Tag: quote

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Operational Due Diligence Like You’ve Never Seen Before | Evan Finkel | Superclusters | S3E4

Evan currently serves as Head of Venture Capital Investments and Research for Integra Global Advisors, a multi-family office. Prior to Integra, Evan served as Senior Manager of Data Science for Anheuser-Busch InBev where he oversaw data science and strategy for the US marketing organization. Prior to Anheuser-Busch, Evan spent two years as a Management Consultant at Marketing Management Analytics and held a technical role at Amazon. Evan earned an MS in Computer Science with a concentration in machine learning from Georgia Tech and studied computational and applied mathematics at the City University of New York and finance and psychology at the University of Miami.

You can find Evan on his socials here:
LinkedIn: https://www.linkedin.com/in/evanfinkel/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[03:27] What are the mechanics of a great cold email?
[07:54] Evan’s background in sports marketing
[10:54] The kinds of data to ignore as an LP
[13:01] Portability and replicability of track record
[19:57] How much thesis drift is too much?
[22:37] What happens when a partner isn’t pulling their weight?
[29:35] Why does Evan have two bachelor degrees?
[34:38] Why study quantum mechanics in applied math?
[38:25] Evan’s journey to Integra
[45:21] Buy vs Build at a fund-of-funds
[47:40] Questions to ask when choosing which vendor to work with
[51:24] How Evan thinks about operational diligence
[58:30] Setting up an information policy in your firm
[1:01:39] Valuation policy at a hedge fund vs VC fund
[1:11:12] Why doesn’t Integra have strict mandates for geographies to invest in?
[1:21:20] The fallacy with LPs overweighing DPI in 2020-2021
[1:27:15] Evan’s greatest life lesson
[1:28:14] Evan’s favorite kosher restaurants in NYC
[1:32:07] “Post-credit scene”
[1:34:24] Thank you to Alchemist Accelerator for sponsoring!
[1:35:25] If you liked this episode, it would mean a lot if you left a like and shared this episode with one friend!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“It’s important to be data-informed, not data-driven.” – Evan Finkel

“Not only does [an investment] have to be the best in that geography, it actually has to be better than the incremental dollar we could put in any other geography.” – Evan Finkel

“The way we think about VC is both on an absolute and a relative basis. On an absolute basis, we have to be able to underwrite a manager to 3X net or better, or ideally 4X net or better. Because otherwise the lockup doesn’t make sense. It doesn’t make sense to lock up your money for 10, 12, or 15 years with pretty limited distributions. In order to be able to consider a VC fund for our portfolio, we have to be able to underwrite it to at least 3X, but ideally 4X or better.

“But then there’s also a relative component. We’re not looking for the best relative managers. Understanding whether this is a really good year or weak year… You might be the best manager of a given vintage, but in absolute terms, you actually might not be quite as impressive. […] It helps us contextualize the performance of a given manager.” – Evan Finkel

“DPI generated in a chaotic environment is sort of similar to TVPI generated in a chaotic environment. It’s great it happened, but let’s contextualize it properly and don’t overweight DPI when you’re evaluating managers.” – Evan Finkel

“In venture, we don’t look at IRR at all because manipulating IRR is far too easy with the timing of capital calls, credit lines, and various other levers that can be pulled by the GP.” – Evan Finkel

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
Follow Superclusters on Twitter: https://twitter.com/SuperclustersLP
Follow Superclusters on TikTok: https://www.tiktok.com/@super.clusters
Follow Superclusters on Instagram: https://instagram.com/super.clusters

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#unfiltered #90 If A Song Took a Lifetime to Play

music, song

Just the other day, I was listening to one of 99% Invisible’s episodes, interestingly titled as “As Slow As Possible,” named after the organization ASLSP, which stands for the same. My knee-jerk reaction was that the abbreviation and the first letters of each word just didn’t match up. Luckily, Roman Mars and Gabe Bullard explained. Although it still left something more to be desired.

“The title is also a reference to a line in James Joyce’s novel Finnegans Wake. The line is: ‘Soft morning, city! Lsp!’ Where lisp is just spelled L S P.”

Nevertheless, the episode itself circles around the concept of taking one song and using the entire lifespan of a pipe organ (639 years) to play that song just once. That even a single note would take two years to play. A fascinating concept! And which led me down a rabbit hole of thought experiments.

What if we took our favorite song and extrapolated that to the human lifespan? Say 90 years. What note would we be on today? Have we gotten to the chorus yet?

So for the sake of this thought experiment, for a brief second, let’s walk down the lane of music theory. Take the average pop song. The average pop song plays for about three minutes. And many at 120 beats per minute. Apparently, 120 bpm is also the golden number you want to get to if you’re working a crowd as a DJ. You never start at that speed, but you work your way up throughout the night. And if you can get people’s heart rate matching the beats per minute, you’ve hit resonance. But I digress.

