In an industry that is heavily apprenticeship-driven, the more tactical advice one gets, the faster they grow. Historically, that meant a senior partner taking you under their wing. Or maybe 2-3. While I’ve been lucky to work and learn alongside some of the world’s most exceptional minds in the funding landscape, I’ve always found it helpful to have multiple teachers. Some in the form of books. Others in the form of shorter form content. Tweets. Social posts. Podcasts. And of course, from the insightful conversations that I have weekly. At the same time, in hopes of supporting the growth of others in this industry (such a small world, but it just isn’t helpful enough), this blog has been and will continue to be my vehicle for stewarding information and insights from the best.
Just like in both of my initial pieces of 99 pieces of advice for investors and founders I wrote in April 2022, this will be a continuation and an evolution of the last. While this will cover more of the same topics as last time, like startup investing, pitching to LPs, and fund strategy, I’m personally really excited about the some new categories, like succession planning, tax, and how to think about exiting positions.
And while I do write long form posts most of the time, and have been guilty of well… longerrrrrr form essays (and maybe one day with even more r’s), like this or this… I digress. While I do enjoy long form expositions, some things are best shared without superfluousness.
Most of the advice below captures the essence of a TikTok or Instagram Reel or a YouTube short. Choose your fancy. Many of which answers the age-old podcast question: “If you were to share one piece of advice with your [insert age]-year old self, what would it be?” Or “What advice would you give someone starting their first fund today?“
And now with “new and improved UI” (don’t get too excited, just number count of soundbites in each category), each fall in one of ten categories:
1/ You can’t be in every good deal, but every deal you’re in better be good.
2/ “You’re not defined by your worst investment. All angels will have failures in their portfolio. It’s part of the process.” – Brian Rumao
3/ “The weird thing is when late stage went from the hardest part of venture to the easiest. And that should have been the flag to everybody.” – Jason Lemkin*timestamped May 2022
4/ “The older you get, the younger your mentors should be.” – Samir Kaji
5/ “Your brand is what people say about you when you’re not in the room. It’s their first reaction when they see an email from you in their inbox. You build that brand — or not — with every interaction.” – Chris Fralic
6/ “Never let a good crisis go to waste.” – Winston Churchill
7/ When there’s risk involved, don’t let the outcome determine the quality of your decision. – Andy Rachleff
Investing — Deal flow, theses, diligence
8/ When assessing startups against their incumbents, consider their incumbents’ ability to hire top talent. For instance, if the incumbents are banks that are known for slower logistical and bureaucratic procedures, it’s easy to hire the best talent out there. On the other hand, if the incumbents are Coinbase, that’s still a fairly young, sexy company that’s innovating quickly, hiring top (technical) talent is more challenging. Shared by a former executive and founder with 2 exits, turned fund manager with 2 funds.
9/ If you’re not getting a call from a founder when they’re in trouble, you’re probably not getting a call from a founder when they’re raising their next big round. – Zach Coelius
10/ Pick great market inflection points to bet on. “The founder is the surfer. The product is the surfboard. The market is the wave. The wave matters most.” If you bet on a good surfer on a bad wave, they’re not going to get you the returns you want. Some Sequoia partner.
11/ Ask for investor updates (before investing). Before you invest, ask for the most recent investor updates. Helps you understand how founders think and communicate. – Brian Rumao
12/ Align with the founders, but also employees on valuations and dilution. – Nikhil Basu Trivedi
13/ The earlier you invest and the more you care about ownership, the more active role you’re expected to take in your portfolio company. You can’t expect to take large ownerships, and not actively help anymore. If you want to be a hands-off investor, you don’t have a right to fight for ownership. In a bull market, founders get picky about who’s on their cap table (as they should be). Focus on your check size to helpfulness (CS:H) ratio. Inspired by Jason Lemkin.
14/ “We have no fear. If we could find God’s phone number, we’d call him.” – David Beirne of Benchmark Capital fame, cited in eBoys. You are never too good to cold-call.
15/ Create a list of your favorite builders (i.e. engineers, community managers, executives, etc.). Then scrape Delaware incorporation docs regularly to see if any on the former list pop up in the search. If so, reach out to them early.
16/ Ask the founders to see different versions of the pitch deck. While we always say, “investors invest in lines, not dots”, oftentimes it’s hard to measure the slope (rather than y-intercept) when you’re meeting only with a founder at the beginning of their fundraise and not sooner. But one way to see is watch how much the pitch decks changed over time (and how quickly the founders incorporated feedback).
