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What Does Signal Mean For An Early-Stage Investor?

signal, lighthouse

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

– John William Smith, “The Lighthouse,” 1814

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

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

To which, he responded:

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

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

The signal paradox

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

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

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

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

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

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

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

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

*Additional context on family offices

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

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

The surplus of “signal” in 2021

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

Source: Crunchbase
Source: Crunchbase

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

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

Source: Crunchbase

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

So where should investors look for signal?

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

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

Signal by idea plausibility

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

Signals by stage

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

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

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

In closing

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

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

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

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

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

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

Cover photo by Michael Denning on Unsplash

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

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

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The Gravitational Force of Founder-Market Fit

wildfire, founder market fit

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

PMF is often nonobvious and guesswork in foresight, but incredibly obvious in hindsight. But the ability to foresee and measure an inflection point in the business is a common thread among the best founders in the world. For Rahul Vohra, that was when 40% or more of his customers responded with “very disappointed” to the survey question “How would you feel if you could no longer use Superhuman?” After all, the famous Peter Drucker did say, “You can’t manage what you can’t measure.”

Founders often find themselves pushing their product onto customers pre-PMF. But once they find PMF, they feel the pull of the market. In the words of David Sacks, when you find PMF, “the market is pulling product out of the startup.”

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

But, what is founder-market fit?

Much like PMF, for founders, there exhibits a similar level of pull. But its measurability is often not by quantitative metrics like PMF, but qualitative. At a virtual lunch last week, Founders Fund’s and Varda’s Delian Asparouhov shared his brutally candid remarks on living a fulfilling life.

One of the questions he answered was when did he know he just had to start Varda. Why didn’t he just stay a full-time VC? Delian called it the “mind virus.” When the problem hits you like a truck and you just can’t get rid of it. Once you get it, it infects your whole brain, and you can’t not think about it.

When you have more questions than answers. And each layer of questions gets more and more specific, and no longer generalist. In fact, the majority of questions that take up your mental real estate do not have membership in the:

  1. First 500 questions about the topic in a generalist’s mind
  2. First 100 questions in a specialist or expert’s mind space. In fact, one of the greatest litmus tests (not the only) you can administer is getting the “Oh f**k, how come I haven’t thought of that?” response.

Naivete matters

Paul Graham wrote an equally great piece on the topic. “Naive optimism can compensate for the bit rot that rapid change causes in established beliefs. You plunge into some problem saying ‘How hard can it be?’, and then after solving it you learn that it was till recently insoluble. Naivete is an obstacle for anyone who wants to seem sophisticated, and this is one reason would-be intellectuals find it so difficult to understand Silicon Valley.”

In the analogous words of Delian, “Just ask the technical experts, is this impossible? There’s a big difference between very, very difficult and impossible. Is it just a very technical religion where people say no or is it impossible?” There’s a superpower in knowing just enough to dream and reach for the “impossible”, but not enough to get trapped in the technical dogma of what is “possible.”

Great founders are armed with the ability to balance childlike wonder with optimistic pragmatism. Great founders dare to dream. It is neither the first, nor the last you’ll hear of James Stockdale on this blog. But nevertheless, I find his words to ring equally as true for the best founders who have graced this planet. “You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they may be.”

In closing

In sum, what is founder-market fit? It is when passion turns into obsession. When founders are married to the problem, as opposed to the solution. When curiously passionate founders cannot stop themselves from doing everything in their power to engineer the solution to a problem deeply personal to them.

Here’s a simple way to think about it, using an equation most scientists are familiar with.

F = ma

Or otherwise, known as Newton’s second law. Force is the product of mass and acceleration. Think of force as the gravitational pulling force a founder has. Mass as the first impression a founder makes in meeting number one. Some permutation of their insights, their background and experience, and their domain expertise. And acceleration as the multiplicative velocity in which the founder learns. Subsequently, we have an equation that looks more or less like this:

Founder-market fit =
(initial impression) x
(founder’s compounding rate of learning)

For investors, a good sign of that is when that passion is contagious in the first meeting. And founders learn incredibly quickly (as a function of action) in every consecutive one after. The gravitational pull a founder brings where you just want to put down everything to listen to them. As investors, we love paying for that world-class education.

Photo by Tobias Seidl on Unsplash

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How to Develop Intuition as a Rookie Startup Investor

intuition, how to develop intuition

In the month before I started this blog in 2019, I had written 20 odd blogposts as a safety net in case I ran out of ideas in my weekly cadence. Most of which never had the chance to stand in the limelight, including my first one on intuition. Particularly, my one on intuition. Over the years, I’ve honed my own “intuition” – if I may be bold enough to call it that – on vetting startups. My intuition today is very different beast from my intuition 2.5 years back. This essay is a product of such constantly evolving self-discovery.

The spark of my intuition

When I first started my career in VC at Berkeley’s SkyDeck, I reached out to about 70-80 investors for a coffee chat, in which I posed one of my now favorite questions. What is the difference between a good and a great VC? Unsurprisingly, but frustratingly enough, most of the answers came in the form of “intuition.” Or its cousin, “pattern recognition.”

To me, who was still so new to venture, that was the best and worst non-answer I could get. Yet despite knowing that there was truth in their answer, I was still directionless. It wasn’t until an afternoon walk through San Francisco’s South Park with a very generous, but curt gentleman who carried quite the luggage beneath both of his eyes that I got the answer I wasn’t looking for.

“See a shitload of startups. When you see 10, pick your top 2. Then see 100, pick your top 2. Then see 1000, and again, pick your top 2. You’re going to notice that your podium will look quite different the more founders you meet with and the more startups you see.”

