It’s fundraising season again. For founders. And for investors.
It may have been a product of the content I’ve been writing and the events I’ve been hosting. It could also be a product of my job title. But in the last few months, I’ve met a great deal of fund managers — from Fund I to Fund XIII. With a strong skew to the right. In other words, vastly Fund I through III.
And given the current market, there is the same pressing question from all: How should I pitch my fund?
And subsequent to that, who should I talk to? Or can you intro me to any LPs?
And in all these conversations, I’m reminded of a great piece Jason Lemkin once wrote on hiring the right VP of Marketing. I won’t go too much into depth since I’ve written about it here. But if you have a spare five minutes, I highly recommend the read. As such, the framework I share with fund managers is:
Fund I and II, it’s all about lead generation.
Fund III and IV, it’s about product marketing. The product is the fund. The product is the partners’ decision making.
Fund V and onwards, it’s all about brand marketing.
I’ll elaborate.
Now I’ll preface with most emerging funds won’t have the capacity to bring on an investor relations person, so the onus lies with the founding partners themselves.
Lead generation
Barely anyone knows you exist. You need to be out there. You’re pre-product-market fit. And you need to sell why you are the best sub-$50 million fund to return three times your LPs’ money back. Five times if you’re pre-seed or seed. LPs are looking for GP-thesis fit. But more importantly for you, this looks very much like a sales game, not a marketing game.
Generating demand where there is none is key. How do you best tell a story no one’s heard of?
You have to break an arm and a leg to close LPs outside of your initial friends and family. You have to show you care. Or as Mark Suster recently said (quoting Zig Ziglar), “People don’t care how much you know until they know how much you care.”
You’re going to events. Trade-show equivalents. You’re hosting your own. Your asking co-investors to be your LPs. You’re asking for LP intros to largely high net-worth individuals, who’ll be your beachhead “customers” before you prove the promise you’re selling capital allocators. And just as much as they’re looking for the right people to marry for the next 10 years or 20 years (latter if you’re working together for at least three funds), you need to qualify them as well. And while yes, it’s important to keep your funnel wide, you need to have a strong idea of who’s a good fit and who isn’t from the very beginning. If it helps, here are some of my favorite pre-qualifying questions.
You’ve now gotten to a stage where your strategy is known. Founders and LPs self-select themselves into investing in you or not. For instance, if you know you can win on a diversified strategy betting with portfolio sizes north of 50, all the LPs that look for concentrated portfolios or strong reserve strategies will turn the cheek.
You’ve built a strategy off of the scare tissue from Fund I. Now you’re selling that strategy. Are you fishing in ponds that other GPs are not? In other words, is it differentiated? And how?
It’s an interesting exercise but it’s usually not the first thing you think of, but the third. When you really dig into your fund’s soul. Why do founders come for you? Why will they choose you over all the other 4000 VC fund options out there? Equally as helpful to do a “Why did you choose me” survey with your founders.
The big question for LPs now is: Is this repeatable?
Why? Your initial LPs for Fund I, maybe II, are smaller checkwriters, given the size of most Fund I’s and II’s. A lot of them know, even innately, that as you scale in assets under management, you will eventually graduate from their check size. But starting from Fund III, and maybe even Fund II, you’re targeting sophisticated and larger LPs, who are looking to build that 20+ year relationship. And for them repeatability and consistency is important.
Brand marketing
When you’ve finally settled into your quartile, which usually takes at least 6-7 years of track record, you’re now focused on largely selling the returns on your previous fund. Your product works. For some funds, they diversify into other product offerings, or bring on new partners to manage new verticals and initiatives.
Just like a Super Bowl ad needs to be played at least seven times or in the marketing world the 7-11-4 strategy (you need at least seven hours of interaction, 11 touchpoints, and in four separate locations) before one remembers and hopefully buys your product, you’re trying to help LPs keep you top of mind. Again not hard and fast rules, but a useful reference point of just how much work it takes to stay top of mind.
That could mean a focus on content — a newsletter, podcast, great/frequent LP updates, social media and so on. Or great AGMs (annual general meetings). And hosting events. Or being that awesome co-investor that pops up other emerging managers’ pitch decks. Strong communication is key — either directly or indirectly — so that when you raise your next fund, your LPs are ready and have pre-allocated to re-up in your fund.
In closing
Now the purpose of all this segmentation isn’t to just be snotty about it, but that the focus for pitching and closing LPs varies per the number of your fund. Don’t try to do everything at the same time. It’s not worth it, and neither do you have the resources, time or bandwidth. Stick to one strategy and get really good at it.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Voila, the fourth installation of 99 soundbites I’ve been fortunate enough to collect over the past year. The first four of what I imagine of many more to come. Each of which fall under one of the ten categories below, along with how many pieces of advice for each category:
You can also find the first three installments of 99 pieces of advice for both founders and investors here. Totaling us to a total of 396 pieces of advice.
But without further ado…
Fundraising
1/ If you’re an early stage startup, expect fundraising to take at least 3-4 months to raise <$1M. If you’re on the fast side, it may take only 2 weeks. – Elizabeth Yin*timestamped April 2022
2/ If you’re going to raise a round over 6-12 months, it often doesn’t seem fair that your first commits have the same terms as those who commit 6 months later, since you’ve grown and most likely have more traction at the time. As such, reward your early investors with preferred terms. Say you’re raising a $1M round. Break the round up to $300K and $700K. Offer a lower cap on SAFEs for the $300K. “Tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs. And that the cap will most likely go up after that.” Why? It lets you test demand and the pricing on the cap – to see if you’re cap is too high or too low on the first tranche. – Elizabeth Yin
3/ As a startup in recessionary times, you have to grow your revenue faster than valuations are falling to make sure you raise your next round on a mark up. Inspired by David Sacks and Garry Tan. *timestamped April/May 2022
4/ There’s only going to be 1/3 the amount of capital in the markets than in 2020 and 2021. So plan accordingly. If you’re not a top 0.1% startup, plan for longer runways. Fund deployments have been 1-1.3 years over the past 1.5 years, and it’s highly likely we’re going to see funds return back to the 3-year deployment period as markets tighten. *timestamped May 2022
5/ B2B startups that have the below disqualifiers will find it hard to raise funding in a correcting venture market:
No to little growth. Good growth is at least doubling year-over-year.
Negative or low gross margins. Good margins start at 50%.
CAC payback periods are longer than one year.
Burn multiples greater than 2 (i.e. You’re burning $2 for every dollar you bring in). A good burn multiple is 1 or less. – David Sacks
6/ Beware of “dirty term sheets.” Even though you’re able to get the valuation multiple you want, read the fine print for PIK dividends, simple “blocks” on IPO/M&A, and 2-3x liquidation preferences. Inspired by Bill Gurley.
7/ “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.” – Sabeer Bhatia in Founders at Work
8/ In a bear market, public market multiples are the reference points, not outlier private market multiples. Why? Public market multiples are their exit prices – how they return the fund. It matters less so in bull markets. – David Sacks
9/ Don’t trust the “why”, trust the “no.” Investors don’t always give the most honest responses when they turn down a company.