So, taking round numbers, the average pop song has a total of 360 beats. Most songs are in 4/4 time. In other words, four beats per bar. An average pop song takes about 2-4 bars for the intro. 16 bars for a verse. Possibly, another 4 bars as the pre-chorus. And the first chorus doesn’t really start till bar 25. And usually lasts another 4-8 bars.

Now, if we were to extrapolate a song to the average human lifespan. 90 years. 360 beats across 90 years. Assuming it takes 24 bars to get to the chorus, the chorus doesn’t start until we’re 24 years old. And the full chorus doesn’t end until we’re 32 years old. With each note lasting a full three months. And the second chorus starts around age 48.

Then again, I remember reading somewhere that most pop songs are played in multiples of four or eight. And that most of these songs only have 80 bars. If that’s the case, the first chorus doesn’t kick in till we’re just past 28 years old and ends around 36 years old.

In either case, the first chorus happens around the time when most people would define as their prime. Young enough to take risks; old enough to be dangerous. The second chorus seems to fit as the second wind people have in their careers. Hell, HBR found, the median age of a startup founder when they start is 45. And with that reference point, they’ll be 47 or 48 when they become venture-backed.

Obviously, this is just me playing around with numbers. Correlation does not mean causation, of course. But nevertheless, the parallels… curious and uncanny.

P.S. Jaclyn Hester and my episode together on Superclusters got me thinking about a lot how much music applies to our lives and how we live and think.

Cover Photo at the top by Marius Masalar 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!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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VC Fund Secondaries Unlocked | Dave McClure | Superclusters | S3E2

dave mcclure

Dave McClure has been a Silicon Valley entrepreneur and investor for over 25 years. He has invested in hundreds of startups around the world, including 10+ IPOs and 40+ unicorns (Credit Karma, Twilio, SendGrid, Lyft, The RealReal, Talkdesk, Grab, Intercom, Canva, Udemy, Lucid, GitLab, Reddit, Stripe, Bukalapak).

Prior to launching PVC in 2019, he was the founding partner of 500 Startups, a global VC firm with $1B AUM that has invested in over 2,500 companies and 5,000 founders across 75 countries. Dave created 20 VC funds under the 500 brand and invested in 20 other VC funds around the world.

Dave began his investing career at Founders Fund where he made seed-stage investments in 40 companies, resulting in 4 unicorns and 3 IPOs. He led the Credit Karma seed round in 2009 (acq INTU, over 400X return). His $3M portfolio returned more than $200M (~65X) in under 10 years.

Before he became an investor, Dave was Director of Marketing at PayPal from 2001-2004. He was also the founder/CEO of Aslan Computing, acquired by Servinet in 1998. Dave graduated from the Johns Hopkins University (BS, Engineering / Applied Mathematics).

You can find Dave on his socials here:
Twitter: https://x.com/davemcclure
LinkedIn: https://www.linkedin.com/in/davemcclure/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[03:37] How did Narnia inspire the start of Dave’s entrepreneurship?
[08:32] On the brink of bankruptcy
[11:42] The lesson Dave took away from his first acquisition
[13:19] What did Dave do that no one else did as a marketing director?
[16:06] What do most people fail to appreciate about secondaries?
[22:31] The 3 bucket method for secondaries
[28:46] How much do fund returners matter for secondaries?
[33:01] When do LPs typically think about selling fund secondaries?
[42:04] What are two questions that Dave asks to see if a portfolio is good for a secondary?
[46:10] Why is it complicated if a GP wants to buy an LP’s stake?
[55:03] When do most funds return 1X? 2-3X?
[57:13] Underwriting VC vs PE secondaries
[1:01:49] How do institutional LPs react to VC secondaries?
[1:07:01] The founding story of Practical VC
[1:15:36] Closing Josh Kopelman in Fund I
[1:18:47] How often does the PayPal Mafia get together?
[1:23:49] What’s the most expensive lessons Dave learned over the years?
[1:27:38] Thank you to Alchemist Accelerator for sponsoring!
[1:28:29] If you enjoyed the episode, would deeply appreciate you sharing with one other friend!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Anything worth doing is worth fucking up the first time. [But] hopefully you don’t keep fucking it up.” – Dave McClure

“Anything worth doing is worth doing badly.” – G. K. Chesterton

“There’s a huge discount for illiquidity, and there’s a huge discount for a lack of buyers.” – Dave McClure

“Secondaries is a dish best served cold.” – Dave McClure

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
Follow Superclusters on Twitter: https://twitter.com/SuperclustersLP
Follow Superclusters on TikTok: https://www.tiktok.com/@super.clusters
Follow Superclusters on Instagram: https://instagram.com/super.clusters

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How Long is the VC Asset Class?

bridge, long

Axios’ Dan Primack recently wrote a great update on the shifting tides of institutional LPs allocating to venture. Smaller LPs often need liquidity, given limited capital inflows. And unfortunately, cannot afford to play the long game. Those with access to additional sources of capital, as well as aren’t constrained by mandatory capital outflows, tend to have deeper desires to continue allocating to venture.