Recently, Plexo‘s Lo Toney told our fellows at DECODE the exact same thing:

And so, in hopes to guide someone in my shoes when I first started, here’s how I think about building intuition. Of course, I am a human and will always be a work in progress. It’s likely that next year I will see things differently than I see them today. Nevertheless this essay is a record of my thoughts today in early 2022.

Where to find a “shitload” of startups

There are multiple avenues these days for deal flow, including, but not limited to:

When I first jumped into venture, I used to ask my friends who I knew were early adopters (a product of going to a school in the Bay Area, like Berkeley) of products to recommend me 3-5 startups/products every other week. When they did, I would treat them out to boba. And if they introduced me to the founders for those products that I’d be excited to talk to, I’d treat my friends out to a small meal – around $10-15. At the same time, at SkyDeck, I tried to sit in on as many meetings as I could, particularly the ones around deal evaluation at the beginning of every cohort.

While I do recommend all of the above, the best training grounds for developing intuition is when you talk to founders yourself.

The five senses

Google defines intuition as “the ability to understand something immediately, without the need for conscious reasoning.”

Source: Google

So, by definition, intuition is subconscious – built upon the brain’s natural ability to recognize patterns. An apt synonym, according to the trillion-plus dollar company… “sixth sense.” A sixth sense birthed from the intense neural processing of the five other senses. So, it was only logical for me to understand the sixth sense by first fully comprehending my five others. That said, I use the five-sense nomenclature loosely, but it nevertheless has become my guiding framework for venture decisions over the years.

Smell

“I invested based on my sense of smell.” These are the very words Softbank’s Masayoshi Son shared about his early investment in Alibaba. And he said the same about his investment into Yahoo! In fairness, his words make for good PR. And may just seem like smokes and mirrors. But for Son to have chosen Jack Ma out of the 20 prospective Chinese entrepreneurs he met with to invest in, he must be onto something.

There are two ways to develop an acute sense of smell as an investor, which you can develop in tandem.

  1. Spending a lot of time looking into the market
  2. Talking to many founders

On the former, we’ve been seeing a number of funds incubate their own startup ideas as a result of investors becoming deep subject-matter experts, but are discontent with the current ideas or teams on the market right now. Two examples include General Catalyst and Founders Fund. Draw market maps. Write research reports. Follow the experts on socials or on their blogs. Even better, talk to them as well. As a general warning, it’s hard being a generalist here. I would pick a few industries and/or functions you’re excited about or knowledgeable in already. Go deep before you go wide.

A few questions that have served me well include:

  1. What kind of inflection points are we at in the market? In what areas have headwinds become tailwinds?
  2. What are the technological, political, and/or socio-economic trends to be aware of right now? And where do these trends set up the world tomorrow to be?
    • I really encourage investors here to dream a little bit. To envision a world given these trends in which you’d be excited to have future generations live in.

On the latter, while Masayoshi talked to only 20, you can assume you he went through at least ten times that number of decks and business ideas. There’s no better practice than being in the field. Assuming you’ve taken step one (i.e. researching the market), one of the best litmus tests I’ve used to gauge a founder is their ability to riff on adjacent subjects to the business with me. Are they capable of going on tangents that really demonstrate domain expertise? Or are they caught up in the myopia of just their business?

Taste

There’s two kinds of tastes in which I look for, almost subconsciously, now.

  1. Have they tasted excellence?
  2. Have they tasted blood?

On excellence, many investors out there look for prior success in the field. For instance, previously founder of a unicorn exit, early employee or key executive at a now-successful company, or former big-time investor. Admittedly, there are only a small handful of these individuals out there. But I knew in my early days of scouting, I was at a massive disadvantage here for two major reasons.

  1. I didn’t have strong connections with most of this subset of the entrepreneurial market.
  2. This was also a founder persona I didn’t have unique insight to. In fact, it was general consensus to always take first meetings with these individuals in the venture industry. And as I learned early in my venture career, you make money either if you’re right on consensus or right on non-consensus. The latter of which is counted in multiples instead of percentages, which I’ve written about here and here.

In knowing so, I look for excellence, period. Have they tasted earned glory in any discipline? Do they know what it’s like to succeed in their field? And do they know what it takes to get there? On the flip side, do they know how hard it was to get there?

On the other hand, for blood, I want to know a founder’s propensity for conflict resolution. When was the last time they fundamentally disagreed with their co-founders? And how did they resolve it? Conflicts are inevitable. They’re bound to arise when you’re putting so much at stake for a common goal. I care less about the fact that they do come up, but more about that when they do, the team doesn’t just fall apart.

Every once in a while, I might disagree with the founder as well. And hear I look for the founder’s knee-jerk reaction and their ability to engage in thoughtful discussion. That does not mean they cannot disagree. Neither am I looking for another yes-person. But are they capable of helping me, and themselves, explore new horizons? Are they open-minded enough to entertain new possibilities, but still hold a remarkable level of focus to their 12-month horizon?

Touch

How high-touch or low-touch is this business? How much legwork does an investor need to do for this business to 10x its KPIs (within the next 12 months)?

For me, during my first meeting with the founder, ideally before, I try to answer two very simple questions:

  1. What is the biggest risk of this business?
  2. And is the person who can solve this risk on the team slide/in the room?

