestamped Oct 28, 2022)
23/ “Funny people are really underrated. […] Charismatic leaders are pretty funny. Humor is a really important emotion for two reasons. One is if you can evoke it a lot and be funny, you can create a sense of bonding. Generally speaking, in a remote world, there is a shortage of emotions you feel. An exchange between us now as we stare at each other in our computer monitors is maybe 1/100th of what it would have been in the real world. When you think about it, why do movies succeed? Movies substitute the real world interaction with synthetic emotion. So… horror, humor, action, drama. So you want leaders who can do the same over Zoom. That’s why Peloton instructors have all the jokes that they’re saying. It’s same exact effect.
“But there is a second reason to why humor matters, which is if you were to imagine a Maslow’s Hierarchy of Needs, I at least find with myself, I’m not able to think of a joke if basic stuff isn’t right. […] You do have to be careful of the ‘court jester’ type. These are people who are so insecure that they’ll do anything to get a [cheap] laugh.” – Daniel Gross. For example, cursing or vulgar jokes or making fun of others are examples of cheap laughter.
24/ For follow-on checks, Founders Fund and Saastr invest 10% of the fund in each of their “winners”. – Jason Lemkin
25/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff
26/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan
Value add
27/ Everyone says they’re a value add investor or founder friendly. And every founder goes through these 10-15 moments in their founder journey from which they lose sleep over. How many of your portfolio founders call you first if shit hits the fan? Those will be who you’re remembered by. No other portfolio founders will remember you.
28/ The network you bring is table stakes. That will neither help you win deals or raise LP capital when it really matters.
29/ “Dirty secret of VC platform teams: they are more about scaling the GP than the founder.” – Sarah Tavel
30/ Are you uniquely positioned to get allocation on the cap table because you can be a value add to these companies? – Vijen Patel
31/ Sometimes the most helpful thing you can do is to say no. When founders ask for introductions, and you don’t think they’re a good fit for your investor network, “It’ll be tough for you to fundraise right now. And if you jump in a conversation now with these other investors, it’ll hurt your ability to fundraise when you finally iron out those 1-2 key metrics and get to that inflection point.”
32/ Before the term sheet is signed, sit down with them and say this. “‘Listen. The chances this company gets to the finish line – the finish line being this fantastic exit – we don’t know what they are. But what I do know is that there is a chance, a high probability, that the company will fail. And I want you to think about this as an opportunity cost. I want you to think about every day you walk in the door to this company or turn on this Zoom as an opportunity cost. If it is not working, I want you to tell me, ‘It’s not working.’ And let’s have just a dispassionate conversation about what that means, so that we don’t waste any more time trying to make it work. And I promise you I will do the same.’
“And if you can set those guidelines from the beginning, you can move onto something that might have better timing. The founder can. And I can. Be aware of what failure looks like.” – Maha Ibrahim
Pitching to LPs
33/ Don’t promise your LPs guaranteed co-investing rights to go directly on the cap table of your portfolio companies. Let the founders decide who gets to invest on their cap tables. – Samir Kaji.
34/ A typical emerging fund takes 1-2 years to raise <$10M. Plan for that timeframe. A fast raise is 6 months. – Elizabeth Yin*timestamped April 2022
35/ To LPs there are 4 main metrics that are of note. Gross and net IRR to show how cash efficient you are, as well as how your portfolio is marked up. TVPI and DPI to show your paper returns and cash you’ve returned to your LPs, respectively. – Chamath Palihapitiya
36/ When you’re pitching institutional LPs (i.e. endowments, pension funds, university investment offices, etc.), you’re bet against 10-year life cycles and portfolio strategies. When benchmarking metrics (i.e. IRRs and TVPIs/DPIs), you have to show you can outperform other asset classes (i.e. real estate) and the public market equivalent (PME). Comparing and contrasting is often the most effective.
37/ When you’re pitching individual LPs (i.e. angels, or “belief capital), largely true for Fund I’s and II’s, it’s about personality and promise. Do people like you? Do you bring in great top of funnel deals? Are you different?
