I want to preface this piece by first saying, though I have LP (limited partner) friends, I’ve never been an LP. So take everything with a grain of salt. For that matter, even I have been an LP, still take this with a grain of salt. After all it’s just my one perspective on the world. Nevertheless, I hope this perspective helps to provide some context around the venture space. As it did for me.
For years, I’ve recommended my friends who were looking at startup job opportunities to think like a VC. And having chatted a number of firms over the years about scout, associate/analyst, venture partner roles, I’ve come to a new revelation. Or rather one that I’ve practiced for a while, but haven’t connected the dots until recently.
When you’re looking for VC job opportunities, think like an LP. I’ve written about the LP calculus a few times before, like:
The bull and bear case of rolling funds, and how the emerging fund manager can win in this saturated market
How have you thought about your own differentiation that gets you access to some of the uniquely fund-defining opportunities you have?
What are the startups in your anti-portfolio? And what have you learned since from them?
[if their funds are wildly different in fund size (i.e. Fund I – $20M, Fund II – $100M)] How do you think about fund strategy now versus Fund [t_now-1]?
For context, usually each subsequent fund doubles in size. i.e. Fund I $20M, Fund II $40-50M, Fund III $80-100M
[If they have fund advisors, EIRs, and/or scouts] How do you pick advisors? What is your mental model for picking scouts?
Or one of my favorite phrasings: How do you differentiate the good from the great [advisors/scouts]?
Over the weekend, my friend sent me a great podcast for me to unwind. In it, I found an unlikely hero soundbite. “Your library holds a lot of value that you may not know until the story arrives. […] No one’s selling characters ’cause they’re one story away from this character becoming a hit.” While its context is related to why Marvel won’t sell any of its superheroes, Alex Segura‘s, co-president of Archie Comic Publications, anecdote proves just as insightful to the world of venture.
Discovering first-time early-stage founders is hard. The same is true for finding the next killer GP or venture firm. AngelList’s Rolling Funds are democratizing access to capital, lowering the barrier to entry for emerging fund managers. And really the success of a fund is determined by its MOIC – multiple on invested capital. 5x and up would be ideal. And that, like I mentioned in my last blogpost, boils down to the fund’s top one or two winners. Loosely analogized to a fund’s unicorn rate (percent of portfolio that are unicorns). In other words, the “one [investment] away from this [fund] becoming a hit.”
To see if a fund can consistently find those stories boils down to its systems. Often times, you’re joining a fund that has yet to have a runaway success. Or a fund that has a fund returner. So, instead, you’re looking at their thesis and if their thesis allows them to be:
The best dollar on the cap table of a startup in their scope
Forward-thinking enough to see where the market is heading, rather than where it’s been
And by definition of being forward-thinking, taking bets/risks that few other VCs would, yet calculated enough to make logical sense given the trajectory of the market. In other words, is the thesis grounded on first principles, yet able to capture their second-order effects?
That, in turn, requires you as a VC applicant to have decent literacy in the market the firm is betting in.
As James Clear, author of Atomic Habits, wrote, “You do not rise to the level of your goals. You fall to the level of your systems.” What are their mental models? Fund strategy? How do they think about portfolio construction? About capital allocation? And more importantly, time allocation?
If you’re looking to learn more about GP-LP dynamics, I highly recommend Samir Kaji’s Venture Unlocked podcast and Notation Capital’s Origins podcast.
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I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?
As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?
Let’s look for a second from the investor side of the table…
Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.
On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.
Up to a $20m fund, there are are many ways to do 3x+
Up to a $60m fund, there are several ways
After $150m fund, there is probably 1 way
— Jason ✨Be Kind✨ Lemkin 🇮🇱 (@jasonlk) April 5, 2017
Why does a VC’s fund strategy matter to you as the founder?
A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.
I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.
If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.
While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:
The uncommon – Differentiators
The common – What everybody else is doing
The uncommon
Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:
Ability to build communities having built large followings
Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
Getting in’s to top executives at Fortune 500 companies
Closing government contracts
Access/domain expertise on international markets
In-house production teams
They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
Ability to get you on the front page of NY Times, WSJ, or TechCrunch
Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
Influencer network
Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
Surprisingly, not as common as I thought, VCs that pick up your call “after hours”
The common
Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:
Money, maybe follow-on investments
Access to the VC’s network (i.e. potential customers, advisors, etc.)
Access to the partner(s) experience
Intros to downstream investors
That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.
Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.
Finding investor NPS
You can find CS:H, or investor NPS, out in a couple of ways:
The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
You find out by asking portfolio founders during your diligence.