99% of the time, the person who can solve the biggest risk of the business has to be in the room. For instance, if it’s a machine-learning (ML) product, it’s a technical risk. So at least one of the co-founders must be a technical genius, not three MBAs. If it’s a B2B SaaS product, it’s a distribution risk. Meaning someone on the team must have deep connections to key decision makers to their target customers. In the early days, that’s really just at least one to two big-name customers. And ten other referenceable businesses. The second biggest risk is sales, and that I count on the founders’ ability to hustle.

1% of the time, and this is probably an exaggeration, you just have to really believe in the founder AND the product or market.

Hearing

Do founders spend more time talking, or more importantly, listening to their customers than they do in Rapunzel’s tower?

While I don’t ask all of them (since we’re guaranteed to run out of time before we run out of topics), here are the questions I consider when assessing how boots-on-the-ground a founder is:

What are customers saying about their product? The good? And the bad?

How did they acquire their first users/customers outside of their existing first degree network? Where from? What messaging do they use?

What is their customer win rate? In knowing so, what worked and what didn’t? At what point in the onboarding process do customers churn? What are their assumptions for why churn happens?

Do they know the numbers of their business (and ideally the market) like the back of their hand? For numbers of the market, are they able to recall the sources of most important numbers? For product metrics, how well do they know the main ones, like engagement, churn, monthly growth rates (over the past 3 months), net retention, and so on? Every so often, there’s a number or two, the founders are not aware of. And it’s fine. The test is once they realize their blind spot, how quickly do they move to patch it up? Subsequently, report back to me about their updated data measurements.

Of course, my job is not to distract founders. And I really try my best not to, so I don’t ask they measure superfluous metrics, unless I really do believe they’re crucial to the business.

Because I usually talk with founders who are pre-product-market fit, I usually lead with the question, “what does product-market fit look like to you?” Are they able to arrive at an actionable and measurable metric to optimize for? And can they back up why that metric is a good proxy for product-market fit?

(In)Sight

Can this founder teach me something new? Something that I never thought of or heard before, but makes complete sense. Is it a preposterous idea but backed by logic? Or does the founder have an original (and money-making) angle to what is already unoriginal? As an investor, especially as you see more startup ideas, the latter question is likely to surface more than the former.

Once the original insight is uncovered, it is then up to me to figure out the potential energy of the insight. How far can this insight take this team? Is it likely that this insight will uncover more insights down the road?

As an investor, you want to be right on the insight and team, not one or the other. Mike Maples Jr. articulates it best when he said, “We realize, oh no, this team doesn’t have the stuff to bend the arc of the present to that different future. Because I like to say, it’s not enough. […] I’d say that’s the first mistake we’ve made is we were right about the insight, but we were wrong about the team.”

“I’d say the reverse mistake we’ve made is the team just seems awesome, and we just can’t look past the fact that they didn’t articulate good inflections, and they can’t articulate a radically different future. They end up executing to a local maximum, and we have an okay, but not great outcome.”

In closing

Seedscout’s Mat Sherman wrote a great Twitter thread last month to help founders who are outsiders raise venture funding.

The fact of the matter is that despite the venture industry being a rather well-connected circle of individuals and firms, most entrepreneurs – both currently and aspiring – are outsiders. If you can’t hit up a close friend to write you a couple million dollars, you’re an outsider. This essay, while written for new investors, hopefully, is equally useful as a guide for founders looking for some insight as to how investors think. Or at the very minimum, how I think.

Photo by Liam Shaw on Unsplash

Any thoughts here are mine and mine alone. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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

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

laugh fox smile

Was the David from a month ago laughably stupid?

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

The timeframe of evaluation

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

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

It is equally as analogous for personal growth.

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

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

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

The shock factor

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

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

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

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

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

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

For founders

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

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

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

And the third most recent?

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

Why such a question?

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

Photo by Peter Lloyd on Unsplash

Thank you to V. who inspired this blogpost.

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

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.

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DGQ 10: Questions Should Not Be Perfect

perfect questions, reflection

Straight off the bat, you might have realized that the 10th issue of the DGQ series – damn good questions – starts off with a non-question. And it is intentional by design. I often waste a number of calories constructing the perfect question. And in many ways, I get very, very close to what I deem as perfection. Exhibit A, B, and C.

But over the course of constructing the perfect question and its subsequent research, I often uncover the answer I am seeking… before I even ask it to the intended designee. I don’t mean for the odd question here and there amidst spontaneous conversation. But the predestined ones to be asked in:

  • Fireside chats
  • Intro conversations
  • Coffee chats with individuals where I’m punching above my weight class
  • Podcast interviews
  • Social experiments
  • First dates (possibly self-incriminating)

Accompanied by the excuse of creating conversation, I ask it despite the since-acquired knowledge. Sometimes to the wonder and amazement of the recipient, but more often than not to the boredom of myself. While the words that flutter out of my mouth may sound like a question, it ends up merely being a statement rearranged on a NY Times crossword puzzle.

In reframing questions for myself, I realized… If I knew all the answers to the questions I would ask, that’d make for quite a boring life. While boredom only surfaced a minority of the time, it occurred noticeably enough times. If I had a mirror to myself every time I asked a question, I imagine I would find myself asking the ones I have the answers to already with a furrowed brow.

Last year, in the relentless pursuit of being a better host for structured conversations, I over-optimized for shock and delightful surprise. Shock became my unfortunate currency for my personal delight. Rather than enlightenment, education, and inspiration. In the construction of the “perfect question,” while protecting my downside – in terms of embarrassment, I capped my upside.

So, this essay is a reminder to myself. Ask dumb questions. It’s okay. It’s only by reinventing yourself again and again through the ashes of unintentional ignorance can you rise like a phoenix.