10/ If you inflate your projections, the only investors you’ll attract are dumb investors. They’ll be with you when things are going well and make your life a living nightmare when things aren’t, will offer little to no sound advice, and may distract you from building what the market needs. By inflating your projections, you will only be optimizing for the battle, and may lose the war if you can’t meet or beat your projections.
11/ VCs will always want you to do more than you are pitching. So if you’re overpromising, they’re raising their expectations even more down the road.
12/ Five questions you should answer in a pitch deck:
If you had billboard, what 10 words describe what you do?
What insight development have you had that others have not?
How you acquire customers in a way others can’t?
Why you?
What you need to prove/disprove to raise next round? – Harry Stebbings
13/ The longer you’re on the market, the greater the differential between expectations and reality, and the harder it is over time to close your round. Debug early on in the fundraising process (or even before the fundraising process) by setting and defining expectations through:
Leveraging market comparables. You don’t have to be good at everything, but you have be really really amazing at one thing your competitors aren’t. It’s okay if they’re better than you in other parts.
14/ You should reserve 10% of your round to allocate to your most helpful existing investors. Reward investors for their help. – Zach Coelius
15/ If your next round’s investor is willing to screw over your earlier investors out of pro rata or otherwise. After they leave, the only one left to screw over is you. – Jason Calacanis
16/ “Nobody’s funding anything that needs another round after them.” – Ben Narasin quoting Scott Sandell
17/ “When a VC turns you down for market size, what they are really saying is: I don’t believe you as the founder has what it takes to move into adjacent and ancillary markets well.” – Harry Stebbings
18/ When raising from corporates, be mindful of corporate incentives, which may limit your business and exit opportunities. “I’ve often seen the structure just simply be a SAFE with no information rights. No Board seats. Check sizes that are worth < 5% ownership. No access to trade secrets.” – Elizabeth Yin
19/ LOIs mean little to many investors, unless there’s a deposit attached to it. A customer must want the product so much they’re willing to take the risk of putting money down before they get it. 1-5% deposit would be interesting, but if they pay the product in full, you would turn investor heads. – Jason Calacanis
20/ “The most popular software for writing fiction isn’t Word. It’s Excel.” – Brian Alvey
21/ “Ask [prospective investors] about a recent investment loss, where the company picked someone else. See how they describe those founders, the process, and what they learned. This tells you what that investor is like when things don’t go their way.” – Nikhil Basu Trivedi
22/ “Founders, please hang onto at least 60% of the company’s equity through your seed raise. Series A or B is the first time founder equity should dip below 50%. I’ve seen cap tables recently where investors took too much equity early on, creating financing risk down the road.” – Gale Wilkinson
23/ “One of the worst things you can say to a VC is ‘we’re not growing because we’re fundraising.’ There are no excuses in fundraising.” – Jason Lemkin. Fundraising is a full-time job, but when you’re competing in a saturated market of attention, it’s you who’s fundraising, but not growing, versus another founder who’s also fundraising and is growing.
25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):
Pre-seed: $750K-1.5M round
Valuation: $5-10M post (*She would not go over $7M)
Traction:
A working MVP
Indications of customer demand = have interviewed hundreds of potential customers or users
2-5 “Design Partners” (non-paying customers or users)
Seed: $2-5M round
Valuation: $12-25M post (*She would not go over $15M)
Traction:
$10-15K MRR, growing 10% MoM
6-12 customers who have been paying for ~6 months or more, a few that would serve as case studies and references
Hired first technical AE
Series A: $8-15M round
Valuation: “anyone’s guess”
Traction:
$1.5M in ARR is good, more like $2M
3x YoY growth minimum, but more like 3.5x • 12-20 customers, indications of ACV growth
Sales team in place to implement the repeatable sales playbook
26/ Don’t take on venture debt unless you have revenue AND an experienced CFO. – Jason Calacanis
27/ When you are choosing lead investor term sheets:
For small VC teams (team <10ppl): Make sure your sponsoring partner is your champion. Why does investing in you align with their personal thesis? Their life thesis? Which other teams do they spend time with? How much time do they spend with them? When things don’t go according to plan, how do they react? How do they best relay expectations and feedback to their portfolio founders?
For larger platform teams (team >10ppl): Ask to talk to the 3-5 best people at the firm. And when the investor asks you to define “best”, ask to talk to their team members who best represent the firm’s culture and thesis. Why? a/ This helps you best understand the firm’s culture and if there’s investor-founder fit. b/ You get to know the best people on the team. And will be easier to hit them up in the future.
28/ “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” – Abhiraj Bhal
29/ “[Venture] debt typically has a 48-54 month term, as follows: 12 months of a draw period (ballooned to 18 months over the last few years), to which you can decide to use it or not 36 months to amortize it after that 12 months. The lender at this stage is primarily underwriting to venture risk, meaning they are relying on the venture investor syndicate to continue to fund through a subsequent round of financing.” This debt is likely to be paired with language that allow the fund to default if investors say they won’t fund anymore and/or just not to fund when asked. “They typically are getting 10bps-50bps of equity ownership through warrants. Loss rates must be <3-4% for the model to work.” If there’s less than 6 months of runway or cash dips below outstanding debt, then as a founder, expect a lot of distracting calls. – Samir Kaji
30/ The best way to ask for intros to investors is not by asking for intros, but by hosting an event and having friends invite investors to the event. There’s less friction in an event invite ask than an investor intro ask. The reality is that the biggest investors are inundated with intro requests all the time, if not just by cold email too.
Cash flow levers
31/ The bigger your customers’ checks are (i.e. enterprise vs. SMB vs consumer), the longer the sales pipeline. The longer the sales pipeline, the longer you, the founder, has to stay the Head of Sales. For enterprise, the best founders stay VP of Sales until $10M ARR. For SMB, that’s about $1-2M ARR, before you hire a VP of Sales. Inspired by Jason Lemkin.
32/ “‘I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.'” The sales playbook of David Beirne of Benchmark Capital fame, cited in eBoys.
33/ “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” – Bill Gurley
34/ If you were to double or triple the price of your product, what percent of customers would churn? If the answer is anything south of 50%, why aren’t you doing it?
35/ Getting big customers and raising capital is often a chicken-and-egg game. Sometimes, you need brand name customers, before you can raise. And other times, you need capital before you can build at the scale for brand name customers. So, when I read about Vinod Khosla’s advice for Joe Kraus: “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, ‘How do we bid $3 million? We only have $1 million in the bank.’ And he said, ‘Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.'”
36/ “Your ability to raise money is your strategy. If you’re great at it, build any business with network effects. If you’re bad at fundraising, it’s strategically better to build a subscription business with no network effects.” – Elizabeth Yin
37/ Be willing to fire certain customers (when things get tough or in an economic downturn). If they aren’t critical strategic partners or are loss making, figure out how to make them profitable. If you can, renegotiate contracts, like cheaper contracts for longer durations. If not, let them go. Make it easy to offboard.