17/ Invest in companies that will be timeless. Where there will still be customers in a recession.
18/ If the competitors of the startup are being bought by private equity firms, then it may be a lucrative space to invest into. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks
19/ There is a superpower to be speaking the same native language as the founders you back (and for them to their customers). Try to understand them for their position of strength.
20/ “The market you’re exiting in is not the one you’re funding now.” – Ben Narasin
21/ “There’s another phenomenon that happens in a time like this: Google’s not hiring. Facebook’s not hiring. People are clamping down. Guess what happens to their most advanced projects? They go. And guess who are the best people in any large company? The best people are working on the most advanced projects. They are the ones who want to do visionary things. They’re the fodder entrepreneur for venture capitalists. So I think many more of the best people — not because they’re not getting paid huge raises in compensation — but because they’re working on less interesting projects — will leave to follow their vision.” – Vinod Khosla (timestamped Oct 28, 2022)
23/ “Funny people are really underrated. […] Charismatic leaders are pretty funny. Humor is a really important emotion for two reasons. One is if you can evoke it a lot and be funny, you can create a sense of bonding. Generally speaking, in a remote world, there is a shortage of emotions you feel. An exchange between us now as we stare at each other in our computer monitors is maybe 1/100th of what it would have been in the real world. When you think about it, why do movies succeed? Movies substitute the real world interaction with synthetic emotion. So… horror, humor, action, drama. So you want leaders who can do the same over Zoom. That’s why Peloton instructors have all the jokes that they’re saying. It’s same exact effect.
“But there is a second reason to why humor matters, which is if you were to imagine a Maslow’s Hierarchy of Needs, I at least find with myself, I’m not able to think of a joke if basic stuff isn’t right. […] You do have to be careful of the ‘court jester’ type. These are people who are so insecure that they’ll do anything to get a [cheap] laugh.” – Daniel Gross. For example, cursing or vulgar jokes or making fun of others are examples of cheap laughter.
24/ For follow-on checks, Founders Fund and Saastr invest 10% of the fund in each of their “winners”. – Jason Lemkin
25/ “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
26/ “[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
Value add
27/ Everyone says they’re a value add investor or founder friendly. And every founder goes through these 10-15 moments in their founder journey from which they lose sleep over. How many of your portfolio founders call you first if shit hits the fan? Those will be who you’re remembered by. No other portfolio founders will remember you.
28/ The network you bring is table stakes. That will neither help you win deals or raise LP capital when it really matters.
29/ “Dirty secret of VC platform teams: they are more about scaling the GP than the founder.” – Sarah Tavel
30/ Are you uniquely positioned to get allocation on the cap table because you can be a value add to these companies? – Vijen Patel
31/ Sometimes the most helpful thing you can do is to say no. When founders ask for introductions, and you don’t think they’re a good fit for your investor network, “It’ll be tough for you to fundraise right now. And if you jump in a conversation now with these other investors, it’ll hurt your ability to fundraise when you finally iron out those 1-2 key metrics and get to that inflection point.”
32/ Before the term sheet is signed, sit down with them and say this. “‘Listen. The chances this company gets to the finish line – the finish line being this fantastic exit – we don’t know what they are. But what I do know is that there is a chance, a high probability, that the company will fail. And I want you to think about this as an opportunity cost. I want you to think about every day you walk in the door to this company or turn on this Zoom as an opportunity cost. If it is not working, I want you to tell me, ‘It’s not working.’ And let’s have just a dispassionate conversation about what that means, so that we don’t waste any more time trying to make it work. And I promise you I will do the same.’
“And if you can set those guidelines from the beginning, you can move onto something that might have better timing. The founder can. And I can. Be aware of what failure looks like.” – Maha Ibrahim
Pitching to LPs
33/ Don’t promise your LPs guaranteed co-investing rights to go directly on the cap table of your portfolio companies. Let the founders decide who gets to invest on their cap tables. – Samir Kaji.
34/ A typical emerging fund takes 1-2 years to raise <$10M. Plan for that timeframe. A fast raise is 6 months. – Elizabeth Yin*timestamped April 2022
35/ To LPs there are 4 main metrics that are of note. Gross and net IRR to show how cash efficient you are, as well as how your portfolio is marked up. TVPI and DPI to show your paper returns and cash you’ve returned to your LPs, respectively. – Chamath Palihapitiya
36/ When you’re pitching institutional LPs (i.e. endowments, pension funds, university investment offices, etc.), you’re bet against 10-year life cycles and portfolio strategies. When benchmarking metrics (i.e. IRRs and TVPIs/DPIs), you have to show you can outperform other asset classes (i.e. real estate) and the public market equivalent (PME). Comparing and contrasting is often the most effective.
