You are not all top quartile. Only 25% of you are.
You are not all top decile. Only 10% of you are.
I refuse to believe that I’m somehow seeing only the best in market. I’m not famous or lucky enough to have that fortune. Even the best known LPs I know are not so.
If your marks include companies held at last round valuation (LRV) for longer than two years, please consider proactive re-marks. This includes your angel portfolio.
SAFE rounds are not mark-ups. Do not conflate real marks with hypothetical marks.
If the founder doesn’t know who you are AND if you don’t know the company’s updates in the last two quarters, you don’t know the founder. Do not pretend you do. Your investment is not accretive to your future network. I dare say if I went to those founders right now, and asked them who their top five favorite investors are, you won’t come up. You’re forgettable. And that’s a cardinal sin of firm-building.
Let me caveat that firm-building means you plan to grow the firm. That where you are today is not where you want to stay forever as a GP. This matters far less if this is a one-and-done fund. That is okay. You don’t have to love venture forever. You don’t have to pretend you do.
Do not believe you are that special if you have a multi-stage GP as an LP. Many of the notable multi-stage GPs have invested in many. Some have invested in multiple dozens. Others hundreds. A handful we see in almost every deck. It is their job to see everything Or at least attempt to. The cardinal sin for a multi-stage GP is to not see the deal, worse than not picking or winning it.
Assume all your LPs will be passive LPs. I don’t care about their profile, how referenceable they are, how much they love you, how much they want to help. Give it a few months, a year at best, they will become passive. Human interest is fleeting. Especially since venture is the smallest bucket in our allocation (excluding funds-of-funds). And yes, they have day jobs. There are exceptions. For instance, someone who wants to start their own VC fund or someone who wants to be a VC themselves. That is not everyone.
When modeling, it is bold of you to assume that more than 10% of your portfolio will be outliers. It is bold of you to assume that more than 5% of your portfolio will be outliers. We are in a power law industry.
You will get diluted. More than you think. With how much longer companies are staying private, and how much capital is available in the later growth stages, you will get diluted. 80% is safe to assume if you have no reserves. Down to 65% depending on how much you have. There are very, very few cases you only have 50% dilution. Yet I see many GPs model their portfolio that way.
Pro rata is a legal right no successful capital will grant without a fight. If you get it without a fight down the road on a great company, ask yourself why you’re so lucky. And never forget to ask yourself that question.
In a market of exceptions, you are all more normal than you think. It sucks. In any other industry, most of you will have fairly little competition for greatness, but you chose one of the few industries where your competition is all exceptions.
How you react to a ‘no’ from an LP is a sobering fact and a great telltale sign of the strength of your relationships. I love chatting with other LPs who’ve passed on you. Not because I need to hear their why—most of our interests and mandates are different, but because I almost always ask how you react to their ‘no.’ And I am not alone here. Usually, LPs volunteer that information up quite readily. Of note, different LPs say ‘no’ differently. Most don’t. A fact I am aware of.
Many of us who do this as our primary job love you. We love venture. We love the romanticism that comes with this space. Do not play the hopeless romantic back. We need the truth.
There’s a great line that Elizabeth Gilbert credits her wife Rayya Elias. “The truth has legs. It always stands. When everything else in the room has blown up or dissolved away, the only thing left standing will always be the truth. Since that’s where you’re gonna end up anyway, you might as well just start there.”
The best time to share the truth is in person. And immediately. The second best is a 1:1 call. If it’s not urgent, save it for the AGM. If it is, call us.
We should not learn about you or your portfolio for the first time via the news. If we are, you’ve lost our trust. Shit happens. We get it. How you respond and communicate shit is what makes or breaks a relationship.
Many of my colleagues try to be helpful even if they can’t invest. Understand because they’re human they can’t be so for everyone. So when they are, don’t take it for granted.
If you conflate any of the above, you’re either lying to yourself or you’re lying to us. The former means you’re never going to make it in this industry. The latter means we’re just not going to be good partners for you.
This is not a Bible. Do not swear by it. Do not pray to it by the bedside every night.
This is just a morning wake-up call. Some of you have already woken up. Many of you may not have.
Photo by Álvaro Serrano on Unsplash