38/ An average SaaS business, that doesn’t have product-led growth, is spending about 50% of revenue on sales and marketing. Those that are in hyper growth are spending 60%. – Jason Lemkin
39/ “The only thing worse than selling nothing is selling a few. If you sell nothing, you stick a bullet in it and move on. When you sell a few, you get hope. People keep funding even though it’s really not viable.” – Frank Slootman
40/ If your customer wants to cancel their auto-renew subscription to your product, you should refund them a 100% of their cost. – Jason Lemkin
41/ “Your price isn’t too high. Your perceived value is too low.” – Codie Sanchez
42/ “15-20% of IT spend is in the cloud.” And it’s likely to go up. – Alex Kayyal
43/ If your customers are willing to pay you way ahead of when your service is executed, you have an unfair and unparalleled cashflow advantage. – Harry Stebbings
44/ If you’re in the CPG business, it’s better to negotiate down the contract. “You buy 75, and you sell 60, they’re going to go, ‘Ah, I got 15,000 in inventory, it’s not a success.’ If you give them 40, and then they have to buy another 20, and they sell 60, they go, ‘Wow, we ordered 50 [(I think he meant 20)] more than our original order.’ You’re still at 60, but one, they’re disappointed, and one, they’re not. You’re still playing some weird mind games a little bit so that they feel good about whatever number was there.” – Todd McFarlane
45/ “If you are under 100 customer/users, get 20 of them in a Whatsapp Group. You will:
Get much higher quality feedback, faster, on the current product.
They will be WAY more proactive in suggesting future product ideas and helping you shape the product roadmap.
It will create a closer relationship between you and them and they will become champions of the product and company. People like to feel they had a hand in the creation process.” – Harry Stebbings
46/ Create multiple bank accounts with different banks to keep your cash, to hedge against the risk of a bank run. The risk is very unlikely to occur, but non-zero, especially in a recessionary market. Inspired by SVB on March 10, 2023. More context here, and what happened after here. Breakdowns here, here and here.
47/ “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for “excess cash” to be invested in safe, liquid options to generate slightly more income.” – A bunch of firms
48/ “Maintain an emergency line of credit. Obtain a line of credit from one of your core banks that can fund the company for 6 months. Do not touch it unless necessary.” – A bunch of firms
49/ In case of a bank run: “1/ Freeze outgoing payments, let vendors know you need 60 days, 2/ Figure out payroll & let your investors know exactly when cash out, 3/ Attempt emergency bridge with existing investors; hopefully reasonable terms or senior debt (but given valuation reset this is a HARD discussion for many), 4/ Figure out who can take deferred salary on management team, which will extend runway, 5/ Make sure you communicate reality to team honestly so they can make similar plan for their household, 6/ Make sure you talk to HR about legal issues around payroll shortfall — which hopefully this doesn’t come to, 7/ In future, keep cash in 3 different banks.” – Jason Calacanis
50/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff
51/ General reference points for ACV and time to close are: $1K in 1 week. $10K in 1 month. $100K in 3 months. $300K in 6 months. And $1M in 12 months. – Brian Murray
52/ A B2B salesperson’s script from Seth Godin. “Look, you’ve told me you have this big problem you need to solve. You have a five million assembly line that’s letting you down, blah blah. If we can solve this problem together, are you ready to install our system? Because if it’s not real, let’s not play. Don’t waste my time, I won’t waste yours. You’re not going to buy from me because I’m going to take you to the golf course. You’re not going to buy from me because our RFP is going to come in cheaper than somebody else’s. You want my valuable time? I’m going to engage with you, and tell you the truth and you’ll tell me the truth. You’re going to draw your org chart for me. You’re going to tell me other complicated products you’ve bought and why your company bought them. And I’m going to get you promoted by teaching you how to buy the thing that’s going to save your assembly line. Let’s get real or let’s not play.” – Seth Godin
53/ “The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.” – Charles Hudson
Culture
54/ Deliver (bad) news promptly. Keep to a schedule. The longer you delay, the more you lose your team’s confidence in you. For example, if your updates come out every other Friday, and you miss a few days, your team members notice. Your team is capable of taking the tough news. This is what they signed up for. Explain a stumble before it materially impacts your bottom line – revenue. Inspired by Jason Lemkin.
56/ “It’s easier, even fun, to do something hard when you believe you’re doing something that no one else can. It’s really hard to go to work every day to build the same thing, or an even worse version, of what others are already building. As a result, there was a huge talent drain from the company.” – Packy McCormick
57/ Lead your team with authenticity and transparency. “Employees have a ridiculously high bullshit detector, more so than anyone externally, because they know you better. They know the internal brand better.” So you have to be honest with them. “Here’s what we’re going to tell you. Here’s what we won’t, and here’s why.” Set clear expectations and leave nothing to doubt. – Nairi Hourdajian
58/ When someone ask Jeff Bezos, when does an internal experiment get killed? He says, “When the last person with good judgment gives up.” – Bill Gurley citing Jeff Bezos
59/ “Getting too high on a ‘yes’ can prepare you for an even bigger fall at the next ‘no.’ Maintaining your composure in the high moments can be just as important as not getting too down in the low moments.” – Amber Illig
60/ “Most have an unlimited policy paired with a results-driven culture. This means it’s up to the employee to manage their time appropriately. For example, no one bats an eye when the top performing sales person takes a 3 week vacation. But if someone is not pulling their weight and vacationing all the time, the perception is that they’re not cut out for a startup.” – Amber Illig
61/ “Whenever we’re dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we’re not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we’re taking, but it’s not going to be what we’re currently doing.” – Tobi Lutke
62/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan
63/ “Leadership is disappointing people at a rate they can absorb.” – Claire Hughes Johnson
64/ Page 19 Thinking: If you were to crowdsource the writing of a book, someone has to start inking the 19th page. And it’s gotta be good, but you can’t make it great on the first try. So you have to ask someone else to make it better, and they have to ask another to make their edits even better. And so on. Until page 19 looks like a real page 19. “Once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.” – Seth Godin
Hiring
65/ Hiring when your valuation is insanely high is really hard. Their options could very much be valueless, since they would depend on the next valuation being even higher, which either means you grow faster than valuations fall (market falls in a bear market) or you extend your runway before you need to fundraise again.
66/ It’s easier to retain great talent in a recession, but much harder to retain them during an expansionary market. Talent in a boom market have too many options. There’s more demand than there is supply of talent in a boom market.
67/ If you’re a company with low employee churn, you can afford to wait a while longer to find someone who is 20% better in the role. – Luis von Ahn
68/ “[Fractional CMOs and CROs often] want to be strategists. Tell you where to focus, and what to do better. But the thing is, what you almost always just need is a great full-time leader to implement all the ideas.” – Jason Lemkin. The only time it works is when the fractional exec owns the KPI and the function, where they work at least 60% of the time OR they work part-time and help you hire a full-time VP.