Source: Dan Primack, Axios

In conversations with a number of LPs who write $3-10M checks, many have learned first-hand venture’s J-curve. Something these emerging LPs have underestimated in the last few years. As such, a number of foreign LPs are holding back. Moreover, there are looming concerns of currency risk. For instance, US-based LPs who have historically invested in funds domiciled outside of the US, are now accounting for currency depreciation. Ranging from 20-30%. Which means, what normally would have been a 4X net fund based in, say, Japan, is now underwritten as a 3X net. And a 10X would be an 8X.

Early liquidity is nice. But any DPI in the first few years is almost never meaningful and often gets recycled back into the fund to make new investments.

With VC being underwritten to 15-year time horizons, as a GP, you need LPs who can afford that time horizon. Yes, most funds have 10-year fund terms, with the two-year extension. But if the 2008-2012 vintages have taught us anything, it’s that GPs will ask for extensions beyond that. Simply since the best companies stay private longer. Airbnb was private for 12 years. Klaviyo, 11 years. Reddit, 19 years.

Of course, some of these companies are outliers. But the average tech company still stays private for 9-10 years. Assuming venture’s three-year deployment period, the last (hopefully great) investment out of a fund may take till Year 13 to finally achieve a large exit, not including the lock-up period too. That’s not accounting for a growing number of funds pitching four to five-year deployment periods. Excluding emerging market funds, where emerging market companies go public faster.

Moreover, companies need double the revenue they needed back in 2018 to go public. Shoutout to Tomasz Tunguz for the graphic.

Source: Tomasz Tunguz

To make things even more spicy, an interesting trend right now is where we see VC firms moving into PE, and PE moving into VC. At the same time, you have some large institutions who are now investing across multiple asset classes, including public markets. Consequentially, an interesting discussion commences. Should private investors hold public assets?

I was fortunate to be in an LP discussion group recently where we debated that exact question. The general consensus was no. VCs are paid to be private market investors, not public markets. Where their expertise does not lend itself well to watching market movements closely. The only exceptions are crossover funds who build out specific public markets teams. And so when an LP invests, they know exactly what they’re getting themselves into. The expectation is to return the capital back to the LPs right after the lock-up period.

But if the narrative ever changes, prepare for an even longer haul. Good thing, most LPs also agree that evergreen funds don’t make sense for venture either. But that’s a discussion for another day.

Photo by Sven Huls 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!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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#unfiltered #88 Koi No Yokan

love, heart

In a late night conversation with my high school friend last week, I picked up a fascinating Japanese phrase from her. Koi no yokan.

The best translation of it that I found was ‘the premonition of love.’ It serves as the antithesis to the notion of love at first sight. It’s love that takes time to grow on you. Slow, but steady. A seemingly acquired, yet inevitable sense of fate. It’s a feeling that begins when you meet someone you’ll eventually fall in love with.

It’s a remarkable concept with no direct English parallel. It sits in rarified air between words like hiraeth, hyggelig, and yūgen. All of which have inextricable meaning behind a seemingly simplistic string of letters. While I’ll leave the afore-mentioned three to your own rabbit holes, as you might imagine, I’ve been having quite a field trip across the linguistic landscape.

Koi no yokan.

It’s a concept that’s often applied to the enamor between humans. This may just be me being a sacrilegious foreigner, but I find the same linguistic beauty with passions.

In many ways, my love for the emerging GP and LP world was the same. If you told me back in college, that I’d want to spend a few decades of my life obsessed over demystifying the space, I’d have called your bluff. Might have even called you bonkers.

And while I’d been hovering like a satellite around the space for a while, it wasn’t till I started writing The Non-Obvious Emerging LP Playbook that I realized there was an inkling of a yearning there. Answers only led to more questions. Each insight I learned was always paired with another punctuated with a question mark. And it honestly was a really fun exercise. I didn’t write that blogpost for anyone else. Just myself. Like a public diary that encapsulated my intellectual expedition in the LP world. Even before I published it, even before any other feedback I got for it, it felt special. All catalyzed by an opportunity to back a first-time fund manager I’d been honored to see grow as the last check in.

At that point, I still had neither committed to the idea of really being a capital allocator nor to the promise of more of such content.

And when that blogpost finally saw daylight, and a number of readers responded in kind, a tenured investor asked if I was going to write a book. It seemed only fitting that a non-fiction 200-page book be the successor to the 12,500 word blogpost. So pen met paper.

I revisited old and forged new relationships off the momentum of the blogpost. And around 80 pages into the manuscript, I ran out of things to write. I didn’t know how to continue. It felt both lacking and comprehensive at the same time. I could add in more examples. Case studies. Or just superfluous language. The equivalent of turning “my dad” into “my wife’s father-in-law.” The latter of which I swore to myself I wouldn’t do.

So I stopped.

Put it aside. And went on with the rest of my life.