37/ When you’re pitching individual LPs (i.e. angels, or “belief capital), largely true for Fund I’s and II’s, it’s about personality and promise. Do people like you? Do you bring in great top of funnel deals? Are you different?
38/ “Don’t run out of leads.” You want to be constantly meeting new investors, ’cause you don’t want to be in a situation where you have to go back and convince people who are clearly not sold. – Elizabeth Yin
39/ If your Fund I consists of mostly individual LPs (i.e. accredited investors, but not qualified purchasers), you’re going to have to fundraise from scratch in Fund II and III. Since they have less of a net worth than institutional LPs, they most likely don’t have the capital to: (a) re-commit for a subsequent fund, (b) and even if they do, they won’t have enough to meet the minimum check size, assuming Fund II/III is bigger than Fund I. Inspired by Elizabeth Yin.
40/ Ask LPs what they like and what they don’t like about the pitch deck, and use each conversation as a learning and refining process.
41/ Figure out how much money you’re capable of raising in Fund I, and raise 25% less. It’s much better to be oversubscribed than suffer from lack of momentum. And leverage the “oversubscription” to help you raise Fund II, III, and so on. Told me to by someone who has sat on over 6 LPACs(LP advisory committees) in his career so far.
42/ The median family office check into first-time fund managers is $750K, with over 80% of family offices investing into first-time managers.
43/ “Does the world need another VC fund?” Most LPs don’t think so, so you need to convince them why you should exist.
44/ Before wasting your time pitching to some LPs, ask “Are you actively investing in venture funds at this time?” Many take meetings, but aren’t. Your time is precious.
45/ You’re going to raise from friends and family in the beginning. Your second cohort of LPs will be people you have a substantial network to. In other words, investors who you have many duplicate warm connections with, so that they can easily qualify your ability. – Dylan Weening
46/ In a recessionary market, LPs find themselves rebalancing their asset allocations. As their public market assets go down, they find themselves overallocated into venture. As such, they’re investing in less new managers. So in order to raise as an emerging GP from these LPs, you need to replace someone they’re currently investing into. That means you need to: (a) outperform them (4x TVPI is table stakes), and (b) have one compelling story on why you, backed by numbers.
47/ When doing diligence, sophisticated LPs evaluate you based on consistency. They will evaluate fund/portfolio performance with AND without your top investment. Hence, they expect a minimum number of investments in your portfolio – usually 20 to 30.
48/ Some LPs have been burned by staying invested in yesterday’s firms for too long. The top firms a decade ago are not the same top firms today. These firms often have an emerging GP thesis.
49/ “This is not a one-trick-pony relationship. You’re a capital allocator. The cost of finding new relationships to build is significant. You need to seek long-term capital allocation partners. Have a three to five fund view – multi-decade relationships. How repeatable is your success?” Shared by an LP in 30 funds.
50/ “The best filter for this is figuring out what [an LP’s] minimum check size is. And, is that greater than 20% of your fund size? If so, it won’t be a good fit.” – Sarah Smith
51/ “There’s a thing called ’round tripping.’ If a fund in India invests in a fund that’s built in the US, then invests back into Indian startups, that’s round tripping. And unfortunately, not allowed.” – Shiva Singh Sangwan
52/ “Before you say yes to LPs, check the CFIUS rules. Under those guidelines, you may not be able to take money from certain countries and parties.” – Arjun Dev Arora
53/ “Valuations are not the way you judge a venture capitalist, or multiples of their fund. […] The way that I judge a venture capitalist is by how many companies did they back that grew into $100M revenue businesses.” – Andy Rachleff
Fund strategy/portfolio construction
54/ It’s often good practice to not lead syndicates the same time as you’re raising for a fund (outside of SPVs to maintain pro rata). It gives too much optionality to LPs. For the most part, it’s easier sell a deal than it is to sell a fund.
55/ Typical GP commits are 1-2% of the fund. If you’re unable to do so (or even if you are), good practices include recycling fees and deal warehousing. The latter is where you keep a portfolio of personal investments in storage before launching the fund. Warehousing deals de-risk the deal by allowing LPs to participate in marked-up deals at more lucrative, aka lower valuations.