Your founder friends are highly recommending said investor to you.
Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quotedBrett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
In closing
“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:
If you were to start a new company tomorrow, would you still want this investor on your cap table?
With three options:
No
Yes
It’s a no-brainer.
And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.
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An investor I had recently been put in touch with asked me this past Monday if I like to write. I thought it was a peculiar question at first. But it strangely kept gnawing at me as the week went on. While I can’t say for certain that it was that investor’s intention, it became a forcing function for me to reflect on my motivations.
If you’ll believe it, I used to hate writing. With a capital H. I used to dread when a teacher or professor would assign us essay prompts for homework. Many of my college and high school friends can probably attest to that fact. More so, I was the world’s best procrastinator. Ok, “best” might be overselling myself. But I had a track record for deferring my 10-/20-page essay until the night before it’s due. It was the antithesis of fun. I knew exactly what my professors sought. All I had to do was put the puzzle pieces together. Frankly, writing was a necessity to survive my academic career, not one I’d seek out as a passion.
It wasn’t always that way. In elementary school, I loved writing poetry. An exploration of my inner creativity, unrestrained by the educator’s whip. I also took part in school poetry competitions. As time went on, writing lost its sparkle, between book reports and persuasive essays.
Before this one, I started two other blogs. Neither of which lasted past three months. Both of which I started back in college. Looking back no one asked me to start a blog, much less three blogs. But looking back, I attribute each time I started a blog to the professors I had. Particularly by their rare ability to make learning fun and contagious. It was much less the content of each class, but rather, the fact that we graduated each class armed not with just answers, but with two other faculties I found indispensable over the years:
The ability to ask nuanced questions,
And the ability to find answers and questions to answer those questions.
My senior year in college I had a third catalyst for writing. As you guessed, also inspired by my professor for a class I didn’t have many expectations for when I signed up, despite hearing glowing reviews from my friends. That year I began writing in journals every day. There is no catch. There are no cheat days. We just had to ideate at least once every day. No matter how long or how short it took, once a day keeps the demons away. At the same time, outside of a promise of commitment, there were no rules. There were no rubrics. No one would grade us on how and what we wrote. Full, uncontrolled creative liberty.
It took me about three months. Slowly, but surely, the spark returned. Over time, journaling evolved into blogging. The best part is I don’t even know what the next stage of my Pokemon evolution will look like. I won’t go in depth here on how I journal these days, but if you’recurious…
Over the past year, I’ve had an increasing number of friends and readers reach out to me and ask me how writing comes so easily to me. It sure didn’t in the larger arch of my life. And not, it doesn’t… not always at least. Some days it takes longer than others. But just like how I wake up and exercise first thing in the morning, journaling is a muscle I am training every day, if not multiple times a day. Whether it’s in my journal or on my Google Keep app or on a Notion page.
That said, I think I’m far less coherent as a speaker than as a writer. I’ve had friends and mentors tell me over the years in conversation, “David, you’re not making any sense.” Unfortunately, in more occasions than I would like, I have a feeling of cognitive dissonance when speaking, which I am actively working to mend. After all, I can only hide behind the veil of asynchronicity for so long. Ironically, I’ve been engaging in more and deeper synchronous conversations than asynchronous over the course of the pandemic.
Luckily, I also haven’t gotten writer’s block yet ever since I began this blog. But there have been certain weeks where I’ve been frustrated at the quality of my journal entries. Enough so, that it never makes it onto this blog. So it goes to say, I never run out of ideas; I just sometimes run out of ideas I think are nuanced enough to share. After all, it’s why I started the #unfiltered series. George Orwell once said, “If people cannot write well, they cannot think well. And if they cannot think well, others will do their thinking for them.”
In closing
I never started this blog with the intention of tracking viewership growth. But I’d by lying if I said I wasn’t grateful and elated to see the reception of some of my essays. On days when readers reach out and say thank you, I really believe the sky’s the limit. When I reach out to people I look up to and they mention in our conversation that they enjoy the content I write, I struggle to contain my smile.
My swim coach once asked me semi-rhetorically, “David, why d’ya like to swim?” To which he followed up and said, “You like to swim because you’ve won.” While in terms of numbers I’m still far from “winning”, this modest scope of reception so far only compounds upon my creative joy.
When I pursue any endeavor in my life, I always ask myself: Are there skills, relationships, and/or enjoyment I build that transcend the pure outcome of this endeavor? (Or two cousins of this question here and here.) For this blog, yes. And it boils down to three reasons:
I write to think. It’s a process of self-discovery. On the flip side of the same token, it’s to prevent my prefrontal cortex from atrophying.