But time and time again, I’d find myself staring at the ceiling at night, journaling, or writing on my whiteboard in the shower about the afore-mentioned topics. It became borderline annoying that my mind kept circling back to it and I was doing nothing about it.

So frick that. As I once learned from Max Nussenbaum, who I got to work with sooner after, the fastest way to test out if there’s a market for your ideas AND if one’s interests are sustained across longer periods of time is to just write about it. And I did. Here, here, here, and more.

At one point, my buddy Erik asked if I was going to start a podcast. At first, I dismissed the idea. Didn’t think I had the skillset or the personality for one. But man, I lost even more sleep in the ensuing weeks after he seeded the idea in my head. And so I started a podcast. (Which holy hell, I can’t wait to show you Season 3 on July 1st)

I realized much later, probably a year after I stopped writing the book, that the reason I couldn’t write anymore, despite asking so many really smart LPs for help, wasn’t that there was nothing more to share, there was still a lot… Hell, even each family office had a strategy so unlike the next. And as the saying goes, if you know one family office, you really only know one family office. So no, it wasn’t because there was nothing else to write. In one world, I could have just written an encyclopedia of strategies. It was that there was so much that had yet to be written, ever, about allocating into emerging managers.

Venture as an asset class was not the Wild West, still an alternative and still risky, but there have been predecessors who’ve productized the practice. But allocating to Fund I’s and II’s without proof of a track record was a horizon most had yet to cross.

Hell, I wrote a LinkedIn post just yesterday on how I think about evaluating Fund I track records without relying on TVPI, DPI, and IRR. And why I think more funds of funds should exist.

An excerpt on my LinkedIn post

Simply put and in summary, there’s a complexity premium on not just venture capital, but specifically on evaluating Fund Is and IIs. And I don’t mean the big firm spinouts who have a portable track record. I mean the real folks who are truly starting to build a firm (not just a fund) for the first time.

I don’t have all the answers. Sure, as hell, I hope to have more in the near future. But I’m ridiculously excited to find answers (and more nuanced questions) — putting science to art — as an emerging LP.

If you couldn’t tell yet… I think I’m in love.

And if you’re interested, I’d love to have you join me on this ride.

Photo by Mayur Gala 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!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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The Power Law of Questions

question, mark

Recently I’ve been hearing a lot of power law this, power law that. And you guessed right, that’s VC and LP talk. Definitely not founder vocabulary. Simply, that 20% of inputs lead to 80% of outputs. For instance, 20% of investments yield 80% of the returns.

Along a similar vein… what about questions? What 20% of questions lead to 80% of answers you need to make a decision? Or help you get 80% of the way to conviction in a deal?

‘Cause really, every question after those delivers only marginal and diminishing returns. And too much so, then you end up just wasting the founder’s or GP’s time. As the late Don Valentine once said, “[VC] is all about figuring out which questions are the right questions to ask, and since we don’t have a clue what the right answer is, we’re very interested in the process by which the entrepreneur get to the conclusion that he offers.”

While I can’t speak for everyone, here are the questions that help me get to 80% conviction. For emerging GPs.

I’m going to exclude “What is your fund strategy?” Because you should have either asked this at the beginning or found out before the meeting. This question informs if you should even take the meeting in the first place. Is it a fit for what you’re looking for or not? There, as one would expect, you’d be looking into fund size, vertical, portfolio size, and stage largely. Simple, but necessary. At least to not waste anyone’s time from the get go.

Where are you at as a GP by Fund III? What does Fund I and II look like by Fund III?

Discipline. In the first 4 years of a fund, you’re evaluated on nothing else except for the discipline and the prepared mind that you have going in. All the small and early DPI and TVPI mean close to nothing. And it’s far too early for a GP to fall into their respective quartile. In other words, Fund I is selling that promise. The prepared mind. Fund II is selling Fund I’s strategy and discipline. Fund III, you’re selling the returns on Fund I.

Vision. Is this GP thinking about institutionalizing a firm versus just a fund? How are they thinking about creating processes and repeatability into their model? How do they think about succession and talent? And sometimes I go a few steps further. What does Fund V look like? And what does the steady state of your fund strategy look like?

What value do you bring to your portfolio companies?

This is going to help with reference calls and for you to fact check if an investor actually brings that kind of value to their portfolio companies. So, in effect, the question to portfolio companies would be: How has X investor helped you in your journey?

On the flip side, even during those reference calls, I like asking: Would you take their check if they doubled their ownership? And for me to figure out how high can they take their ownership in a company before the check is no longer worth it. There are some investors who are phenomenal $250K pre-seed/seed checks for 2.5-5% ownership (other times less), but not worth their value for $2-3M checks for the same stages. To me, that’s indicative of where the market thinks GP-market fit is at.

I also love the line of questioning that Eric Bahn once taught me. “How would you rate this GP on a scale of 1 to 10?” Oftentimes, founders will give them a rating of 6, 7, 8, or if you’re lucky 9. And the follow up question then becomes, “What would get this investor to a 10?” And that’s where meaty parts are.