38/ “Don’t run out of leads.” You want to be constantly meeting new investors, ’cause you don’t want to be in a situation where you have to go back and convince people who are clearly not sold. – Elizabeth Yin
39/ If your Fund I consists of mostly individual LPs (i.e. accredited investors, but not qualified purchasers), you’re going to have to fundraise from scratch in Fund II and III. Since they have less of a net worth than institutional LPs, they most likely don’t have the capital to: (a) re-commit for a subsequent fund, (b) and even if they do, they won’t have enough to meet the minimum check size, assuming Fund II/III is bigger than Fund I. Inspired by Elizabeth Yin.
40/ Ask LPs what they like and what they don’t like about the pitch deck, and use each conversation as a learning and refining process.
41/ Figure out how much money you’re capable of raising in Fund I, and raise 25% less. It’s much better to be oversubscribed than suffer from lack of momentum. And leverage the “oversubscription” to help you raise Fund II, III, and so on. Told me to by someone who has sat on over 6 LPACs(LP advisory committees) in his career so far.
42/ The median family office check into first-time fund managers is $750K, with over 80% of family offices investing into first-time managers.
43/ “Does the world need another VC fund?” Most LPs don’t think so, so you need to convince them why you should exist.
44/ Before wasting your time pitching to some LPs, ask “Are you actively investing in venture funds at this time?” Many take meetings, but aren’t. Your time is precious.
45/ You’re going to raise from friends and family in the beginning. Your second cohort of LPs will be people you have a substantial network to. In other words, investors who you have many duplicate warm connections with, so that they can easily qualify your ability. – Dylan Weening
46/ In a recessionary market, LPs find themselves rebalancing their asset allocations. As their public market assets go down, they find themselves overallocated into venture. As such, they’re investing in less new managers. So in order to raise as an emerging GP from these LPs, you need to replace someone they’re currently investing into. That means you need to: (a) outperform them (4x TVPI is table stakes), and (b) have one compelling story on why you, backed by numbers.
47/ When doing diligence, sophisticated LPs evaluate you based on consistency. They will evaluate fund/portfolio performance with AND without your top investment. Hence, they expect a minimum number of investments in your portfolio – usually 20 to 30.
48/ Some LPs have been burned by staying invested in yesterday’s firms for too long. The top firms a decade ago are not the same top firms today. These firms often have an emerging GP thesis.
49/ “This is not a one-trick-pony relationship. You’re a capital allocator. The cost of finding new relationships to build is significant. You need to seek long-term capital allocation partners. Have a three to five fund view – multi-decade relationships. How repeatable is your success?” Shared by an LP in 30 funds.
50/ “The best filter for this is figuring out what [an LP’s] minimum check size is. And, is that greater than 20% of your fund size? If so, it won’t be a good fit.” – Sarah Smith
51/ “There’s a thing called ’round tripping.’ If a fund in India invests in a fund that’s built in the US, then invests back into Indian startups, that’s round tripping. And unfortunately, not allowed.” – Shiva Singh Sangwan
52/ “Before you say yes to LPs, check the CFIUS rules. Under those guidelines, you may not be able to take money from certain countries and parties.” – Arjun Dev Arora
53/ “Valuations are not the way you judge a venture capitalist, or multiples of their fund. […] The way that I judge a venture capitalist is by how many companies did they back that grew into $100M revenue businesses.” – Andy Rachleff
Fund strategy/portfolio construction
54/ It’s often good practice to not lead syndicates the same time as you’re raising for a fund (outside of SPVs to maintain pro rata). It gives too much optionality to LPs. For the most part, it’s easier sell a deal than it is to sell a fund.
55/ Typical GP commits are 1-2% of the fund. If you’re unable to do so (or even if you are), good practices include recycling fees and deal warehousing. The latter is where you keep a portfolio of personal investments in storage before launching the fund. Warehousing deals de-risk the deal by allowing LPs to participate in marked-up deals at more lucrative, aka lower valuations.