Creative joy. There’s something just so satisfying when a blank canvas turns into a cohesive illustration of my mind’s entropy.
And knowing that, no matter how miniscule, it’s inflected a handful of people’s lives upwards. That, and knowing that every so often, somebody out there will smile as they read this.
#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.
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In the venture world, the word timing is thrown around in a very canonical way. Many investors and founders mythologize the concept of timing around a business. While there is some science and data that might be able to point in the general direction, success is a lagging indicator of timing. And arguably, the only way anyone can really determine if the timing is right or not is in hindsight. Investors that said they knew the exact timing of the market may just be attributing their success to survivorship bias.
To analogize it, it’s the same as knowing when to invest in the market or in a particular stock. Everyone wants to buy at the lowest, sell at the highest. Your ROI is positively correlated with the sell price, and negatively correlated with the buy price. But when is the lowest? No one really knows for certain. We can guesstimate a timeframe with reasonable confidence, but that’s the best we can do. The same is true for measuring timing in the market. Yet there is one thing that I’ve come to learn in my years in the venture world that’s as close as you can get to the “true” timing of the market. A miracle.
Let me explain.
One miracle
Every startup needs one miracle to succeed. One. No more. No less. Elad Gil said in an interview with James Currier at nfx, “Every startup needs to have a single miracle… If your startup needs zero miracles to work, it probably isn’t a defensible startup. If your startup needs multiple miracles, it probably isn’t going to work.” He further elaborates, “If you have more than one, you have compounding small odds and that means you’re very, very likely to fail.”
Before that miracle, if you’re truly creating a revolutionary business, by definition, you’re in the non-consensus. You have more non-believers than you do believers. If it were an obvious business, then everyone would do it. If everyone does it, economically-speaking, the ROI is low. In a situation, where every kid sells lemonade with the exact same recipe by the street corner, everyone is fighting for the exact same customers. Eventually, it’ll lead to a race to the bottom.
That single miracle is going to be that trial by fire. The true test of grit and founder obsession. That trial, whenever it is, predictable or not, determines if your product will stay a niche idea (and possible fizzle into obscurity) or a business that will change the world. For you and your business, that miracle could have been catalyzed by the pandemic, the GME short squeeze, ’08 recession (if you’re an older business), the inauguration, or something yet to come. The question is: How do you respond in the face of adversity?
Why is that miracle important?
Tim Ferriss once said, “Your superpower is very often right next to your wound, like your biggest wound. […] They’re often two sides of the same coin.” If you can survive and conquer that trial, the miracle – your superpower – becomes one of your strongest moats. The lessons you learned, the trust you (re)built, and the legacy you begin to construct. Those lessons – those earned secrets – while not impervious, will ideally be incredibly hard to obtain for others without walking through fire. A metamorphic journey from a vulnerable caterpillar to a beautiful monarch. What Joseph Campbell calls the “hero’s journey“.
And in the longer time horizon, that you are no longer just the protagonist of that miracle, but that you are also a producer of miracles for others. You are then capable of minting miracles systematically. Be it your customers, your team members, and your investors.
Why #unfiltered?
You might be wondering why I tagged this essay as #unfiltered. Frankly, it’s a new unrefined hypothesis that I’ve been playing around with. While it’s been inspired by others, I believe there’s more nuance I still need to uncover as well. That I’ll need to test a bit more to see if it can be a more robust thesis.
Going forward, I will continue to ask founders questions like:
What is the origin story of this idea?
If you were to fail in 18 months, what would be the most likely reason why?
Conversely, if you were to wildly succeed in that same time frame, what would be the biggest contributor?
Why are you a different person today than when you started this business? Who/what catalyzed this/these change(s)?
Examples of who: customers, team, partners, investors
Examples of what: black swan events, market trends, socio-economic habits, new technologies, an inflection point in your life when you faced impossible odds, failures, etc.
But I’ll be particularly looking for the earned secret among a miracle of adversity. Simply put, I’m looking to hear this song play in the background. The beginning of a mythical legend in the making.
#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!
Over the years, the silver screen sure has mythologized the dropout founder – from Steve Jobs to Bill Gates to Mark Zuckerberg. While students who choose to dropout will continue to wow the world, and I believe it (otherwise, I wouldn’t be working with Danielle and Mike at 1517 Fund, if I didn’t), reality isn’t nearly as black and white. A Quora user requested my answer to this question recently. Why do business schools not make world class entrepreneurs? It presumed that great academic institutions, mainly B-schools, were no longer capable of minting world-class founders. Admittedly, it’s neither the first, nor will it be the last time I see or hear of it.