Of course, it’s important to do this exercise a few times, especially with the top performers in their portfolio to truly have a decent benchmark. And the ones that didn’t do so well. After all, our brand is made by our winners. And our reputation is made by those that didn’t.

In the trifecta of sourcing, picking, and winning, this is how GPs win deals.

How do you resolve conflict or disagreement in the partnership?

This is really prescient in a partnership. Same as a co-foundership. If someone says, we never disagree, I’m running fast in the other direction. Everyone disagrees and has conflicts. Even twins and best friends do. If you don’t, you either have been sweeping things under the rug or one (or both or all) of you doesn’t care enough to give a shit. Because if you give a damn, you’re gonna have opinions. And not all humans have the same opinions. If everyone does, realistically, we only need one of you.

Hell, Jaclyn Freeman Hester even goes a step further and asks, How would you fire your partner?

Jaclyn on firing partners and team risk

Personally I think that last question yields interesting results and thought exercises, but lower on my totem pole (or higher if you want to be culturally accurate) of questions I need answers to in the initial meetings.

How are you finding companies? How are you building your pipeline?

This is always a question I get to, but especially valuable, when I ask it to spinouts. Building a repeatable and scalable sourcing pipeline is one of the cruxes of being a great fund manager. But in the age when a lot of LPs are shifting their focus to spinouts from top-tier funds, it’s an important reminder that (a) not all spinouts are created equal, and (b) most often, I find spinouts who rely largely on their existing “brand” and “network” without being able to quantify the pillars of it and how it’s repeatable.

For (a), a GP spinning out is evaluated differently than a partner or a junior investment member. A GP is one who manages the LP relationships, and knows intimately the value of what goes in an LPA, on top of her/his investing prowess. And the further you go down the food chain, the less visibility one gets of the end to end process. In many ways, the associates and analysts spinning out need the most help, but are also most willing to hustle.

Which brings me to (b). Most spinouts rely on the infrastructure and brand of their previous firm, and once they’ve left, they lose that brand within a year’s time. Meaning if they don’t find a way or have an existing way to continue to build deal flow, oftentimes, they’ll be left with the leftovers on the venture table. This question, for me, gives me a sense of whether an investor is a lean-in investor or a lean-back investor. The devil’s in the details.

What are the top 3 reasons I shouldn’t invest?

This is a test to see how much self-awareness a founder/GP has. The most dangerous answer is saying “There are no reasons not to invest.” There are always reasons not to. The question is, are you aware of them? And can you prioritize which risks to de-risk first?

In many ways, I think pitching a Fund I as illustrating the minimum viable assumption you need to get to the minimum viable product. And Fund II is getting to the minimum lovable strategy (by founders and other investors in the ecosystem). And with anything that is minimally viable, there are a bunch of holes in it.

Another way to say the above is also, “If halfway through the fund we realize the fund isn’t working, what is the most likely reason why?”

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Angels who are Useless to Founders

angel. statue, broken

This may very much be the hill I end up dying on as an angel. I also realize that the title of the blogpost itself is ionically charged. But it’s something I feel strongly about.

Two caveats.

One, this is going to be one of my more strongly worded blogposts. I don’t write many of these. It doesn’t give me joy to “call” people out. If you’re a reader to this blog for the more mild-mannered Cup of Zhou, I’ll see you next week. 🙂

Let’s just say I’m writing this out of frustration after chatting with a founder who hit all the below red flags. But more importantly, frustration at myself for not recognizing the below a mile away when I took the meeting. And the opening 2 questions for that meeting was can you share what you do? and what do you invest in? Both of which are quite evident on my LinkedIn. Moreover the cold outreach came via LinkedIn.

Two, I’m a small check angel. And this may not apply if you write north of a $100K angel check or a $250K LP check. You’re likely also excluded from this hill I’ll die on if you don’t have the network that would alert you on deals on a regular basis.

That said, if you’re a small check investor like me AND you have a decent network, any founder who doesn’t know exactly why they want you on the cap table outside of money is probably not a founder worth your time.

Why?

  1. To them, you’re just another check, and not THE check. Whatever wrapper they put on things, you’re dumb money to them. Now, it’s not about feeling self-important. In fact, don’t delude yourself on your importance. It’s about being valuable, outside of the money. The early stages of company-building are so crucial that you really need all hands rowing in the same direction. Any hands that are idle, or worse, rowing in the opposite direction, is a waste of time, attention and resources.
  2. They don’t know what they want. They don’t know the critical needs of the business. Is it talent? Is it getting to $1M ARR and developing a sales strategy? Is it scaling past product-market fit? Is it finding product-market fit? And because they don’t, they don’t know what they need help in. And any non-surgical answer, including terms relative to broad strokes, is a dud.
  3. And in many ways, because of the above reasons, you’re wasting your dollar. The best founders are surgical and intentional to a fault. They’re also some of the best salespeople in the world. And they will make you feel like you’re the most important person in the world (whether actually true or not, but sometimes, even that doesn’t really matter). Because if they can win you over, they have a great batting average of winning key customers over.