56/ In a downturn, investors are still funding startups but adding in more terms in the form of side letters. The riskier the bet, the greater the liquidation preferences, anti-dilution provisions, and minimum hurdle rate expectations.*timestamped in April 2022
57/ “Bank loans for VC funds have short paybacks (90-180 days). The 2+ year paybacks relate to large PE funds. IRR boost is minimal in VC.” – Samir Kaji
58/ Don’t be scared to recycle carry early. Most funds suffer from under-deployment, which usually leads VCs to deploy the last 25% of capital either towards deals with high valuations or in difficult situations (down rounds, pay to play rounds). – Villi Iltchev
59/ While pro rata rights are technically legally binding, earn the right to invest in subsequent rounds, rather than just expect it.
60/ Liquidation preferences have little impact on fund returns, which makes sense when you actually think about it, but many VCs add these provisions to protect their downside. Data shows that only the bottom quartile funds see IRR impacted greater than 1% due to liquidation preferences. Returns are driven by the winners in your portfolio where liquidation preferences don’t matter. There’s a big difference in a strategy to win versus a strategy not to lose.
61/ IRR is a vanity metric for funds early in their life cycle. While it can be a useful metric for LPs to compare across vintages and their portfolio, overoptimizing for it gives a false sense of hope. Why? IRR values quick capital deployment. Recycling hurts IRR. Many things change over the span of a 10-15 year fund. – Seth Levine.
62/ Ownership and pro rata allocations are inversely proportional to the number of portfolio companies in a fund. Many managers can’t get 100% of their pro rata allocations, but rather only 50-75% of their allocations. Inspired by Henri Pierre-Jacques.
63/ Venture reserves make less sense in a bull market. Reserves are usually put into a fund’s winners. But in a hot market, a larger percentage of your portfolio companies get mark ups – making it harder to differentiate signal from noise. Reserves make sense in a bear market when it’s easier to differentiate signal from noise. In a bull market, it might be better to have no reserves, and spin up SPVs for a follow-on strategy.
64/ Your ability to get into later rounds, not just ’cause of pro-rata rights, should be a big determinant if you have a reserve strategy. Can you earn your allocation in later rounds? Will founders fight for you even when downstream investors want more equity? The best companies are hot commodities. Even if you have a follow-on strategy, you might not be able to get in those subsequent rounds.
65/ If you want to include more than 99 accredited investors in your fund, set up a parallel structure where you have one fund for accredited investors (<$10M) to include 249 accredited investors, and another fund for qualified purchasers (QPs).
66/ “The best way to protect yourself against the downside is to enjoy every bit of the upside.” – Bill Gurley
67/ If you have a parallel fund structure (i.e. one for accredited investors, one for qualified purchasers (QPs)) and you’re going through rolling closes, understand that your initial allocation in each deal will change as a function of each fund’s committed capital from LPs.
For example, let’s say you’re raising a hypothetical $100M fund – a $10M fund for accredited investors, and $90M for QPs. Let’s call the $10M fund Fund IA, and the $90M fund Fund I. On average, QPs take much longer to make a decision, so you’re likely to close your Fund IA before you close Fund I. As such, your first investments out of the fund might be 50-50 from each fund. But as you finish closing your Fund I, you will need to rebalance your allocation into earlier deals, like changing it from a 50-50 allocation between the two funds to 90-10. As such, in your term sheets, make sure you include the “right to transfer securities to affiliates.” And make it clear to your founders why that’s in there before everyone signs.
68/ If you’re building a concentrated portfolio, think about portfolio construction from a bottom-up perspective, rather than top-down. How many unicorns/decacorns do you need to return the fund? How often have you historically seen them in your inbox? That’ll be your deployment schedule. And subsequently, your capital call schedule.
69/ “Fund management is irrelevant unless there are winners in the portfolio.” – Laura Thompson
70/ Calculate your mark ups on priced rounds rather than valuation caps on SAFEs. Your TVPI and IRR may look nice in the short-term, and may help you raise from individual LPs. But once you start talking to institutions, you look deceitful or have no idea what you’re doing.