The MBA grads
I met a Fortune 100 executive last year who said that it was because of her Wharton MBA, that she catapulted her career in artificial intelligence and machine learning. Specifically, it was because of the research she did with her professor, Adam Grant, that led to opportunities and introductions down the road. On the same token, David Rogier of MasterClass met his first investor at the Stanford GSB. In fact, it was his business professor who wrote that first check, just under $500K.
Business schools are amazing institutions of learning, but admittedly most people go for the network and the brand. On the same note, I would never go as far as to say that business schools don’t mint world-class entrepreneurs. If we’re going by pure valuation, there’s a study that found a quarter of 2019’s top 50 highest valued startups had MBAs as founders.
And here are a few more founder names among many, not even including some of the most recognizable CEO names, like Satya Nadella (Microsoft), Tim Cook (Apple) and more.
Tony Xu and Evan Moore of Doordash
Michael Bloomberg of Bloomberg
Steve Hafner of Kayak
Aneel Bhusri and Dave Duffield of Workday
Jeremy Stoppelman of Yelp
Mark Pincus of Zynga
Having grit and having a business degree don’t have to be mutually exclusive. I work with founders who come from all manners of educational backgrounds: high school dropouts, college dropouts, BA/BSs, MBAs, PhDs, MDs, JDs, home schooled, and self-taught. At the end of the day, it doesn’t matter what kind of education someone has. What matters is what they do with the education.
What an Ivy League dean once told me
Back when I toured the US to decide which school to SIR (statement of intent to register) to, I met the dean of an Ivy League school. I thought he was going to spend our 20 minutes trying to convince me to come to his school. But he didn’t. Instead he said, “David, it doesn’t matter which school you choose to go to. While I would be honored to have you attend ours, what matters is what you do while you’re in school. You could choose to just take classes here or you could go to a CC, but choose to be a member of 5 clubs, 3 of which you take leadership positions in. And if I were to look at you in four years, I’d be prouder of the latter person you chose to become.”
Capping the risks you could take
When I graduated from Berkeley, I also came out with a certificate in entrepreneurship and technology. While I still believe to this day that no class can really teach one to be entrepreneurial, I learned quite a bit of the institutionalization around entrepreneurship – what exists in the ecosystem, some of the risks involved and how to hedge those bets. Yet, my greatest lessons on entrepreneurship didn’t came from a textbook. But rather, the risks I took outside the classroom. Because each time I made one, I internalized it.
To do great things, you have to first dream big and act on those big dreams. By definition, big dreams entail high degrees of risk. High risk, high reward. And with risk, you’ll make mistakes. So one of the rules I live by is that I will force myself to make mistakes – many mistakes – more than I can count. But my goal is to make each mistake at most once. Jeff Bezos once said, “If you can’t tolerate critics, don’t do anything new or interesting.”
Equally so, there’s a joke that Andy Rachleff, founder of Wealthfront and Benchmark, shares with the class he teaches at the Stanford GSB. While it pertains to VCs, I find it analogous to founders and mistakes, “What do you call a venture capitalist who’s never lost money on an investment?”
“Unemployed.”
But, what institutionalized academia does help you with is provide you a platform to make mistakes. Without the downside. Capped downsides, but it’s up to you, the student, to realize what could be the uncapped upside. Last month I chatted with a VC, who works at a top 10 firm. Our conversation eventually spiraled into her MBA at the Stanford GSB. There she took on projects that put her on the streets talking and building products for potential customers. Her professors taught her the hustle, but it was up to her to apply her learnings. While she chose the VC path after, her experience led her to become a trusted advisor to founders while she was still in school.
In closing
Similarly, world-class entrepreneurs aren’t decided by which school they go to, or lack thereof, but how and why they choose to spend the days, weeks, and years of the short time they have on Earth. And where they practice their entrepreneurial traits.
I would be pretentious to say that you should get an MBA if you want to be founder. Or that you should dropout if you want to be one. If we’re to look at the cards on the table, MBAs are expensive. A $200K investment. Almost half of what might be your pre-seed round. But I can’t tell you if it’s a great investment or not, nor should I. For an MBA, or for that matter, any higher education. I pose the two extremes – MBA (or a PhD too) and a dropout – as I presume most of our calculi’ fall somewhere in-between. Instead, I can merely pair with you with the variables and possible parameters that may be helpful towards your decision. So, I’ll pose a question: Are there rewards you seek in the process rather than just in the outcome (of an MBA/higher education)?