56/ In a downturn, investors are still funding startups but adding in more terms in the form of side letters. The riskier the bet, the greater the liquidation preferences, anti-dilution provisions, and minimum hurdle rate expectations.*timestamped in April 2022
57/ “Bank loans for VC funds have short paybacks (90-180 days). The 2+ year paybacks relate to large PE funds. IRR boost is minimal in VC.” – Samir Kaji
58/ Don’t be scared to recycle carry early. Most funds suffer from under-deployment, which usually leads VCs to deploy the last 25% of capital either towards deals with high valuations or in difficult situations (down rounds, pay to play rounds). – Villi Iltchev
59/ While pro rata rights are technically legally binding, earn the right to invest in subsequent rounds, rather than just expect it.
60/ Liquidation preferences have little impact on fund returns, which makes sense when you actually think about it, but many VCs add these provisions to protect their downside. Data shows that only the bottom quartile funds see IRR impacted greater than 1% due to liquidation preferences. Returns are driven by the winners in your portfolio where liquidation preferences don’t matter. There’s a big difference in a strategy to win versus a strategy not to lose.
61/ IRR is a vanity metric for funds early in their life cycle. While it can be a useful metric for LPs to compare across vintages and their portfolio, overoptimizing for it gives a false sense of hope. Why? IRR values quick capital deployment. Recycling hurts IRR. Many things change over the span of a 10-15 year fund. – Seth Levine.
62/ Ownership and pro rata allocations are inversely proportional to the number of portfolio companies in a fund. Many managers can’t get 100% of their pro rata allocations, but rather only 50-75% of their allocations. Inspired by Henri Pierre-Jacques.
63/ Venture reserves make less sense in a bull market. Reserves are usually put into a fund’s winners. But in a hot market, a larger percentage of your portfolio companies get mark ups – making it harder to differentiate signal from noise. Reserves make sense in a bear market when it’s easier to differentiate signal from noise. In a bull market, it might be better to have no reserves, and spin up SPVs for a follow-on strategy.
64/ Your ability to get into later rounds, not just ’cause of pro-rata rights, should be a big determinant if you have a reserve strategy. Can you earn your allocation in later rounds? Will founders fight for you even when downstream investors want more equity? The best companies are hot commodities. Even if you have a follow-on strategy, you might not be able to get in those subsequent rounds.
65/ If you want to include more than 99 accredited investors in your fund, set up a parallel structure where you have one fund for accredited investors (<$10M) to include 249 accredited investors, and another fund for qualified purchasers (QPs).
66/ “The best way to protect yourself against the downside is to enjoy every bit of the upside.” – Bill Gurley
67/ If you have a parallel fund structure (i.e. one for accredited investors, one for qualified purchasers (QPs)) and you’re going through rolling closes, understand that your initial allocation in each deal will change as a function of each fund’s committed capital from LPs.
For example, let’s say you’re raising a hypothetical $100M fund – a $10M fund for accredited investors, and $90M for QPs. Let’s call the $10M fund Fund IA, and the $90M fund Fund I. On average, QPs take much longer to make a decision, so you’re likely to close your Fund IA before you close Fund I. As such, your first investments out of the fund might be 50-50 from each fund. But as you finish closing your Fund I, you will need to rebalance your allocation into earlier deals, like changing it from a 50-50 allocation between the two funds to 90-10. As such, in your term sheets, make sure you include the “right to transfer securities to affiliates.” And make it clear to your founders why that’s in there before everyone signs.
68/ If you’re building a concentrated portfolio, think about portfolio construction from a bottom-up perspective, rather than top-down. How many unicorns/decacorns do you need to return the fund? How often have you historically seen them in your inbox? That’ll be your deployment schedule. And subsequently, your capital call schedule.
69/ “Fund management is irrelevant unless there are winners in the portfolio.” – Laura Thompson
70/ Calculate your mark ups on priced rounds rather than valuation caps on SAFEs. Your TVPI and IRR may look nice in the short-term, and may help you raise from individual LPs. But once you start talking to institutions, you look deceitful or have no idea what you’re doing.