69/ Hire your first full-time comms person after you hit product-market fit, when you are no longer finding your first customers, but looking to grow your customer base. – Nairi Hourdajian
70/ “Ask [a high-performing hire] if there’s someone senior in her career that’s been a great manager, and if so, bring them on as an equity-compensated advisor to your company. If there’s someone in industry she really admires but doesn’t yet know, reach out to them on her behalf.” Give her an advisor equity budget, so they can bring on a mentor or someone they really respect in the industry. As a founder, create a safe space for both of them. Monthly 1:1s and as-needed tactical advice, introductions, and so on. And don’t ask that mentor to give performance feedback “because if so it’s less likely they’ll have honest, open conversations.” – Hunter Walk
71/ Hire talent over experience for marketing and product. “In marketing and product I prefer people with less experience and a lot of talent so we can teach them how we do things. They don’t have to unlearn anything about how they already work. We teach them how we work. For developers it might be different because it takes a lot of time to be a really good developer, and it’s relatively easy moving from one environment to another.” – Avishai Abrahami
72/ If you’re going to use an executive search firm to hire an exec, ask the firm three questions: “1/ Walk me through your hardest search? 2/ Walk me through a failed search? 3/ Why did it fail? 4/ How do you assess whether an exec is a good fit?” You should be interviewing the firm as much as the candidate. Watch out for “a firm with a history of candidates leaving in a short timeframe. Avoid firms that recycle the same execs.” – Yin Wu
73/ Before signing with any recruiting agency, ask “What happens if the person hired is a bad fit? (Many firms will restart the search to align incentives.) Is there a time limit for the search? (Some firms cap the search at 6 months. We’ve worked with firms without caps.)” – Yin Wu
Governance
74/ “The higher the frequency and quality of a young startup’s investor update, the more likely they are to succeed in the long run.” – Niko Bonatsos
75/ Five metrics you should include in your monthly investor updates:
Monthly revenue and burn, in a chart, for the whole year
Cash in the bank, at a specific date, and runway based on that
Quarterly performance for the past 8 quarters, in a chart
Target for the quarter AND year and how you are trending toward it
76/ Another reason to send great, consistent investor updates is that when prospective investors backchannel, you want to set your earlier investors up for success on how they pitch you.
77/ If you don’t have a board yet, still have an “investor meeting.” “Create investor meetings where you invite all your investors to do an in-person + Google Hangout’ed review every 60 days. They don’t have to come. But they can.” – Jason Lemkin
78/ “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” – Bob Iger
79/ “Entrepreneurs have control when things work; VCs have control when they don’t.” – Fred Wilson
80/ If an investor really wants their money back (usually when VCs have buyer’s remorse), there are times when they force you to sell or shut down your companies. Instead, ask them, “What would it take to get you off my cap table?” – Chris Neumann
Product
81/ “The ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” – Bruce Dunlevie, cited in eBoys
82/ Once you launch, you’re going to be measured against how quickly you can ramp up to $1M ARR. One year is good. Nine months is great.
83/ The more layers of friction in the onboarding process (i.e. SSN, email address, phone number, survey questions), the better you know your user, but the higher the dropoff rate. For PayPal, for every step a user had to take to sign up, there was a dropoff rate of 30%. – Max Levchin in Founders at Work
84/ “Product-market fit can be thought of as progressively eliminating all Herbies until there are no more Herbies. Then, you’re in a mode where you can invest in growth because it’s frictionless.” – Mike Maples Jr. (In the book, The Goal, the trek is often delayed by a large kid called Herbie. As you can imagine, the group only moves as quickly as their weakest link.)
85/ “There’s a ruthlessness in the way Dylan finds sources, uses them and moves on.” – No Direction Home. Be ruthless about how knowledgeable you can be about your customers, about your problem space, and about your product. The knowledge compounds.
Competition
86/ “If you patent [software], you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.” – Max Levchin in Founders at Work
87/ If you know you’re building in a hot space, and your competitors are being bought by private equity firms, share that with your (prospective) investors. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
88/ “As a startup, you always want to compete against someone who has ‘managed dissatisfaction at the heart of their business model.” – Marc Randolph
89/ “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” – Ayrton Senna. It’s easier to overtake your competitors in tough markets than great markets.
90/ “Having a real, large competitor is better than having none at all!” – Anna Khan
Brand/Marketing/GTM
91/ If you’re a consumer product, your goal should be to become next year’s hottest Halloween costume. Your goal shouldn’t be fit into a social trend, but to define one.
92/ Don’t be married to the name of your company. 40% of NFX‘s early stage investments change their names after they invest in the seed.
93/ The viral factor doesn’t take into account the time factor of virality. In other words, how long it takes for users to bring on non-users. Might be better instead to use an exponential formula. “Think of a basic exponential equation: X to the Y power. X is the branching factor, in each cycle how many new people do you spread to. Y is the number of cycles you can execute in a given time period. The path to success is typically the combination of a high branching factor combined with a fast cycle time.” – Adam Nash
94/ In a down market, you may not need as big of a marketing budget as you thought. Your competitors are likely not spending as much, if at all, to win the same keywords as before.
Legal
95/ “Nothing is more expensive than a cheap lawyer.” – Nolan Church
The hard questions
96/ “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.” – Andy Rachleff, cited in eBoys
97/ “Inexperienced founders are usually too slow to fire bad people. Here’s a trick that may help. Have all the cofounders separately think of someone who should probably be fired, then compare notes. If they all thought of the same person…” – Paul Graham
98/ When you’re in crisis, find your OAR. Overcorrect, action, retreat. Overcorrect, do more than you think you need to. For instance, lay off more than you think you need to. Actions can’t only be with words. Words are cheap after all. And retreat, know when it’s time to take a step back. “Sometimes you just have to do your time in the barrel. When you’re in the barrel, you stay in the barrel. And then you slowly come out of it.” – Nairi Hourdajian
99/ “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.” – Tom Loverro
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, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“If you look at all big human achievements, like flying to the moon, for instance, it’s all based on large scale cooperation. How did humans get to the moon? It wasn’t Neil Armstrong flying there by himself. There were millions of people cooperating to build the spaceship, to do the math, to provide the food, to provide the special clothing, and the funding.
“The big question becomes: why are we capable of cooperating on such a large scale when chimpanzees or elephants or pigs can’t?
“It’s the ability to invent and believe fictional stories.”
For any big achievement, and I’m specifically reminded of the recent news with FTX — for FTX to get as large as it did at its peak — it was a monumental achievement. It was the work of many, rather than a single individual. It was the result of many buying into this narrative that Sam Bankman-Fried shared. That includes his team. His customers. His investors, from Sequoia to Tiger to Softbank to Coinbase. Many of whom are smart people who gave into the velocity of the market the last two years.
Source: Sequoia article on FTX While I’m not sure how I feel about founders playing games during the meeting, I can’t deny the vision isn’t compelling.
To be fair, and this is not to condone the wrongdoings of the FTX team, every founder’s job is to distort reality. To put the human race on a fast track towards a future that is non-fiction to the founder, but fiction to everyone else. A world that isn’t false, but has yet to come. As author William Gibson once said, “The future is already here — it’s just not evenly distributed.”