FYI, also probably not worth your time if they:

  1. Say you specialize in XX industry is not enough. Anyone can guess that at a glance at your LinkedIn. Even more so, if you’ve made it explicit.
  2. Spend more time pitching to you than asking you questions to understand your values and what you’re interested in. They’re more interested in what comes out of their mouth than by how much reaches your ears.
  3. Say you’re valuable for intros you can make. LinkedIn doesn’t tell people the strength of your first degree connections. For better or worse, I’m connected with a lot of people. Product of me being a bit too liberal with inbound connections early on. But it doesn’t mean I know them all equally as well. In fact, intros for a founder as an investor are table stakes. You must either be best friends with key decision makers/customers or downstream investors, or it’s really not as useful. And that only comes out if the founder spends time getting to know you, as listed in the second point above.

Ever since I added “Angel investor” to my LinkedIn profile, I’ve received a lot of noise. Quantity of deal flow went up by maybe 10-20 per week (and some weeks where I post something or get tagged in something that gets 5K+ impressions, that inbound deal flow from LinkedIn doubles if not more). But I’d say 95% of that are deals I would never invest in. Either since it’s out of scope, stage, check size, or just type of founder. Which at some point, when I remember to and I’m not typing this on my little 6×3 inch screen, I’ll have to redact that title, “Angel investor.”

Deal flow has become easy. But easy doesn’t mean good. The truth is, I’d rather mean a lot to a few than a little to a lot people.

And by the way, the same is true, if you’re a small check LP.

At the end of the day, as a founder (or emerging GP), it’s about finding your early believers. Those who choose to stand by you not just because everything’s going up and to the right. But those who will stand by you when shit hits the fan.

I was watching the latest episode of Hot Ones (yes, this is my guilty pleasure), where Sean is interviewing Will Smith, and Will shares that there are three kinds of friends in your life that you call at 3AM.

  1. One kind of friend looks at the phone and pretends to be asleep.
  2. A second kind of friend that picks up the phone that makes you feel bad for being in trouble.
  3. And the third kind is putting their pants on while they’re answering the phone.

You want the third kind.

It also harkens back to the same conversation Aakar, Ho, Vignesh, and I had two weeks ago. Believing comes from faith. And faith comes not just from where you are today, but where you will go. And that is established on Day 1.

To get early believers, you have to show you care. You have to give (even if it means your time, attention, and/or enthusiasm/interest), before you get. That is as true for investors as it is for customers.

Photo by Jon Tyson 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!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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DGQ 21: What’s going to get you excited to be at this business in 5 years?

watch, time

This one was inspired by Harry Stebbings’ episode with Dan Siroker that I tuned into earlier this week. In it, Dan describes his most memorable VC meeting, which happened to be with Peter Fenton at Benchmark. Where Peter asks Dan, “Dan, what’s gonna get you excited to be at this business in five years?”

In sum, what are your future motivations going to look like? Nine out of ten times, it’s likely not going to be exactly the same as the one today. And given that it will look differently, can you still stay true to the North Star of this business as you do today? What’s gonna change? What’s gonna stay the same?

For the most part, the people and the problem space are likely to stay the same. The product may look quite different though. And it’s highly likely that in five years, you would have found product-market fit. So, that’s Act I. Is it the advent of the next chapter of what your company could look like that gets you excited? Hell it might be. You can then tackle a bigger problem. A larger market. An adjacent market. Or what Bangaly Kaba calls the adjacent users. For some founders, it’s the market they always wanted to tackle, but couldn’t when they realized their beachhead market must be something else.

While I can’t speak for everyone, here are some of the answers I’ve personally come to like over the years. From either founders or fund managers:

  • There is no other industry that offers the same velocity of learning that this one provides.
  • I want my company’s legacy to outlive my own. And I want to empower the next generation of builders with the resources and the power to solve the greatest needs of our generation.
  • I want to go home and tell my my wife/husband/kids that I lived my fullest life today. And this is what gives me endless joy.
  • Act I was solving a problem I faced. Act II is solving a problem others face in our space.
  • Getting on the phone with a customer and hearing how much our product changed their lives makes me really happy.
  • If I’m not regularly putting the firm’s reputation on the line, we’re not trying hard enough. And I live for that challenge.
  • I want to build a world where people don’t settle for “It is what it is.”
  • No one else is solving the problem I want to solve in the way that I believe it should be solved.
  • I want to continue to be a superhero, a role model, for my daughter/son.

In many ways, it’s quite similar to the question I ask first-time GPs or aspiring GPs about their motivation.

Things in venture exist on long time horizons. For founders, it’s at least 7-9 years before an exit. For fund managers, it’s 10-15 years per fund. And that’s just a single fund. Anything more is longer. So in order to compete against the very best, you need to have long time horizons. You must have the resolve to stay the course. As Kevin Kelly says, “The main thing is to keep the main thing the main thing.”