71/ Avoid overly large GP commits. If you invest too much of your own net worth into a fund, you’re going to make decisions that sacrifice the long game of the fund for short term personal liquidity, like selling secondaries to buy a house. Don’t go higher than 10% of your net worth. – Sheel Mohnot
72/ “For funds that are <$20MM, the GP commitment is fairly meaningless in the evaluation of a fund. Either the person is already taking a great opportunity cost by running such a small fund or has independent personal wealth where a small GP commitment is irrelevant to them.” – Samir Kaji
73/ “Most LPs allow you to reinvest returns 18-36 months after the investment period. The early wins are often small and don’t impact the returns so you are better off reinvesting to go for another unicorn. This is a game of outliers.” – Henri Pierre-Jacques
74/ “Management fee schedule adjustments: Pause or slow down fees in ’23 (with authority delegated to LPAC to avoid conflicts of interest)” – Chris Harvey (timestamped Feb 13, 2023). A way to leverage your LPAC to communicate fund decisions to the rest of your LPs
75/ “What % of companies successfully got funded from investment to the next round?
Seed —> Series A should be >35%.
Series A —> Series B should be >50%.
Series B —> Series C should be >50%.
And, Series C —> Series D+ should be >60%.” – Aman Verjee
76/ As a long-term investor, you have to generate at least three times the risk-free rate (3-month T-bonds, bank interest rates, etc.) to have an investment make sense in the long-term. – Chamath Palihapitiya, speaking when T-bonds’ rate is 6.5%, meaning a private investment must generate at least 20-25% for it to make sense
Selling positions
77/ “In consumer and consumer social, advocate more aggressively for selling along the way. The hype cycle of consumer means heat and traction do not have the sustainability of enterprise ARR and so more weight placed on selling some portion earlier there.” – Harry Stebbings
78/ “Pigs get fat but hogs get slaughtered. Even if we believe a company has tremendous longterm upside, it’s not inappropriate to take some money off the table in order to manage that risk. As we’re recently reminded, markets go down, not just up. Just be aware of the incentives, emotions, and other factors at play. It’s ok to behave one way before you hit your DPI target and another way after, but understand how those factors produce better or worse possible outcomes. This is also true with regards to recycling. If we can sell partially out of a position and put those proceeds into one that we believe has more incremental upside, that’s accretive to our results.” – Hunter Walk
79/ “Generally once a position is worth 3x the fund sell 1/3rd to return 1x the fund (if there is liquidity). […] For the hot names you will get a bunch of inbound. Negotiate to get a price you like. For less hot names, just talk to the investors leading the next round and see if they want to add to their position. A lot of times they do and don’t mind buying out earlier investors.” – Sheel Mohnot
80/ “For public shares, we’ve landed on the following model:
1/3rd immediately (either first-day lockup expires or immediate on direct listing)
1/3rd 6 months after
1/3rd up to our discretion
Here’s why — The first third books your win. If you do seed, you likely have a huge position by the time you hold public shares. The second third allows the stock price to stabilize after the market has been hit with lots of supply from VCs doing distributions. The last third allows you to have an opinion on the stock/market — however, you can choose to distribute this third anytime, including alongside or after the previous thirds.” – Chad Byers
81/ If you’re a reasonably good fund, you should return at least 1x your fund (1x DPI) within 5-7 years. – Chamath Palihapitiya and Jason Rowley
LP management
82/ Early funds generally have 30 LPs in the fund. Fund I is often an exception.
83/ A general rule of thumb is to not have any one LP contribute more than 25% of the fund, or else you might lose control when you have such a large “shareholder”.