I also love the thesis of Alexia‘s fund, Dream Machine. We make science fiction non-fiction.
Founders pitch their answer to: What will the world look like? Investors, customers, and talent then make bets with their time and money on which future they would like to see happen and the likelihood of it happening.
FTX is no exception. The fine line is when a founder does get creative, it is imperative for them to have a moral compass, which seems like SBF didn’t have. And of the million and one things they’ve done wrong (no board, giving loans using customer money, fraud, etc. and some more that are more questionable in nature, like political donations, etc. — none of which from what little I know are things I would ever endorse), I have to say they nailed their marketing and messaging. They got a lot of people excited about it fast. It’s easier to get people excited about the future of money than the future of fintech or the future of crypto.
The past week has been an insane week for crypto, namely when FTX filed for bankruptcy. And while there are many different angles to it, I took it upon myself to revisit a podcast episode from two months back where Nathaniel Whittemore, FTX’s former Head of Marketing, shared his marketing insights. Namely, around their 2021 Super Bowl ad.
A Super Bowl ad two years since its founding date. If nothing else, that’s impressive. Moreover, they got Larry David who has been known to never appear on ads to do it for them.
But what I found to be very powerful is Nathaniel breaks down why they chose to do a Super Bowl ad in the first place:
“People always focus on how much [an ad] costs. ‘This ad costs X.’ Which in a vacuum seems so high. […] What I think that analysis doesn’t take into consideration:
“The number of people actually watching those ads. If you’re gonna get X people with an ad that costs a $100,000, but then, 50x that with an ad that costs $5 million, that’s the same ratio.
“But the more important piece is that at least in America, the Super Bowl is the literal one moment each year that people not only are not annoyed with ads, but it is an active part of the experience that they’re having and they’re excited.”
He also does caveat that it doesn’t mean a Super Bowl is good for every kind of marketing campaign. But more so for brand-building, as opposed to product marketing or lead gen.
To echo that, David Sacks wrote a great piece on the importance of having an operating philosophy which I’ve referenced on this blog before. In it, he finds it incredibly powerful for companies to aggregate product updates and marketing campaigns in four big “lightning strikes” (each quarter) rather than have tidbits of information floating around every week.
Of course, companies like Twitch, Salesforce, Apple, and Google have taken it a step further by having a large launch event once a year. As Sacks mentions, “It’s not just about the external marketing value. There’s a huge internal benefit from setting dates and deadlines in order to hit a public launch.” It drives excitement and a narrative that both customers and future customers, as well as team members can get behind. The world is waiting. Your team is shooting to meet and beat expectations. And that’s incredibly motivating.
What does this mean for the crypto narrative?
A friend who took a hit from the recent series of events asked me at dinner last night, “What does this mean for crypto?”
Of which I think Yuval does a better job explaining it than I could. In the same podcast episode, he explains, “Not everybody believes in the same god or in any god. But everybody believes in money. And if you think about it, it’s strange because no other animal even knows that money exists. If you give a pig an apple in one hand and a pile of a million dollars in the other hand, the pig would obviously choose the apple. And the chimpanzee the same. And the elephant.
“Nobody, besides us, knows something like money exists in the world. The value of money doesn’t come from the paper. Most of the money in today’s world is not even paper; it’s just electronic data moving between computers. So where’s the value from? It’s from stories we believe.
“We are at risk of the whole thing collapsing. It happens from time to time in history. Inflation to some extent is that. The value of money is not what we were told it is. And inflation can sometimes hit thousands of persons and millions of persons. Eventually, the money becomes worthless.”
I don’t personally believe crypto will become worthless at any predictable point in the future. In fact, I think it has a great future ahead. Just a little early for its time from an infrastructure perspective. But, it is a non-zero possibility. That said, the more institutions, especially larger ones like FTX, that use crypto as the currency of faith, collapses, the more the faith behind the story of crypto will waver. And with repeated bad players, it is a race between mass adoption and the rate faith deteriorates.
For as long as the exchange currency is in dollars, crypto has still yet to be widely adopted. For instance, the value of crypto is pegged as a function of the dollar. As of the day I’m writing this on November 16th, 2022, if you type in bitcoin in Google search, the first search result is that Bitcoin is worth 16,768 US Dollars. In other words, as long as crypto is measured in dollars, the story of the dollar is stronger than that of crypto.
In closing
I’m not here to share my latest scoop or an update on the current situation about FTX. Twitter is filled with these already. Plenty of smart individuals have already covered all the ground I would ever even think about covering. I don’t keep my finger on the pulse of crypto and FTX nearly as much as my friends and colleagues.
Really, the purpose of this blogpost is really my curiosity that in order for FTX to get the notoriety that it has today, the team must have done something really well. And in my eyes, it’s not the product or the business, but the narrative in which they built. So, if someone at HBS or GSB isn’t writing a case study on this, they should.
P.S. Had to pass this to two friends at 6AM this morning to see if this blogpost was even worth publishing. Bless their hearts for their support so early in the morning.
#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!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”
“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”
“I don’t think we’ll make it, David. How do we break it to our team?”
It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.
Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.
Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.
I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:
Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.
Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!
To preface, none of this is legal 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.
On fundraising…
1/ Some useful benchmarks and goals for stages of funding:
<$1M: pre-seed
Find what PMF looks like and how to measure it
$1-5M: seed
$2-4M – you found PMF already and you’re gearing up to scale
$5M – you’re ready for the A
$5-20: Series A *timestamped mid-2021, your mileage may vary in different fundraising climates
2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly. *timestamped mid-2021, your mileage may vary in different fundraising climates
3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.
4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.
5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.
6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys *Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.
7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?
Pitch deck + appendix slides
Current round investment docs
Use of funds
Current and proforma cap table
Pilot usage data, if any
References + links to everyone’s LinkedIn:
Key members of management
1-2 customers, if any
1-2 investors, if any
Financials: annual + YTD P&L + projections
Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
List of all FAQ investor questions throughout the fundraising process
Press, if any
Legal stuff: Patents, trademarks, IP assignments, articles of incorporation
8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.
9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.
10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.
11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.
12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“
13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.
Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.
It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.
14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.
15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitorslides.
16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.
17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.
18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”
19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.
20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.
21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.
22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.
23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.
24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.
25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.
26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky
27/ If you want money, ask for advice. If you want advice, ask for money.
28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.
29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.
30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.
31/ A good distribution of your company’s early angel investors include:
32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.
33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao
On managing team/culture…
34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)
35/ Please pay yourself as a founder. Some useful founder salary benchmarks:
Seed stage – lowest paid employee
Series A or when you find product-market fit (PMF) – lowest paid engineer
When you hit scale – mid-level engineer
When you’ve reached market dominance – market rate pay for CEOs
If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again
36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.
One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eaterinterview, time-stamped at the start of the pandemic.
37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.
38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libinbefore, when he said, “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.
39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.
40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.
41/ James Currier has a great list of ways to compensate your team and/or community.
Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
Cash (e.g. USD, EUR)
Equity shares (traditional)
Discounted fees
Premier placement and traffic/attention
Status symbols
Early access
Some voting and/or decision making, ability to edit/change
Premier software features
Membership to a valuable clique of other nodes
Real world perks like dinner/tickets to the ball game
Belief in the mission (right-brain, intrinsic)
Commitment to a set of human relationships (right-brain, intrinsic)
Tokens (fungible)
Non-Fungible Tokens
42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.
43/ “Outliers create bad mental models for founders.” – Founder Collective
44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.
45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.
46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.
47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.
48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.
49/ “The founder’s job is to make the receptionist rich.” – Doug Leone
50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.
52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.
53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.
54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.
55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.
56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.
57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.
58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.
59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.
On governance…
60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.
61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.
62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.
63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.
64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:
(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation) *based on what you believe their salary would be **typically 1-2 years
65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.
66/ Monthly/quarterly investor updates should include, and probably in the below order:
Your ask
Brief summary of what you do
Key metrics, cash flow, revenue
Key hires
New product features/offerings (if applicable)
67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.
69/ “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.
70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman
71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.
72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.
73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”
74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham
On building communities…
75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.
76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”
77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.
On pricing…
78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?
Customers will try to negotiate for earlier renewal, longer contract periods.
When you waive the price increases, customers feel like they’re winning.
You can upsell them more easily to more features.
79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.
80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.
On product/strategy…
81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:
Product discipline, through priorities, where company leaders have to think months in advance for, and
Expectations and motivates team members to help showcase a new product.
82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.
83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.
84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.
85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
86/ Good founders are great product builders. Great founders are great company builders.
87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.
88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani
89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.
90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.
91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”
92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.
93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.
For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.
94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.
On market insight and competitive analysis…
95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.
96/ Have a contrarian point of view. Traits of a top-tier contrarian view:
People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
It’s iterative. Be willing to change your mind when the facts change.
97/ Falling in love with the problem is more powerful than falling in love with the solution.
98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.
99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
I recently read Fable‘s Padmasree Warrior‘s breakdown of leadership lessons. Prior to Fable, she held executive positions at Motorola, Cisco, and NIO and currently serves on Microsoft and Spotify’s board. Out of all the insights she shared, I couldn’t help but reach out on one intriguing point she brought up: “Hire for expertise, not experience.”
Expertise ≠ Experience
Before reading the blogpost on her, I had never thought of expertise and experience as two separate wheelhouses of knowledge. While there is definitely some overlap, as Holly Liu, founder of Kabam, says:
Expertise and experience are similar, but not the same. It is to no surprise most people often conflate the two, myself included. Experience is a record of past events. Expertise is your ability to leverage experience to positively influence the outcome of future events.
I’m reminded of something Henry Ford once said. “If I had asked people what they wanted, they would have said faster horses.” Experience would have dictated faster horses. Expertise would have dictated why we once chose horses over other modes of transportation. And the framework to think about transportation in the next century.
Hiring for expertise
When I asked Padma, “What kinds of questions do you ask potential hires to measure on expertise rather than experience?”
She responded: “I usually as ‘if X happened what would you do?’ ‘If there is nothing here… how would you start a product?'”
I followed up with a David classic: “If I can be completely selfish one more time, and I understand if you don’t have the time, for the question, ‘if there is nothing here, how would you start a product?’ or similar ones, what differentiates between a good answer and a great answer?”
Padma added: “If someone says ‘I did this at such and such’ – wrong answer. I look for ‘I would start with … then do… then grow’.”
Everyone’s guilty of a bit of revisionist’s history when looking in hindsight. It’s in our DNA. We are the only species that create narratives from seemingly disparate data points. After talking with multiple recruiters, executives, and CEOs on the topic, I realized there is often a tendency for people connect their past achievements together and sound like they knew exactly what they were doing all along. But in foresight, that often isn’t true. There’s a lot of guesswork and uncertainty when looking through the windshield, compared to images that often seem closer in the rearview mirror.
To follow up on Padma’s thoughts, I had to ask my former professor, Janet Brady, the former Head of Marketing and Head of Human Resources for Clorox, about hiring for expertise. “I’m a big fan of situational interviewing, where I ask ‘What would you do if…?’ In the process, I am looking for (a) how would this come up, and (b) how would they approach the problem. It’s easy to make the puzzle pieces fit and make up narratives in the past, but much harder when given a situation to deal with on the spot.”
As with any matter, things are not as binary as they first seem to be. She concedes that there is validity in asking about experience as well. But the context around experience is often more insightful than the experience itself. Brady shared, “You never do something alone. If you see a turtle on top of a fence post, you don’t know how it got there, but you know it had help.” How many people were on your team? What was your role on the team? What problems did you run into? And how did you deal with those problems?
But one of her interview questions in particular stood above the crowd for me. “What did you do in this role that no one else in this role has done?” While past achievements aren’t always predictors of future progress, in this case, what you’re looking for aren’t anecdotes but general themes in life, specifically, the ability to question the status quo and act on it.
Echoing Brady’s questions on problems a hire has faced, what might be more interesting is what didn’t work out in the past. The scar tissue someone’s accumulated over the years. Marco Zappacosta of Thumbtack loves the question: “What’s your biggest professional regret?”. And he elaborates, “I’m under no illusions that I’m hiring perfect people, but I want to make sure I’m hiring people who are self-aware of being imperfect.”
Put into practice
SaaStr’s Jason Lemkin shared a great example in his blogpost. How the expertise of VPs of Marketing differ depending on what stage of a company’s maturity they earned their stripes. A corporate marketer’s experience might translate poorly to running marketing at a startup. Equally so, a seed-stage startup marketer’s job might carry much less significance in a Fortune 500 role.
Corporates focus on corporate marketing and brand marketing. A form of marketing that’s “all about protecting and reinforcing the brand once you are way past scale.” It’s less about getting your brand recognized since customers have already heard of your brand. It’s about getting potential customers over the activation energy required before making a buying decision. As Jason puts it, “the brand creates so many leads and customers all on its own.”
Startups, on the other hand, are all about demand generation. In other words, generating leads. It’s a numbers game. Spend X dollars to get Y leads, that generate five times of $X of revenue. The equivalent of an LTV-to-CAC ratio of 5x. At the same time, he notes that “brand marketing is very expensive in the early days – and frustratingly, generates zero leads.”
Someone with Z years of marketing experience might have a lot of scar tissue, but might not be able to solve the marketing problem for your startup. Demand gen folks can’t hide anywhere if they don’t get results, but corporate marketing folks can hide behind a brand. Focus on finding the expertise you need rather than the years of experience that might look sexy on a resume or on a pitch deck. As always they’re not mutually exclusive, but it’s important to know the difference.
Who knows? Maybe the next generation of lead gen is all about Twitter presence and memes, as a16z’s Andrew Chen recently tweeted.
Bottoms up SaaS founder to Enterprise sales founder:
On a bigger picture, the process of sales and marketing is a form of free education for a customer base. The better you can get your users to understand what you’re building, the more likely they will buy. Memes are just another medium of analogy and education. Better yet, of storytelling.