In other words, are there skills, relationships, gratitude, entertainment, and/or peace of mind you build in the journey that transcend the outcome of your decision on the future of your education?
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Not too long ago, I came across a question on Quora that I had to double click on: Why should founders care about VC brand? Money is money, isn’t it? While the question itself seemed to have a come from a less-informed perspective, I found it to be a useful exercise to once again go through the checklist of founder-investor fit.
Money, frankly, is just money. A Benjamin will look the same and work the same as any other Benjamin out there. Assuming you don’t need anything else other than money, I’d recommend other sources of funding other than venture funding, i.e.:
(Equity) crowdfunding,
Rev share,
Angels – high net-worth individuals who write checks in the 1000s to 10s of 1000s of dollars;
Also worth looking into, but are representative of the VC model, are super angels and solo capitalists. Many of whom might be leading their own rolling funds (more context) now;
Government (public) and private grants – really small sums of money, but money nonetheless;
Accelerators/incubators – less upfront capital. But the partnerships they have with other startup services save you a lot of money (i.e. AWS, Adobe Suite, etc.);
Selling domain names (yes, I have a friend who initially funded his business by doing that, but other than that, I’m kidding);
And I’m sure I missed some others out there.
On the other hand, most founders who raise VC funding want something more than just monetary capital, including, but not limited to:
Mentorship/advisorship –
Ex-operators who can give you tactical advice,
Former founders who can empathize with you,
VCs who can check your blind side and had previous portfolio founders who have gone through what you’re going through now,
People who have access to resources that will aid you on the founding journey (ideally not distract you),
And frankly, people who’ll be there for you when you have to make the tough calls,
Highly recommend Harry Hurst’s tweet about the CS:H ratio (check size: helpfulness, which I elaborate on here) as a mental model to figure out which VCs depending on fund size/check size can help you the founder the most at the stage you’re at.
If you’re trying to fill up a round, a brand name investor can easily help you fill in the rest of the round with their network and their participation alone. They’ll also help you raise downstream capital – directly or indirectly.
It’ll be easier to find customers. With a brand name VC, you also get quite a bit of media attention from Forbes, TC, NY Times, and so on. Customers are more likely to trust you knowing that you’re backed by a recognizable brand, especially the folks on the other side of the chasm on the adoption curve.
It’ll be easier to hire world-class talent. Your business, in their mind, is less likely to go out of business tomorrow. And while you’re not looking for candidates who seek stability, it does give the candidates you do want to hire a peace of mind and confidence that you have external validation.
There’s a saying that the difference between a hallucination and a vision is that other people can see the latter. It’s really a chicken and egg problem. I’m not saying a VC’s brand will guarantee the success of your startup, but I do believe it will help, with the underlying assumption that you pick the right VC. Whereas it used to be a differentiator a decade ago, all VCs these days say they’re founder-first or founder-friendly. But unfortunately not all are. They might be if things are going well. But the true tells are what happens when things don’t go well. Here are some of my favorite questions to ask portfolio founders before you work with a VC. And how to find founder-investor fit.
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I’ve been a long time fan of Naval Ravikant, so when he went on Clubhouse recently to share his thoughts, despite not having an iPhone (I know ?), I had to find a way to tune in. While Clubhouse is designed to be the ephemeral demystification of the broader world, there are a rarified few conversations I believe are and should be evergreen. Naval’s happens to be one of them. Whether Clubhouse itself compiles these knowledge banks or through some third-party service, we already have listeners and Clubhouse users recording these conversations. A temporary hack that paves the way for a broader solution.
Over the weekend, I found Naval’s definition of purpose to be one of the best I’ve heard to date:
“You have to live up to your own moral code. Your life is an eternal single-player game. You’re not competing against anybody else; you’re competing against yourself. You set your own desires and your goals. You have your own perspective. You have your own morality. And you have to live up to it.
“There is no standard meaning or purpose. If there was a single purpose or meaning for all of us, then we’d all be slaves to that single purpose. We’d all be robots – every one of us fighting each other in conflict to get to that one purpose. And there’s not even a single purpose for you necessarily, other than the one that you create. So, you get to create your meaning and purpose. You get to craft your own story here. […]
“It is a race, but you’re just running against yourself. You pick the finish line; you pick the goal line; you pick the meaning; you pick the purpose. So you can pick a meaning or purpose that is antithetical to happiness, or one that aligns with it.”