I’m reminded of a quote by quite a contrarian philosopher, Karl Popper, but nevertheless quite appropriate here. “Good tests kill flawed theories; we remain alive to guess again.”

If you’re reading this essay, be prepared for a lot more dumb questions from me. Dumb, not garbled. Dumb and simple. I’ll continue to do my homework before conversations. But if I’ve found the answer already, I’m going to keep myself accountable to either find new questions or cancel the meeting. Cheers to the motif of exploration! And I’ll see you where I cannot foresee.

Photo by Faye Cornish on Unsplash

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

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.

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#unfiltered #63 How To Be Selfish To Be Selfless

Back in my sophomore year of college, I was running to be the vice president of a business organization. Part of the requirement to run as one was to shadow at least two executives from previous generations who held the same role. Brownie points if you shadowed the broader executive team as well. The goal was to better prepare yourself by increasing the context you had about a new role.

I checked off those boxes with flying colors. In fact I ended up talking to more than 20 other executives and other key campus constituents we would be interfacing with. Along the way, I shared what I would do, not do, and do differently compared to previous roles. I also told them how I would forever change the organization and its impact on campus and students. Frankly, I felt like I was a on a roll. I was on top of the world.

Yet one winter night (it’s always the winter nights that get you), when I was on my haughty high horse, one person stopped me in my tracks. With one simple question. “What is your selfish motivation?”

“I’m going to change…”

“No, David… what is your selfish motivation?“

Flash-forward

Last week, one of my favorite hustlers reached out to me. She was planning to start a newsletter soon and wanted some advice from a fellow writer. After a few exchanges asynchronously, it became apparent that her biggest obstacle was keeping to a schedule. If you’re a frequenter here, you’ll have noticed I’ve already lost all semblance of a schedule other than publishing weekly. Some weeks I publish on Mondays. Others on Tuesdays. Some weeks see two essays. Others only one. But I have yet to lose my streak of publishing weekly. But I digress.

There’s a large graveyard filled with content creators who post ten or less times. Off the cuff, I dare say 90%. Prior to this blog, two of my other blogs were also no stranger to the obituary.

So, I posed the same question that stumped me all those years back. What is your selfish motivation?

What is your selfish motivation?

Most people, especially in the realm of entrepreneurship, job interviews, politics, and PR stunts, share their selfless motivations. Everyone’s a Samaritan. While there is some truth to it, everyone needs a really good selfish motivation.

On your best days, if your project is doing really well and you’re absolutely crushing it, your selfless motivation will be what you tell the latest press release, your cousins over the holidays – the story you pitch to others. The story you also tell yourself to give your job meaning. But on your worst days, when you want to give up, your selfish motivation is what’ll keep you going. When you’re at your worst, you won’t want to care for others. You care about yourself. What’ll keep you sane? If your selfish North Star isn’t strong enough, it’s easy to give up.

You need both. Your selfless motivation will help you reach for the stars. Your selfish motivation will prevent you from hitting rock bottom.

For example, for this blog, my selfless motivations are:

  1. Democratizing access to resources and education to help people move the world’s economy forward,
  2. Empowering founders to not fall through the same potholes I or other founders fell through – to make new mistakes not old, and
  3. Empowering and inspiring others to live more enriching lives.

It’s what I tell others. My lofty goal that’ll make writing this blog meaningful to me.

On the other hand, my selfish motivations are:

  1. I write to think. My thoughts are so much clearer on paper than if I just speak them. If I don’t write things down, I’m a mess.
  2. I forget things easily. Short term memory loss. And my blog is a way for me to catalogue my own learnings.
  3. I feel much more comfortable being vulnerable with strangers than with friends. So my blog helps me relieve much of my stress and anxiety.
  4. I am neither as good as people say I am nor as bad as people say I am. This blog keeps me honest.

In closing

That same winter night was the day of the winter equinox. I don’t mean to dramatize my little anecdote, but I nevertheless I do find it provides a little flavor to the story.

“No, David… what is your selfish motivation?”

“I don’t follow.”

“I ask every officer candidate this question. There will be days that you will hate the job more than you will love it. And I need to know if you have it in you to weather those days.”

I don’t remember what I told him that night. I don’t think it was a particularly honest answer. Or maybe I was honest. But it wasn’t enough. I didn’t get his vote of confidence, but I did enough legwork to get the approval of others.

In the end, I got the position. And he was right. Times got tough. There were days I hated the job. And on those days, in particular, I didn’t do anything remotely close to “changing the organization and its impact on campus.”

In his words, I wasn’t selfish enough.

Photo by Ian Chen on Unsplash

#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!

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No One Talks About Selling

Seemingly, everyone these days – from Twitter to podcasts to blogposts (including mine) – talk about buying and investing in startups. What are best practices for investment theses? How do I pick the best companies to invest in? Conversely, how do I get picked or get allocation into hot startups? But people rarely seem to be talking about selling positions. So, if you know me, I hit up two of the smartest people I know – one early-stage, the other growth-stage. Both of whom might be familiar faces on this blog. So I asked them:

How do you think about selling a position? How much does DPI matter for your investors?

The below insights include minor edits for clarity.

The notice that you’ve all seen a million times

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

Shawn Merani (Parade Ventures)

Shawn was instrumental in my early career growth in venture. When I met him years ago, he was still running Flight Ventures, where he wrote early checks into Dollar Shave Club and Cruise Automation and was one of the first syndicates on AngelList. There he led a network-based model of syndicate leads, which I’ve heard been described by others as a “venture partner program on steroids.” Now he’s the solo GP at Parade Ventures, a seed stage venture fund investing in enterprise-themed companies.