The better you can weave together seemingly disparate data points to create a compelling narrative without confounding extraneous variables, the greater your level of expertise. As Packy McCormick, one of my favorite writers, wrote on an a16z blogpost on expertise, “We live in a world where expertise can be justly claimed by anyone who can continue to prove it. Synthesis and storytelling are the keys to navigating that world. In a world with so much information available and fewer unquestioned experts, the ability to let large amounts of information wash over you, figure out where to dive deep, pull out the most compelling bits, and tie them all together is key.”
In closing
Hiring great talent across all levels breaks down to less of how many years of experience, but more so how you can leverage those experiences to understand and use unique and seemingly disparate data points going forward. Fall forward; don’t fall backward. An expert hire might not have all the answers to your problems, but will have built stress-tested mental models that’ll help in finding the answers for the questions you have.
Back when I was at SkyDeck, Caroline taught me that great entrepreneurs follow the “scientific method of entrepreneurship.” If I were to analogize her idea to expertise, an expert is a champion of the “scientific method of application.”
Of all the experts I’ve met – a title which is often one that society has deemed rather than being self-prescribed – they’ve almost always had an answer or multiple to a certain question. What proof would it take for you to change your mind?
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Founders often ask me what makes a VC say yes. Or what they need to do for a VC to say yes. Or what they need to do for me to say yes. TL;DR: it depends. On firm, partner, thesis, active conversations, stealth investments, next fund fundraising schedules, reserve ratios, implicit biases, and more. In sum, a million reasons. And even if I knew all the above, I still can’t guarantee a term sheet.
So I can’t say what’ll guarantee a VC yes. A term sheet. If I could, I’d be the one writing them. Nevertheless I do my best to help brilliant founders get funded. On the flip side, here’s what aren’t educated guesses, but guarantees. Or as close as one can get to a guarantee. A guaranteed no. An anti-playbook, if I might call it that. If it doesn’t help, I hope, at the very minimum, it provides you a few minutes of entertainment.
Not treating me as a human. This is less of a reason for me to get myself worked up. There are discriminatory, dismissive, bigoted people in the world. I get it. This is more of a problem for the founder when they’re looking to scale the team. Being a dick limits your ability to grow and/or empathize with the market. If you’re fine with treating me this way, then you’re definitely going to not bat an eyelid with other future hires, team members, investors, and customers. Equally true for any VCs/angels/investors out there.
Badmouthing others. This is more of a personal turnoff. We’re all intellectuals here. And it’s okay to have differing opinions of the world. But it’s not okay to talk behind others back. If you’re gonna badmouth others, I imagine the exact same for anyone else who gets on your bad side for whatever reason, including myself. Practice good social hygiene.
Complaining about your team/product. Complaining is a bit more nuanced. It’s fine from time to time, we’re human. I don’t expect you to be the perfect human, but a first meeting with me, as with any investor, is a first date. I want to hear about the bigger picture, the vision, the dream. Impress me. If you have time to complain during a 30-minute meeting, you’re probably not spending your time wisely. And if this is an intro meeting, you have yet to build up your social rapport with me to complain. Being frustrated about the market is fine. Being honest, introspective, and vulnerable is also fine. Your mileage may differ for the last part, but I love candid founders.
Lying. That goes without saying, if you’re lying about numbers or if I somehow find out that you are, then no. If you don’t know, you don’t know. If your numbers aren’t pretty, admit it. While I might not be able to help you get funded, I’ll do my best to help. If you don’t know something, admit it as well. And find out after. Going back to the earlier point, I love candid founders who have a bias to action.
Having an exit strategy slide. This is more true for larger $100M+ funds I send deals to. Having an exit makes sense for angels, and smaller funds, but larger funds need to look for fund returners and outsized winners, and an exit of XX/XXX million is not sexy at all.
Crazy, but not crazy and reasonable. This one is a new one, inspired by PG. It’s fairly rare, since I try to avoid putting myself in situations with crazy, especially cantankerous people. But it happens. If by any chance, you know your idea might err on the side of crazy, walk me through the logic of how you got there. Don’t just tell me “It makes sense to me” or “I know the industry better than you do.”
Lack of focus. It’s great if you want to do a million things, but saying you want to focus on everything means you’ll end up focusing on nothing. A lack of focus shows a lack of priorities. Focus and be able to back up why are you focusing on this at this point in time. I love Phil Libin‘s 4-year plan defined by one word for each year forward. You can find that plan here and here.
Asking for an intro without any context. “I saw you were connected with X on LinkedIn. Can you introduce us?” If that line pops up in the first 30 seconds of our first conversation, I’m running away. I need to know who you are, what you’re building, why it matters, and hell, why would this person you want to get introduced to is a good use of yours and their time. Build a relationship first. Don’t lead with the transaction. I am not an ATM machine. Neither are other people – investors or not.
Asking me to sign an NDA. Early on in my career, I admittedly signed a number of NDAs sent to me by founders. I love connecting brilliant people together, but if I have to get your permission each time I pass it to an investor or a potential advisor, it’s too much work for me. Frankly, I have other priorities. I get it; I’m a stranger. But I hope you can at least trust that I won’t run away with your idea or give it to a competitor. You have my word. If that isn’t enough for you, that’s fine. I’m just not your guy.
Asking the VC to do their work. “When we raise X dollars, we will do Y tasks.” I usually follow up on that statement with “What have you done so far to accomplish Y?” My least favorite founders are the ones who say something along the lines of, “We’ll worry about that when we get there.” Or “We were hoping our future investors will find someone for us.” We don’t expect you to know everything and everyone, nor do everything right, but we expect you to do some legwork to show you are learning. Show us that you’ve been scrappy, resourceful, and used what you had available to you.
Lack of self-awareness. “Where are you weak at?” If your answer is “Nothing” or “I’m good at everything”, that sends alarm bells to any investor. Which might also lead to a secondary question of “What do you need me for then?” A close cousin is one of my favorites: “What is your competition doing right?” If your answer is also “Nothing”, then you might need to do some market research and reconnaissance again. There’s a reason other customers are using your competitors’ and incumbents’ products. Find it out. On top of what they’re weak at. There’s a romanticized concept in Silicon Valley that every founder needs to be like Jobs with his reality distortion field. While it’s true you need to be able to help others see the future you’re seeing, you also have to deeply understand the realities of today of what’s stopping you from getting there.
Nothing’s changed since the last time we spoke. Investors invest on potential. A bet we make in a company is a bet that it has a chance to be as big as X tech giant in your space. Your ability to meet the demand in the market scales with the number of investment dollars in your company. That said, we expect movement. We expect deltas. And if your product really is inevitable in the market, you should be making progress with or without injections of capital. The latter, just at a slower pace. Venture capital is impatient capital. Also understand, 99% of businesses in the world don’t need VC dollars and operate incredibly well without venture investors.