A month ago, my friend and I watched Pixar’s Soul. In it, the writers illustrated a powerful lesson on life’s inspiration. As Jerry enlightens Joe, that distilling your whole life into a singular purpose is “so basic”, Joe enlightens Soul 22, “your spark isn’t your purpose. The last box fills in when you’re ready to come live.” To live means to enjoy and savor every minute, every second, the entire 24-hour day, all 365 days of the year, and every year we are alive and breathing. Not just, and I’m generalizing here, the 40-100-hour workweeks. Joy and purpose, after all, was never meant to measured as a unit of time alone.
Many of us live life looking for our purpose in life – a singular destination. A singular raison d’être. We compartmentalize our entire lives into self-prescribed labels. In high school, it was either by our grades or our extracurriculars. In college, by our majors. In our adult life, by our job title. I can’t speak for everyone, but I’m willing to bet that most, if not all people, are more robust than just their full-time roles make them out to be. Just like I’m more than a VC Scout. That’s why I’m so fascinated by polymaths in our society.
In opening our minds to a world beyond a single degree of freedom, we give ourselves more surface area to find inspiration and happiness. As Tim Ferriss once said, “It is not that beauty is hard to find; it’s that it is easy to overlook.”
Equally so, his rhetoric on passion is equally as provocative. Or specifically, the relationship between your passion/obsession (more on obsession here and here) and domain expertise. The latter, as Naval calls it, “specific knowledge”:
“How do you gain specific knowledge? It’s almost a catch 22. Specific knowledge is built up by you through your passions. So, when they say follow your passion, it’s kind of what they mean. It doesn’t always lead to money, but it can. Because if you’re obsessive about something and learning it for your own genuine intellectual curiosity – not to get a degree, not to make money, not to impress your friends – you’re going to end being better at it than anybody else. So, I really believe that you should only read and engage in activities that you genuinely enjoy. And you should cultivate your intellectual obsessions without any goal that you may be surprised when you look back and connect the dots later that one of them developed into a goal. One of the hallmarks of specific knowledge is that it will feel like play to you, but it will look like work to others. So, anything that fits that model, you should develop. […]
“You get what you want out of life. You just have to want it badly enough. If it’s your all-consuming desire, you will get it. You will create the path to the destination no matter what it takes.”
Naval’s encyclopedic answers asked underscored once again a question I ask myself when I am the most lost:
What would I do if, at the end of the day, I would be only one applauding myself?
#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!
As I’m gearing up for a few projects, I spent the last few weeks pondering on a number of questions. And to stress test those questions, I spent the greater half of that time asking the people around me. But in the process of doing so, I found 10 of the above questions sponsored the most self-inquiry within myself and others.
The Questions
Elad Gil, legendary angel investor, said in an interview late last year that “every startup needs to have a single miracle… If your startup needs zero miracles to work, it probably isn’t a defensible startup. If your startup needs multiple miracles, it probably isn’t going to work.” Was there a defining miracle, when preparation met opportunity, that got you to where you are today?
Similarly: Life is some percent skill and effort and some percent of luck. How much has luck contributed to get you to where you are today?
In 2005, a Yahoo! Exec once told the Alexis Ohanian, founder of Reddit, that they were a “rounding error” which Alexis then framed on the company wall as motivation. Have there been chapters of your life that were defined by strong opposition – externally or internally – and your ambition to prove them wrong?
Pat Riley, Hall of Famer basketball coach, wrote in his book, The Winner Within, “You don’t wanna be the best at what you do; you wanna be the only one who does what you do.” What skills, experience, or mental models do you have where you are the only person – or in extremely rarified air – who can do what you do?
Quoting Jerry Colonna in his book Reboot, how are you complicit in creating the conditions you say you don’t want?
Norman Vincent Peale, author of the bestseller, The Power of Positive Thinking, once said, “Shoot for the moon. Even if you miss, you’ll land among the stars.” Entrepreneurs are people who pursue impossible odds and enjoy the journey of shooting for the moon to become world-class athletes. Telling them no is like telling a 7-year old they can’t become an NBA All-Star. Odds are they’re not going to succeed, but the process of pursuing that goal makes it worthwhile. And in doing so, they become a stronger, more resilient individual than never trying to pursue it in the first place. In your life, what have you done or would you do regardless of the outcome of the pursuit?
Andy Rachleff, founder of Wealthfront and Benchmark, once said in an interview: “If we’re batting a thousand or close to a thousand, we’ve done a really poor job.” If your probability of success is really high, the likelihood of a big win is extremely low. To win and not just focus on not losing, you have to take big risks. And as per the definition of risk, you’re more likely to fail. Have you had a failure in your life that contributed the most to where you are today?