“I would preface all of this with the fact we have never fully exited a position before a traditional liquidity event, but more so, have managed our position given the duration of our ownership and to generate returns for our LPs and manage risk. 

“We talk to founders all the time, and foster a relationship that grows. When I was writing check sizes for 1-5% of ownership, my engagement then is very different from my engagement with founders now, where we take more concentrated bets.

“When it comes to selling, it’s about influence and information. The larger our ownership, the more information we have access to. And if a company is doing well, we don’t think about selling. In fact, it’s the exact opposite; we buy more. If things are working, we take our pro rata. In some cases, we take more than my ownership target. And founders are willing since we’ve been helping them from the beginning. We know when there’s going to be a 3-4x uptick every 12-18 months. Compounding is powerful.

“Our investors back the fund because they trust us. They don’t talk to the founders as often as we do. They trust our decision when we say we should buy more or keep our shares. There are two ways to talk about DPI:

1. Making money for your current investors, and
2. Telling the story.

“Selling is really a case-by-case scenario, and it really depends on my relationship with the founder. All the equity in which I sold so far has been before Parade. But if we know the company is doing well, we buy more. There are also holding periods to consider under QSBS, which has huge tax benefits.”

For those that are unfamiliar with the terminology, DPI means distributions to paid-in capital. Effectively, how much money you actually return to your investors versus “paper returns”. QSBS, or qualified small business stock, tax exemption allows investors in qualified businesses to avoid 100% of the capital gains tax incurred if they hold their stock for more than 5 years.

Ratan Singh (Fort Ross Ventures)

I posed the same question to someone I’ve been a huge fan of the day I met him – Ratan Singh, Partner at Fort Ross Ventures. He’s an investor in some of the most recognizable businesses today, including the likes of Rescale and Clearcover, as well as holds board seats at Blueshift and Ridecell. You may remember Ratan from a previous essay about speed as a competitive advantage for investors. And you’ll likely see him a lot more on this blog. He summed it up best in our chat when he said, “There are two reasons why an investor needs to care about DPI: time horizon and fund strategy.” Both of which are variables, not constants, between early- and growth-stage investments.

“The true metric at the end of the day is DPI. DPI is turning in money to your investors. And there are two reasons why an investor needs to care about DPI: time horizon and fund strategy.

“Let’s start with time horizon. For a seed stage fund, as you get close to the end of your fund cycle, that’s when DPI matters. What type of vintage is the fund in? In 2021, it’s going to be the 2010 and 2011 funds.

“For the majority of the time, you want to ride your winners. At the end of your time horizon, ask for a one- to two-year extension. Usually LPs want more money or their shares distributed. They’ve already waited 10 years. Two more won’t make a difference, especially if you have some big fund returners in the making.

“For fund strategy, did you meet the objectives for your LPs already? If you have, and you want to sell some of your winnable deals in your portfolio to help raise your Fund II because those are the same LPs that would re-up in your next fund, then you might consider selling.

“The worst reason to sell is that you want to take the wins you currently have since you think the market is overvalued. ‘I’m at the peak.’ Or ‘I want to take chips off the table because there’s something bad that will happen, but that is very hard to predict.’

“There were a bunch of funds at the beginning of this year that sold their entire positions. They were desperate to lock in a win. They sold because they thought the market was at the top. And, they were wrong. I’m against it. Selling early doesn’t fully realize the strategy you have put forth. For us, at the growth stage, we shoot for 48 months to an exit. If it takes longer, did we underwrite it wrong? But even if it does, the case may be that the company is growing a little slower than expected.

“At the early stage, all funds will say 2 to 3x cash-on-cash in the LP presentation. Most funds return 1 to 1.5x, on average, with most funds total DPI at 1.2 to 1.5x, which barely returns the fund. Before your time horizon, everyone likes to cite unrealized gains and mark ups because TVPI’s all they have.

“DPI matters most for funds in the top quartile – the top returners, funds with more than $500 million, or nowadays, $1 billion mega-funds. For the bottom majority of funds, early DPI won’t matter. They would be limiting their upside.

venture returns
Author’s Note: Notice that 65% of financings lost money for their investors.
Source: Correlation Ventures

“The new interesting commentary is that – where the job is getting harder – a lot of crossover funds are making binary bets. Finding the one deal that’s the next Salesforce – the next industry-defining company. And putting a lot of capital to find that one or two companies. Tiger and Coatue, still maintain that 10-12% IRR, but spend a lot to find the company that’ll be the next Databricks. Every generation has their industry-defining companies. And, they’re willing to lose it all to find that one.

“You usually don’t see this at the growth stage. It’s bad for innovation. Everyone is trying to find investments that are scaling. 1000 investments in the past year became unicorns. And there are 3000+ unicorns. Yet, the top five to seven companies are still undercapitalized.”

In closing

As we closed the selling part of our conversation, Ratan shared a great quote from an Economist article:

“Flush with cash amid a deal frenzy, what is the industry to do? One option would be to liquidate portfolios, that is, to sell more assets than it buys, in effect trying to cash in some chips when prices are high. As yet, however, this does not seem to be happening. Take the figures for three big managers, Blackstone, Carlyle and KKR. So far this year for every $1 of assets, in aggregate, that they have sold, they have bought $1.30. Although Carlyle is being more cautious than the other two firms, these figures indicate that the industry overall thinks the good times will roll on.”

In fairness, as the saying goes, the high risk, high reward. Data does show that the funds with the greatest track records have more deals that lose money than those make them more money than they invested.