84/ “After my LPs wire their money, I send them an intake form where I ask the question: How would you describe yourself as an LP? I have a number of statements they can select to indicate whether they are a newer or more experienced LP, if they’d like to be more active with founders, how often they’d like to communicate with me, and if they are interested in co-investment opportunities and events. I have another question following that: If you want to be more active, what are ways you enjoy helping?” – Sarah Smith
85/ “Be thoughtful about how you’re managing your time, so that you don’t turn into a full-time venture professor. You’re an investor, a GP. That’s what you’re getting paid to do.” – Arjun Dev Arora
86/ “Avoid LPs who ask you to give up economics as a GP or change your terms. LPs who want to negotiate lower management fees, a different carry structure, or they want to own 20% of the general partnership for the next three funds are best avoided if possible. They want to change the terms that everyone else has. I wouldn’t allow that. If other LPs find out (and they eventually do), it would cause my LPs to lose trust in me and rightfully be frustrated that they got worse terms.” – Sarah Smith
87/ “If someone does ask for it, and if they aren’t a large enough check, we tell them, ‘We like to reserve this spot for our largest LPs because they have the largest exposure in our fund. We’re open to you being a member in our LPAC, if you increase your check size.” That way, you can leave the ball in their court. Either, they won’t push further or they’ll commit more capital to the fund.” – Eric Bahn
88/ “If you’re in your Fund I or II, like I am, you’re still figuring shit out. You’re still testing what works and resonates and what doesn’t. I ask them, ‘what have you seen other managers do in this situation?’” – Paige Finn Doherty
89/ “The average, for a normal venture fund, is around 5-7 years to call 90% of the capital.” – Chamath Palihapitiya
SPVs/Syndicates
90/ There are two types of syndicate leads: “marketers” and “connoisseurs.” The former focuses on volume, which lead to more noise than signal. The latter focuses on quality, and as “tastemakers” lead to higher signal over noise. As LPs, quality may matter more than quantity, especially when you’re most likely diversified by being in several other syndicates already. Inspired by Julian Weisser.
91/ If you’re warehousing SPVs for your fund, do note that the number of unique LPs in your SPV(s) count towards your accredited investor limit.
92/ If you’re an LP in an SPV and agree for it to be warehoused into a fund, you are forgoing your right to the individual deal for access to the fund’s portfolio of deals.
93/ As the syndicate lead, set the minimum check size at or less than your own check size.
94/ Your GP commit into your SPV is directly proportional to your net worth. The greater your net worth, the more you’re expected to contribute. Any less, would be a negative signal. That said, the less of a net worth you have, the more you’re expected to be a great curator of deals.
Succession planning
95/ “The best way to think about succession planning is that you have to have team members at different parts of their life. Different generations. Even if they’re non-founding partners, if they all retire at the same time, you can’t build a legacy.” – An investor with 9-figure AUM
96/ Structure your fund to have a generational off-ramp for compensation. A lot of funds are structured so that payout is done through the management company, and so owning equity in the management company becomes increasingly more expensive as the firm matures and has greater AUM, etc. So the next generation, in order to succeed the firm, must buy out the previous generation’s equity. So, leadership transitions are not easy. Instead, structure your firm so that the management company doesn’t have value, where the value is at the GP. So transitions are a lot easier. – Maha Ibrahim
Tax planning
97/ When invest in a startup via SAFEs or convertible notes, your QSBS timer counts when the SAFE converts on equity round, not during the convertible round.
98/ As a GP who takes management fees through a management company, often LLC, you don’t receive W-2’s. As such, you can’t withhold taxes, so you have to be disciplined on cash management. “Outside of federal and state tax, there is a massive self-employment tax of 12.4% on up to $147,000 of earnings. And an additional 2.9% on any earnings.” – Jarrid Tingle
99/ The origin of the 1% GP commit comes from taxation laws prior to 1996. But even now, “in order for GPs to avoid their carried interest being taxed as ordinary income vs. long-term capital gains, many GPs still follow safe harbor.” – Courtney McCrea and Sara Zulkosky. While this isolates GPs who aren’t independently wealthy or are well-capitalized, in lieu of the typical cash contribution, I see a lot more emerging GPs warehouse deals and recycle carry.
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