Along the same vein, there’s also a Jeff Bezos quote I really like: “If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people… Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

Photo by Luke Chesser 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.

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

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Telltale Signs of When Risk is High

jenga, risky

At the end of last week, an LP told me something quite provocative. That right now in 2024, we’re in a low-risk environment.

And in all fairness, I thought he was completely bonkers. Fear is high. Investments have slowed their pace, especially in the private markets. Markets have really yet to recover. Some believe we’ve hit the bottom and will bounce around the bottom a few times. Others think we’ve yet to see the worst of it. Hell, just yesterday, Eric Bahn tweeted the below:

Wars are raging across the world. Currency is fluctuating on a global scale. Hell, even for the average person, prices are going up at a rate unfamiliar to most people’s memory.

But his next line really made me pause. “You’re right. There’s geopolitical risk, currency risk, market risk, and valuation/pricing risk. And we can identify every single one of them. In fact, the actual risk of investing today is really low, but the perceived risk is really high. Risk is highest when you can’t tell what the risk is. That was 2020 and 2021, when you couldn’t put a finger on what kinds of risk were out there.”

And that really stuck with me. To underscore again, risk is highest when you can’t tell what the risk is.

And so paved way for this blogpost. Albeit, that last line was the punchline.

He later told me that the concept wasn’t original, but that its origin traces its way back to Ken Moelis. Regardless of the attribution, it’s worth doing a double take on.

There’s that famous Peter Drucker line, “You can’t manage what you don’t measure.” And in many ways, it is just as true for risk as it is for tasks and KPIs and OKRs.

The family office for a well-known luxury brand once told me that they like to pay the complexity premium on esoteric alternatives. To them, venture is one of those esoteric alternatives. In addition, they’re also happy to overpay during bull markets. Access to a volatile and nascent asset class, to them, deserves a premium.

But taking a step back, there may be more wisdom to it than I initially thought. In bear markets, when the risk is real and discrete, there is no complexity premium to pay. After all, you can begin to manage what you do measure. On the flip side, in a bull market, where no one really knows who will win or what the macro risks are, a premium can be and often is paid as a bet on a company’s future and insurance against a margin of error that is hard to define.

Of course, one can say that the premium is often hype-driven instead of risk-driven. But really, hype is just long-term risk donned with a new set of clothes. A short-term luxury with a buy-now-pay-later tag that comes in quarterly installments of belt-tightening and regret.

While I personally have always believed that as an investor it’s better to be disciplined and to “dollar cost average” across vintages vis a vis time diversification, there are several great investors who believe price is a trap. At the top of my head, Peter Fenton and Keith Rabois. The latter shared his thoughts earlier this year on why. At least for seed and Series A. That in summary, there is no limit on how much you pay for a great company at the seed and Series A (likely the pre-seed as well) that won’t return you multiple-fold back. And that debates on price really are leading indicators on conviction or lack thereof.

The last part of which I agree to an extent.

All that to say, I think a useful exercise to go through whenever making a major (investment) decision is to take out a notepad and write down all the risks you can think of. If you can think of it, you can probably find a way to hedge against it. On the flip side, if you’re about to make a decision and you can’t think of any risks, that’s probably the biggest risk you’ll take.

As my mom told me since I was a kid, “There’s no such thing as a free lunch.”

But if you do come up with a good list, and the world around you is still scared, and you think there might be something special in the opportunity in front of you, sometimes it pays to be bullish when others are bearish.

Photo by Naveen Kumar 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!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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A Jerk’s Guide to Being Kind

dog, bully, fight

First off, my lizard brain that optimizes for immediate gratification thought “A Jerk’s Guide to Being Kind” would be a fun title. Clickbait-y (kinda). Great for SEO. So I used that as my prompt for this public journal entry. 🙂

So, if you didn’t come for a public apology and how I say no, I’ll see you in next week’s blogpost.

Secondly, I was reading Chris Neumann’s blogpost this week, aptly named “The Beginner VC’s Guide to Not Being a Jerk.” And realized, holy frick, I’m a jerk. In it, he describes five things that VCs do that come off as jerkish.

  1. Don’t Use Possessive Adjectives
  2. Don’t Multitask When a Founder is Pitching
  3. Don’t Badmouth Founders
  4. Don’t Mansplain
  5. Don’t Ghost Founders

And of the five above, I know I’m an offender of three of the above. Using possessive adjectives. Multitasking. Ghosting. Probably in that order from most frequent to least frequent. (Sorry, Chris. Sorry to founders I’ve done this to.) The first two I don’t do intentionally, nor do I do the either of them often.

Not sure if it makes too much of a difference, but rather than say “my company” or “our companies,” I do say “our portfolio companies.” Just with one extra word in there. Occasionally, will let it slip when I’m trying to shorten the sentence I’m saying.