Interestingly enough, there’s also a huge differential between the world’s most valuable and most funded startups. According to Founder Collective, “the most valuable companies raised half as much capital and produced nearly 4X the value!” All of which echo Ratan’s words. “The top five to seven companies are still undercapitalized.”

Source: Founder Collective

The public often looks towards invested capital as a proxy of startup performance. But the data suggests that isn’t the case. In the words of the team at Founder Collective, “capital has no insights.” One of my favorite lines from Ashmeet Sidana of Engineering Capital frames it is still: “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation.”

But when DPI boils down to selling on multiples at the end of the day, I often reference Samir Kaji‘s tweet on the return hurdles expected of different stages of investors. As you might guess, the return expectations of each type of fund varies based on fund strategy.

As all things in the world, exiting is just as nuanced and complicated as entering. Hopefully, the above insights will be another set of tools for your toolkit.

If this essay has inspired more questions, here are some further reading materials, courtesy of Ratan:

Photo by Visual Stories || Micheile on Unsplash

Thank you Shawn and Ratan for reading over early drafts.

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

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Three Types of Risk An Early-Stage Investor Takes

risk

From market risk to product risk to execution risk, I’ve written many a time the types of risks a founder takes, including here, here, and here. As well as shared that the first and foremost question founders need to answer is: What is the biggest risk of this business? Subsequently, is the person who can solve the biggest risk of this business in the room (or on the team slide)?

Over the weekend, I heard an incredible breakdown of the other side of the table. Rather than the founder, the three types of risks an investor takes. The same of which need to be addressed for LPs to invest. From Kanyi Maqubela on Venture Unlocked.

  1. Market risk as a function of ownership
  2. Judgment risk
  3. Win rate risk

Market risk as a function of ownership

If you’re investing in an consensus market – be it hot, growing, and is garnering a lot of attention, you don’t need a huge percentage. I mentioned before that every year there are only 20 companies that matter. And the goal of a great VC is to get into one of these 20 companies. Ownership doesn’t matter. Even 1% of a $10B outcome is a solid $100 million.

On the other hand, if you’re in a small or non-consensus market, you need a meaningful ownership to justify your bets. For the same $100 million return, you need to maintain 10% at the time of a unicorn exit.

Going back to economics 101, revenue is price multiplied by quantity. Revenue in this case is your returns, your DPI, or your TVPI. Price is the valuation of the business. Quantity is how much you own in that business. Valuation, as a function of market size, and percent ownership are inversely proportional to reach the same returns. The smaller the market, the more ownership matters. The bigger the market, the less it matters.

Judgment risk

At the top of the funnel, the job of any investor is to pick or to get picked. I’ll take the latter first. Getting picked is often far less risky. But far harder to get allocations for, especially if you’re a fund that has ownership targets, vis a vis the market risk above. At the same time, the larger your check size, the harder it is to squeeze into the round.

To generate alphas from picking, there are two ways:

  1. Get in early.
  2. Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.

The question to ask yourself here is: What do you know that other investors are overlooking, underestimating, or altogether not seeing? And how did you reach that conclusion as a function of your experience and analysis?

As Kanyi said on the podcast, “We think we’ve got unusually good judgment and nobody else likes this, but we like it for reasons that are unfair.” The unfair part is key.

Win rate risk

Win rate risk breaks down to what unique advantage you, as an investor, bring to the table that will help the company win. In simpler terms, what is your value add? Of the businesses you say “yes” to, can you increase the number of those who win? As an early-stage investor – angel or VC, there are four main ways an investor can help founders:

  1. Access to downstream capital or capital from strategic investors
  2. Access to talent – How can you increase the output of the business?
  3. Sales pipeline – How can you help grow revenue directly?
  4. Strategy – Do you have unique insight into the industry, business model, product, GTM, or team management that will meaningfully move the business forward?

In closing

If you’re an investor, I hope you found the above as useful of a reframing as I did. If you’re a founder reading this, I often find it useful to stand in the shoes of your investors. And in understanding how your investors think, you can better formulate your pitch that’ll align your collective incentives.

The conversation around risk management, at the end of the day, is a conversation of prevention. A realm of prevention while useful to hedge your bets is a strategy to not lose. It’ll help your LPs find comfort in investing dollars into you. But to truly stand as a signal above the rest and to win, you have to look where other investors aren’t. The non-obvious. Specifically the non-obvious that’ll become obvious one day. And you have to do so consistently.

Photo by Matthew Sleeper on Unsplash

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

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#unfiltered #61 How To Host A Fireside Chat 101

fireside chat

For years, I’ve given myself the lazy excuse. “I’m an introvert, so it’s okay if I’m bad at group conversations.” Empirically, the larger the group, the more I regress to being a wallflower. I was much more proficient at one-on-one and small group conversations than larger conversations. To be exact, to quote my friend, I was the “most David-like” in groups of 4 or less. I began to struggle in groups of 5-8. 9+ were the bane of my existence, at least on the front of contributing meaningfully to the conversation. And for the longest time, I never thought to look into that notion more, other than put myself in situations with larger groups and force myself to talk. I merely attributed my inadequacy to introversion and shyness.

For luck to stick

Yet, luck always has a way of finding its way to you. And if you’re curious, the best way to increase the surface area for luck to stick comes in two parts:

  1. Say yes meaningfully to more things.
  2. Have a bias to action.

What does saying yes meaningfully mean? This isn’t about saying yes to everyone and everything. This also isn’t about saying no to almost everything. I used to have a mantra, which I took from De Niro’s character in Ronin, “Whenever there is any doubt, there is no doubt.” Effectively, if I ever find myself in doubt, I shouldn’t hesitate to say no. But if you’re like me, I have the ability to second-guess everything. What can I say? I have a wild imagination. Eventually, that mantra led me to say no to almost everything in pre-2021. Subsequently, I cannot even imagine the number of opportunities I let slip through my fingers.