You’re not obsessed about the product and the market. Building a scalable startup requires obsession. It requires you to lose sleep. You can’t just check out at 5 or 6pm. While I can’t measure that in the first meeting, a close proxy is how well you know the table stakes metrics of your business – net retention, CAC, LTV, growth, revenue, engagement rates – and more. In fact, obsessed founders usually tell me that they’ve already thought of and tried out the first 10 ideas I think of. Moreover they bring me back the results of their discovery. Obsession is contagious.
I have no idea what your product is or does. This is simple. If I walk out of our meeting and I still have no idea how to describe your product to others and why we need it in the world now, there’s no way I can confidently pitch your startup to the partners. Piggybacking off of the #14, if you’re obsessed about the product, you’ve told your story a million times and a million ways already. A few of which should have already resonated with select audiences. And even if it wasn’t to investors, you must’ve already told that same story to your customers. As a CEO/founder, you are the first and most important salesperson. In many ways, it means you have to push the sale. You have to get your customers to take action. I, admittedly, am a potential customer. A recipient of your sales strategy. And if I don’t get your pitch, it’s likely others might not as well. That said, for certain industries, like deep tech or biotech, I’m really, really dumb. So take my thoughts with a grain of salt.
This post was inspired by Jason Lemkin‘s blogpost, which I highly recommend checking out.
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I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?
As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?
Let’s look for a second from the investor side of the table…
Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.
On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.
Up to a $20m fund, there are are many ways to do 3x+
Up to a $60m fund, there are several ways
After $150m fund, there is probably 1 way
— Jason ✨Be Kind✨ Lemkin 🇮🇱 (@jasonlk) April 5, 2017
Why does a VC’s fund strategy matter to you as the founder?
A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.
I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.
If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.
While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:
The uncommon – Differentiators
The common – What everybody else is doing
The uncommon
Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:
Ability to build communities having built large followings
Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
Getting in’s to top executives at Fortune 500 companies
Closing government contracts
Access/domain expertise on international markets
In-house production teams
They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
Ability to get you on the front page of NY Times, WSJ, or TechCrunch
Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
Influencer network
Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
Surprisingly, not as common as I thought, VCs that pick up your call “after hours”
The common
Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:
Money, maybe follow-on investments
Access to the VC’s network (i.e. potential customers, advisors, etc.)
Access to the partner(s) experience
Intros to downstream investors
That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.
Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.
Finding investor NPS
You can find CS:H, or investor NPS, out in a couple of ways:
The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
You find out by asking portfolio founders during your diligence.
Your founder friends are highly recommending said investor to you.
Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quotedBrett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”
In closing
“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:
If you were to start a new company tomorrow, would you still want this investor on your cap table?
With three options:
No
Yes
It’s a no-brainer.
And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.
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There’s a saying in venture that: “A-players hire A-players; B-players hire C-players.” Your ability to grow a business is often closely correlated with your ability to attract and acquire talent. But what does it mean to attract and hire world-class talent? Especially for functions you, as a founder, yourself may not be an expert in.
“A-players hire A-players; B-players hire C-players.”
How does a first-time founder how to vet a seasoned sales executive? Or on the flip side, how does a non-technical founder learn to differentiate a good AI engineer from a great AI engineer?
While even the best founders, leaders, and managers make hiring mistakes, hopefully this post can act as a reference point as to what to look for. And while I have yet to master the craft, I’ll borrow 5 lessons from some of the best that has served as a guiding principle for me and for some of the founders I’ve worked with.
5 Lessons from 4 of the Greatest
Hire passion; train skill.
Desire/obsession > passion.
And, the ephemeral nature of passion.
Hire VPs who can hire.
Attract and hire intentionally.
On building trust.
On scaling yourself.
To hire your best complements, ask people in your network 2 questions.
I hear so many founders in their pitch decks say: As soon as they raise funding, [blank] will happen. [blank] could be: hiring that CTO or lead developer or an operations lead, getting to X0,000 users, or going “all in” on growth (often heard as Facebook and/or Google ads). That line by itself really doesn’t mean much. So I always follow up, with: “How do you plan to achieve [blank] milestone after you extend your runway/receive venture backing?”
Then this is when I start thinking, “Oh no!”, especially as soon as I hear, after I partner with X investor, they will help me do Y, or worse, they will do Y for me.
And I’m not alone. So, what signals does that response give investors?
Alright, Investor A, I’m planning for you to do the legwork for growing my business.
I don’t know what I’m doing, but please invest in my naivety.
I haven’t thought about that problem/milestone at all, and I’ll worry about it when I get there. So, take a big risk in me.
Why I love athletes, chefs and veterans
There is no white knight in shining armor when you’re raising a round.
This is the reason I love athletes. And for that matter, veterans and chefs, too. Each of them chose a career where they are forced to deal with adversity. Personally and collectively. To a level, most of us might call inhuman. While I’m sure I’ve missed many other industries that also sponsor such arduous growth, and yes, I know I’m generalizing here, these 3 industries seem to have a higher batting average of producing individuals who can find the internal grit to overcome almost any obstacle.
“They’ve trained themselves to be better at doing things that are hard.”
While he wasn’t necessarily talking about professional athletes, chefs, or veterans, the same is true. The people who are better than you at doing something don’t have it any easier than you do. Rather, they’ve developed a system, or mental model, that helps them conquer extremely difficult obstacles. And because it’s become muscle memory for them, it seems easier for them to accomplish these goals. At the same time, we should never discount their blood, sweat, and tears, or what some of my colleagues call scar tissue, just because we cannot see them. It’s why we in venture call startups “10-year overnight successes“.
To founders
Bringing it back full circle, a great founder (as opposed to a good or okay founder) never completely relies on an external source for the growth of their company. By the same token, a great founder also never blames the failure of their startup because of an external source. A great founder – regardless of the business’s success or failure – learns quickly to not only repeat the same mistake again, but also develop insights and skills to push their business forward. While you as the founder isn’t required to be the best in the world of a particular skill, you will need to practice and accel at it until you can find the best in the world. But to hire the best in the world, you also have to be reasonably literate in the field to differentiate the best from the second best.
The solution
Here’s what investors are looking for instead:
We’ve thought about the problem. We’ve A/B tested with these 3 strategies (and why we chose each strategy). Numbers-wise, Strategy B proves to: (a) have the most traction, and (b) is most closely aligned with our core metric – revenue.
Here are the 2-3 core milestones we plan to hit once we get this injection of capital. And we will do what it takes to get there. In order to get there, we’ve thought about hiring an expert in operational efficiency and purchasing these 5 tools to help us hit these milestones. For the former, here’s who we’ve talked to, why we think they’re a perfect fit, and what each of their responses are so far. For the latter, each tool in this short list can help us save X amount of time and Y amount of burn. Do you think we’re approaching these goals in an optimal way?
Note: The signal you’re giving here is that you and your team are results-/goals-oriented, while the process of getting to those goals are fluid and stress-tested.
In both cases, you’re showing your potential investors that you’ve done your homework already (versus a Hail Mary). But at the end of the day, you are open and willing to entertain their suggestions, which, ideally, come with years of experience in operating and/or advising other founders who have gone through a similar journey.
So, stay curious out there! Always question the seemingly unquestionable!
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