I know I’m more prone to multi-task when I’m not the only investor in the room, and definitely when I’m not the primary investor. Again, don’t do it often, but it happens. And I never do so when I’m the only other person in that conversation. 99% of the time I do let the founders and GPs I talk to know that I’m just taking notes of our conversation. Personally don’t use the AI notetakers, but that’s a discussion for another day.

And ghosting. My goal is to get to inbox zero every day. And I really do my best not to ghost. But three things will always happen:

  1. Some email or text always ends up slipping through my inbox. Either it goes in spam, or during certain days, I’m bombarded with hundreds of emails and it slips through the cracks. And I do give every founder and GP who pitch me the right to re-surface past emails if it does slip through.
  2. If the email or message seems like it came out of an automation or mail merge AND I’m not interested, I do let it drop. I read EVERY email for sure. But if that email looks like the same one that you send to every investor, those have been going straight into the archives more and more. That also means that some emails just read like it’s an automated email even if it doesn’t, and it slips through.
  3. There’s a shortlist of people who have abused my old personal policy of responding to every email I get. And so for those people, I’m not sorry if I do ghost you. That said, it’s a pretty short list of people (probably 30-40 people as of now).

And lastly, well, I’ve made founders pitching me cry. Not something to brag about. But in sharing what I thought was honest feedback, I made tears flow.

So, in summary, I’m probably a jerk.

In my mind, a jerk is someone who prioritizes their own beliefs and priorities to the point that they either intentionally ignore or severely de-prioritize others’. Although I try my best not to ignore what other might want or need, but I do often prioritize my own. So to add on to all the above, I’m sharing some situations where my jerkiness comes out and what I say in those moments.

When having tough conversations

I actually learned this while listening to Lenny’s podcast with Matt Mochary. When I need to let someone go. When I need to call a friend out on their bad behavior. Or when my partner and I get into a fight. “Preface hard conversations with: This is going to be a difficult conversation. Are you ready?”

In addition, I also preface with how long I think the discussion will take. “May I have thirty minutes of your undivided attention?” And what the topic will be on. No point in blindsiding the other person.

It helps set the stage. And if the other person needs more time, they have the option to back out. Moreover, all tough conversations are 1:1 conversations. At least for me, even if it relates to many, I start notifying them all on a 1:1 basis.

When trying to leave a conversation at an event

This one also isn’t original. I learnt from a friend of mine who is far more eloquent than I am. Not all conversations at events are created equal. And sometimes, at an event, especially a networking event, my goal is to say hi to the event host or to talk to someone else on the floor. And in between, I may find myself in another serendipitous. Case in point, yesterday, I ended up meeting a founder who sold his last company for $500M exit to a large Fortune 50 company in the parking lot and who was figuring out his next thing. Serendipitous. And super fun, but I was going to be royally late for another event if I stayed chatting in the parking lot.

So, when I need to leave a conversation, instead of excusing myself to go to the bathroom or get more food, I’ve learned to say, “I’d love to ask you one last thing that I’d beat myself up tonight if I didn’t ask before I need to go say hi to XXX.”

One, it timeboxes the next few minutes of the conversation. Two, I’m still interested in the individual and I want them to get the last word before I head out.

For 1:1 conversations

I usually let people know at the very beginning of the conversation that I have a “hard stop” at a specific time. Which 90% of the time is true. Usually another meeting. Or I have just way too much work on my plate that I need to get to.

When turning down a meeting (for now)

I wish I had more time in a day to talk to awesome people. I also wish I had more energy in a day to talk to awesome people. But unfortunately, I only have 24 hours in a day. And well, I’m an introvert. As in, I enjoy writing this blogpost you’re reading right now since 5AM in the morning than telling someone in a live conversation what I will end up writing here.

As such, if I’m interested in meeting at some point, I usually say something to the tune of: “I would love to meet, but if I do so within the next XXX weeks / months, I would have failed in my promise to the people I care about. So if you’ll allow me to be a good friend / family member / supporter of my existing projects and investments, could we revisit this in YYY weeks / months?”

Other times to save everyone’s time, since I won’t find my interest levels gravitating towards said topic, I let people know it just isn’t of interest to me in the foreseeable future, and that their luck may be better elsewhere.

When turning down an investment opportunity

This is actually something that was inspired by one of Jason Calacanis’ podcast episodes. And while there are many things I may not agree with him on, I really like the phrasing he uses to turn down founders who push back against his investment decision. And I’ve added some lines that best fit the way I talk. Which I also included this in my 99 series for investors.

“I always have to accept the possibility that I’m making a mistake. The venture business keeps me humble, but these are the benchmarks that the team and I all believe in.”

In closing

Sometimes I think it’s inevitable to appear as a jerk to some people out there. While one can try to reduce the splash damage, the truth is sometimes what you have to say may not be what the other person wants to hear or see. But as long as you hold yourself to a high degree of integrity and do so in as kind of a way as you can, I think that’s all that really matters.

Often times, I do believe it’s more important to be kind than nice. I hope the above helps.

Photo by David Taffet 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!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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