Saying yes meaningfully, on the other hand, meant my “yes” framework only needed to rely on a yes to at least one of two questions:

  1. Does this make me jump out of my chair right now?
  2. If I pursue this project, will I obtain skills, knowledge and relationships that will transcend the outcome of the project itself?

On the other hand, having a bias to action merely means to follow through with whatever you say you will do. Actions should always follow your words. If you say it, mean it.

Responsibility and accountability

A few months ago, a few of yes’s started to snowball. I began hosting fireside chats and panels, with an audience many times larger than the upper limit of my extroversion.

Unlike when I’m interviewing people for this blog or for a small podcast project I’m doing on the side with a friend, fireside chats are live by design. And because of that fact, backspace is not my friend.

Yet, despite it all, I didn’t succumb to the pressures of “extroversion”. Paired with a comparatively lower level of apprehension, I was and am more often looking forward to rising to the occasion in these conversations than in any other large group conversations. One might argue fireside chats and panel discussions are still small group conversations. It is… until you try to include audience participation during these conversations.

But why? Why did it feel more natural to host these fireside chats, panels, and group social experiments yet still struggle in ordinary group conversations?

I thrive on responsibility. The greater my sense of responsibility, the better I do in a conversation. Often times, the roles of each participant in a conversation aren’t clear. Who’s asking the questions? Who’s moderating the conversation? Should there even be someone leading the conversation? If things turn awkward, is it any one person’s fault?

At large, we also see this in group conversations – online and offline. On average, the larger the group, the less each individual feels accountable to contribute meaningfully to the group.

In 1:1 conversations, the responsibility for a great conversation is split 50-50. There’s nowhere to hide. In 3-person groups, it’s 33-33-33. In 4, it’s 25-25-25-25. And so on. At some point, often starting around the 4-person mark, people start feeling that the conversation can go on with or without them. In these fireside chats, it was very clear that it was host and guest’s responsibility for a great conversation. So despite boasting a larger headcount, the responsibility was largely split 50-50.

The lessons

While my goal is to be competitive in the top 0.1% of hosts, it’d be crass to say I started with any level of proficiency. Merely a passion. A passion to learn and help guests be their best selves. And when both guests and the audience walk away from the conversation, both will have felt that was an hour well-spent. As the theme of this blog is building in public, I’d love to share the start of this journey with you.

As such, here are a few lessons I’ve internalized so far:

  1. Do your homework. My goal is always to know my guest(s) better than they know themselves at that point in time – specifically, in my rabbit hole research, finding things that warrant the “How did you know that” response from my guest. I start this process 4 weeks in advance. On average, I spend about 5-10 hours of research per guest, covering:
    • Socials,
    • Content they’ve created (if any),
    • PR/media articles,
    • Podcasts/interviews, and
    • Cross-referencing with mutual friends.
      Most of the above I find across 7-10 pages of Google search results.
  2. Prep for more questions than you need. Usually for every half hour, you need 2-3 good questions, but always prepare 6-7 questions for every half hour as backup.
  3. Some guests prefer having the questions beforehand to prepare; some don’t. I always ask when I invite them and respond accordingly. If they want to see the questions, I send that 1-2 weeks before the date of via email and updating the calendar invite with those questions.
  4. Before every interview, in lieu of the pre-chat, I ask two questions. The goal is for your interview to just be another fireside chat, but that it’ll be THE fireside chat.
    1. Fast forward 2-3 years from now, what would make our fireside chat one of the most, if not the most, memorable fireside chat you would have done up to that point? I don’t need an answer immediately, and you can also tell me right before our conversation next week, but would love to use that as a north star for our talk.
    2. If there are any, what do you not want to talk about? Or are sick of talking about?
  5. You’re running a two-sided marketplace. You want it to be THE fireside chat for both your guest AND your audience.
  6. If, for some reason, I can’t find any good stories or anecdotes that need more context, I ask the guest a third question. Do you have one or two stories that when you told them privately or publicly earned you a standing ovation? Subsequently, rather than the full story, I ask for just a small teaser phrase that would help me transition the conversation into it. And well, I like to be surprised too.
  7. If, for some reason, I can’t think of any specific/good questions, I ask the guest in the “pre-chat”:
    • What’s a question you wish I asked you that’s not in the itinerary? or,
    • What’s a question you wish you were asked, but never asked in previous interviews?
  8. Make the conversation personal and relatable. Be sure to mix in both advice and story anecdotes. Despite all my fireside chats so far circle around a highly technical subject, what provides color is how much the guest is also a human with a life outside of work. Anecdotally, the more relatable a conversation is for the audience, the more likely they are to:
    1. Internalize the advice, or at least consider it, and
    2. Reach out and connect with the guest.
  9. Depth matters more than breadth. It’s better to ask follow-up questions than to hit every question on your agenda. When sharing my questions with guests, I often tell them that “We’ll get to one, two, or some of the questions below, but I imagine we’ll run out of time before we run out of topics.” Anyone can replicate the same superficial questions as you ask. And if you only stick to the initial prompts, your interview will be like 95% of other interviews your guests would have been on. For your audience, while the strategic context is nice, the best takeaways are tactical – most of which are uncovered by follow-up questions.
  10. Know your audience. In order for the advice and anecdotes to be useful and/or entertaining to them, you have to tailor your jokes, stories, and lessons to what would resonate with them the most. You need to find language-audience fit. Equally so, I found it extremely useful to also share the rough audience demographic with the guest beforehand.
  11. Guests who bring their A-game are more important than guests who are just A-listers. While not mutually exclusive, there are too many potential guests out there that won’t take your interview seriously. Either via a lack of prep or treating it as a schedule write-off. It’ll be temporally relevant, but easily forgettable. And when that’s the case, neither the guest nor the audience takes much away from the conversation. Subsequently, it ends up being a waste of time for everything. When I started off, I only invited people that I knew reasonably well.