On the same token, have there been alleged setbacks turned out to be a blessings in disguise? Or, were there “misfortunes” that turned out to be fortunes?
Let’s say life is a game blackjack. If the first card you drew represents your journey prior to 2020 – face up – and the second card exemplifies your life from 2020 till now – face down, which two cards did you draw? And would you continue “hitting” knowing the hand you’re dealt?
I saw in a Quora thread once, “When you are happy you enjoy the music, but when you are sad you understand the lyrics.” When you were in your lowest of lows, were there words, phrases, or lessons that had profoundly new meaning to them?
Desmond Tutu, who won the Nobel Peace Prize in 1984, once said, “My humanity is bound up in yours, for we can only be human together.” So, to borrow his words, what are the common themes between moments you’ve given up your humanity, either individually or collectively?
What is the narrative that you find most compelling when your inner weather is the most turbulent?
#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!
Founders often ask me, what slides on my pitch deck do I have to make sure I get right? The short answer, all of them. Then again, if you’re focusing on all of them, you’re focusing on none of them. So I’ll break it down by fundraising stages:
Pre-seed/seed (might as well include angels here too)
Series A/B
Since I spend almost no time in the later stages, I’ll refrain from extrapolating from any anecdotes there.
If you’re using DocSend, you already have the numbers for your deck viewership in front of you. As DocSend’s CEO Russ Heddleston said in his interview with Jason Calacanis, VCs often spend ~3.5 minutes on your deck. Though I’ve never timed myself, it seems to be in the same ballpark for myself as well. After all, it’s the deck that gets the meeting, not the deck that determines if you get funding or not.
Nevertheless, I hope the below contextualizes the time spent beyond the numbers, and what goes on in an investor’s head when we’re skimming through.
Pre-seed/seed
Team
What is the biggest risk this business is taking on?
Is the person who can address the biggest risk of this business on this slide?
And does this person have decision-making power?
Let’s say your biggest risk is that you’re creating a market where there isn’t one. Do you have that marketing/positioning specialist – either yourself or on your team – to tackle this problem? As much as I love techies, three CS PhDs are going to give me doubts.
Similarly, the biggest risk for a hypothetical enterprise SaaS business is often a sales risk. Then I need proof either via your network/experience or LOIs (letters of intent) that you have corporations who will buy your product.
Or if it’s a tech risk, I’ll be hesitant if I see two MBAs pursuing this. Even if their first hire is an ML engineer, who owns 2% of the business. Because it doesn’t sound like the one person who can solve the biggest risk for the business has been given the trust to make the decisions that will move the needle.
This might be a bit controversial, but having talked with several VCs, I know I’m not alone here. I don’t care about quantity – number of years in the industry or at X company. Maybe a little more if you were a founding team member who helped scale a startup to $100M ARR. I do care for quality – your earned secret, which bleeds into the next slide.
Solution/product
The million-dollar question here is: What do you know that makes money that everyone else is overlooking, underestimating, or just totally missed? If you’re a frequent reader of this blog, you’ll be no stranger to this question. I’ve talked about it here and here, just to name a few.
Or in other words, having spent time in the idea maze, what is your earned secret? Here are two more ways of looking at it is:
Is there an inflection point you found, as Mike Maples Jr. of Floodgate calls it, in the socio-economic/technological trends that makes the future you speak of more probable?
Is it a process/mental model that you’ve built over X years in the industry that grafts extremely well to an adjacent or a broader industry?
I believe that’s what’ll greatly increase the chances of your startup winning. Or at least hold your incumbents at bay until you reach product-market fit. If you’re able to find the first insight, then you’ll be able to find the second. And by pattern recognition, you’ll be able to find the third, fourth, and fifth in extreme velocity. It’s what we, on the VC side, call insight development. And your product/solution is the culmination of everything you and your team has learned faster and better than your competitors.
Of course, your product still has to address your customers’ greatest pain points. You don’t have to be the best at everything, but you have to be the best (or the only) one who can solve your customers’ greatest frustration. So VCs, in studying how you plot out the user journey, look for: do you actually solve what you claim this massive problem in the market is?
Series A/B
Traction
What are your unit economics? I’m looking for something along the lines of LTV:CAC ~3-5x.
Who’s paying?
For enterprise, which big logo is your customer? And who are your 5-7 referenceable customers?
For consumer:
If it’s freemium, what percent of premium users do you have? I’m looking for at least a 3-5% here.
If your platform is free, how are people paying with their time? DAU/MAU>25-30%? Is your virality coefficient k>1? 30- and 90-day retention cohorts > 20%, ideally 40%.