In closing

In all fairness, this essay could have been two separate pieces. But on a Friday morning watching the sun rise above the horizon with a cup of hot Pu’er tea next to me, it just felt right to share both my takeaways hosting conversations and the backstory that led me to be in that situation. Cheers. And I hope my takeaways supercharge you as much as they’ve supercharged me.

Photo by felipepelaquim on Unsplash

#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!

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Where Does Implicit Gender Bias In The Startup World Come From

Last Thursday, I had an extremely thought-provoking conversation with an attorney-turned-investor. Out of the incredible array of topics our open-ended exploration on the topic of diversity – geographically and demographically – led us to, there was one thing in particular that I had to double click on.

She shared, “Men typically get asked promotion questions. ‘What does your upside look like?’ Whereas women and other underrepresented founders get asked prevention questions. ‘How do you prevent your startup from going out of business?’ And promotion questions begets more promotion questions. Similarly, prevention questions leads to more prevention questions. Founders who are typically asked prevention questions raise less capital than those who are asked promotion questions.”

I found that inextricably fascinating. I’ve never thought about investing through those lens before. It makes complete sense. The more an investor asks how are you not going to fail, the more they has convinced themselves this won’t be a good investment. On the flip side, the more an investor asks how awesome will you be, the more they’ve convinced themselves that this will be an investment worth their time.

And subsequently, I ended up reexamining the way I ask questions. I’ve never tracked the way I ask questions by demographic. But I fear that I may, in the past, have done something along the same veins.

When we closed out our conversation, she left me with one name: Dana Kanze. And well, if you know me, I had to look into her.

Lack of Venture Dollars

Dana Kanze is an assistant professor of organizational behavior over at London Business School. She wrote a paper titled We Ask Men to Win and Women Not to Lose: Closing the Gender Gap in Startup Funding back in 2018 that won her the Academy of Management Journal’s Best Article of the Year award, which she inevitably did a TED talk on that I highly recommend checking out.

She cites in that research that “although women found 38% of US companies, they only get 2% of the venture funding.” While that metric is a few years old, recent trends echo the same notion. Despite the increase in conversations to include diversity at the table, in board rooms and as decision makers, Crunchbase found in a study back in August that women still only get 2.2% of venture funding, which is actually lower than any of the previous five years.

Source: Crunchbase

And despite larger round sizes, we don’t see a rise in round sizes to female-only and mixed-gender teams either.

Source: Crunchbase

Cynthia Franklin, director of entrepreneurship at Berkley’s Innovation Labs at NYU, did say, “The bets are being made, but they’re smaller.” Which accounts for the fact that 61% of total funding for female founders happens at the early stages. Frankly, it might be too early to tell. Nevertheless, Dana has a point.

Why female founders raise less capital

Originating from E. Tory Higgins‘ regulatory focus, Dana shares the bifurcation of questions that male and female founders get. Promotion and prevention questions, respectively. “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.”

After analyzing nearly 2,000 questions and answers asked at TechCrunch Disrupt to presenting founders, she found that investors often ask male founders promotion questions. And investors ask female founders prevention questions. Specifically, 67% of questions to males were promotion questions. And 66% to females were prevention ones.

Yet I found one notion Dana shared particularly fascinating. “All VCs displayed the same implicit gender bias manifested in the regulatory focus of the questions they posed to male versus female candidates.” That both female and male investors had the exact same implicit cognitive biases against females.

Promotion questions beget promotion answers, which beget more promotion questions, reinforcing favorable opinions. It becomes a virtuous feedback loop, which culminates often times in a “yes”. On the other hand, prevention questions beget prevention answers. Which leads to more prevention questions. This, subsequently, leads founders down a negative feedback loop, reinforcing loss-correlated opinions. When it came down to it, “startups who were asked predominantly promotion questions went on to raise seven times as much funding as those asked prevention questions.”

The silver lining, as Dana shares, is that if founders respond to prevention questions with promotion answers, they raise 14 times more funding than those who answer prevention with prevention. The lesson is reframe your answers positively, betting on the long term potential and vision. Or in Alex Sok‘s words, focus on a strategy to win rather than a strategy not to lose.

In closing

Investors invest in lines, not dots. And often times, VCs don’t realize they’re spending more time analyzing the y-intercept than the slope. And that mentality actualizes in the form of questions founders get.

As a founder, understand your investor intention – subconscious and conscious. Playing off of Matt Lerner‘s language/market fit, find your fundraising language/investor fit. Once you understand their intention, capture their attention. In a saturated market of information, attention is your audience’s scarcest resource. Frame the dialogue with a promotion focus to get your investors over the activation energy to book the next meeting.

As an investor, pay attention to your cognitive biases. Most of the time, and often the most detrimental, are the ones we don’t realize. If anything, this blogpost is me pinching myself to wake up.

Photo by Garrett Jackson on Unsplash

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