What does your conversion funnel look like? What part of the funnel are you really winning? Subsequently, what might you need more work on?
The competition
95 out of every 100 decks, I see two kinds of competitor slides:
2×2 matrix/Cartesian graph, where the respective startup is on the upper right hand corner
The checklist, where the respective startup has all the boxes checked and their competitors have some percentage of the boxes checked
Neither are inherently wrong in nature, but they give rise to two different sets of questions.
The former, the graph, often leads to the trap of including vanity competitors. For the sake of populating the graph, founders include the logos of companies who hypothetically could be their competitors, but when it comes down to reality, they never or rarely compete on a deal with their target user/customer. April Dunford, author of Obviously Awesome, calls these “theoretical competitors.”
A simple heuristic is if you jumped on a call with a customer right now and ask: “What would you use currently if our solution did not exist?”, would the names of the competitors you listed actually pop up during the call? Or with a potential customer, what did they use before you arrived? For enterprise software, Dunford says that startups usually lose 25% of their customers when the answer to the above question is “nothing”. When your greatest incumbent is a habitual cycle deeply engrained in your user’s behavior, you need to either reposition your solution, or find ways to educate the market and greatly reduce the friction it takes to go from 0 to 60.
The latter, the checklist, usually sponsors a second kind of trap – vanity features. Founders often list a whole table’s worth of “awesome features” that their competitors don’t have, but many of which may not resolve a customer’s frustration. And on the one that does, their competitors have already taken significant market share. The key question here: Do all features listed resolve a fundamental problem your customers/users have? Which are necessary, which are nice-to-have’s? Are you winning on the features that solve fundamental problems?
The question I ask, as it pertains to competition, in the first or second meeting is: What are your competitors doing right? If you were to put yourself in your competitor’s shoes, what did they ace and what can you learn from the success of their experiment?
Financial projections
What are you basing the numbers off of?
What are your underlying assumptions?
How fast do you claim you can double the business growth? Is it reasonable? If we’re calculating bottom-up, can you actually sell the number of units/subscriptions you claim to? What partnerships/distribution channels are you already in advanced talks with? Anything further than 2 years out, for the most part, VCs dismiss. The future is highly unpredictable. And the further out it is, the less likely you’re able to predict that.
I also say financial projections for Series A/B decks is because only with traction can you reasonably predict what the 12-month forward revenue is going to look like. Maybe 18 months, depending on your pending contracts as well. In the pre-seed/seed, when you’re still testing out the product with small set of beta users, it’s hard to predict. And pre-seed/seed decks that have projections without much traction are often heavily scrutinized than their counterparts that don’t have that slide.
In closing
Of course, that doesn’t mean you should neglect any slide on your deck. Rather, the above is just a lens for you to see which slides an investor might allocate special attention to. If you can answer the above questions well in your pitch deck, then you’re one step closer to a winning strategy not only in fundraising, but in building a company that will change the world.
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!
Over the past few months, I’ve been slowly experimenting with how I can take Hidden Questions online, while not sacrificing the intimacy of the relationships it builds as well.
Hidden Questions started as a question game I played with friends and colleagues, which eventually expanded to other strangers. The goal of which was to deepen our friendship within minutes rather than weeks, months, or even years. In sum, a game where each person has to answer the question truthfully, but is not required to reveal what the question is. The catch is that if the person decides to conceal the question, they have to take a “punishment” (i.e. crazy hot sauce, disgusting foods, durian, Beanboozled jelly beans, etc.). Before they decide to or not, other participants can ask clarifying questions, as long as it’s not “Is X the question?”, and bet additional units of “punishment” if the answeree chooses to conceal the question. Of course, if the answeree does reveal, the people who bet will take the “punishment” instead.
After over 30 sessions in the past 3 months, a few things have been hotfixed since the in-person game:
One-time perishable links – While not the be all end all, vua.sh lets us create a “secret messages” where only the people with the link can access the question – and only once. Once the link is opened once, it’s dead. So, this gives folks a peace of mind knowing that no one can go back and find out what the questions are. The people who create these questions are the last group/individuals who play.
One-slide Powerpoint presentations, reminiscent of Jeopardy, with increasing risk/depth factor of questions, scaling punishments with question difficulty/depth.
Mailing the “punishments” to the people I’m playing with, like Sean Evans and his team does for their show, Hot Ones, where they mail their 10 hot sauces to their guest before the interview. This way, I can keep people accountable to the punishments
Zoom, or an equivalent web conferencing tool – Social distancing at its best. Even better now, ’cause I get to play with people outside the Bay Area as well.