71/ Avoid overly large GP commits. If you invest too much of your own net worth into a fund, you’re going to make decisions that sacrifice the long game of the fund for short term personal liquidity, like selling secondaries to buy a house. Don’t go higher than 10% of your net worth. – Sheel Mohnot
72/ “For funds that are <$20MM, the GP commitment is fairly meaningless in the evaluation of a fund. Either the person is already taking a great opportunity cost by running such a small fund or has independent personal wealth where a small GP commitment is irrelevant to them.” – Samir Kaji
73/ “Most LPs allow you to reinvest returns 18-36 months after the investment period. The early wins are often small and don’t impact the returns so you are better off reinvesting to go for another unicorn. This is a game of outliers.” – Henri Pierre-Jacques
74/ “Management fee schedule adjustments: Pause or slow down fees in ’23 (with authority delegated to LPAC to avoid conflicts of interest)” – Chris Harvey (timestamped Feb 13, 2023). A way to leverage your LPAC to communicate fund decisions to the rest of your LPs
75/ “What % of companies successfully got funded from investment to the next round?
Seed —> Series A should be >35%.
Series A —> Series B should be >50%.
Series B —> Series C should be >50%.
And, Series C —> Series D+ should be >60%.” – Aman Verjee
76/ As a long-term investor, you have to generate at least three times the risk-free rate (3-month T-bonds, bank interest rates, etc.) to have an investment make sense in the long-term. – Chamath Palihapitiya, speaking when T-bonds’ rate is 6.5%, meaning a private investment must generate at least 20-25% for it to make sense
Selling positions
77/ “In consumer and consumer social, advocate more aggressively for selling along the way. The hype cycle of consumer means heat and traction do not have the sustainability of enterprise ARR and so more weight placed on selling some portion earlier there.” – Harry Stebbings
78/ “Pigs get fat but hogs get slaughtered. Even if we believe a company has tremendous longterm upside, it’s not inappropriate to take some money off the table in order to manage that risk. As we’re recently reminded, markets go down, not just up. Just be aware of the incentives, emotions, and other factors at play. It’s ok to behave one way before you hit your DPI target and another way after, but understand how those factors produce better or worse possible outcomes. This is also true with regards to recycling. If we can sell partially out of a position and put those proceeds into one that we believe has more incremental upside, that’s accretive to our results.” – Hunter Walk
79/ “Generally once a position is worth 3x the fund sell 1/3rd to return 1x the fund (if there is liquidity). […] For the hot names you will get a bunch of inbound. Negotiate to get a price you like. For less hot names, just talk to the investors leading the next round and see if they want to add to their position. A lot of times they do and don’t mind buying out earlier investors.” – Sheel Mohnot
80/ “For public shares, we’ve landed on the following model:
1/3rd immediately (either first-day lockup expires or immediate on direct listing)
1/3rd 6 months after
1/3rd up to our discretion
Here’s why — The first third books your win. If you do seed, you likely have a huge position by the time you hold public shares. The second third allows the stock price to stabilize after the market has been hit with lots of supply from VCs doing distributions. The last third allows you to have an opinion on the stock/market — however, you can choose to distribute this third anytime, including alongside or after the previous thirds.” – Chad Byers
81/ If you’re a reasonably good fund, you should return at least 1x your fund (1x DPI) within 5-7 years. – Chamath Palihapitiya and Jason Rowley
LP management
82/ Early funds generally have 30 LPs in the fund. Fund I is often an exception.
83/ A general rule of thumb is to not have any one LP contribute more than 25% of the fund, or else you might lose control when you have such a large “shareholder”.
84/ “After my LPs wire their money, I send them an intake form where I ask the question: How would you describe yourself as an LP? I have a number of statements they can select to indicate whether they are a newer or more experienced LP, if they’d like to be more active with founders, how often they’d like to communicate with me, and if they are interested in co-investment opportunities and events. I have another question following that: If you want to be more active, what are ways you enjoy helping?” – Sarah Smith
85/ “Be thoughtful about how you’re managing your time, so that you don’t turn into a full-time venture professor. You’re an investor, a GP. That’s what you’re getting paid to do.” – Arjun Dev Arora
86/ “Avoid LPs who ask you to give up economics as a GP or change your terms. LPs who want to negotiate lower management fees, a different carry structure, or they want to own 20% of the general partnership for the next three funds are best avoided if possible. They want to change the terms that everyone else has. I wouldn’t allow that. If other LPs find out (and they eventually do), it would cause my LPs to lose trust in me and rightfully be frustrated that they got worse terms.” – Sarah Smith
87/ “If someone does ask for it, and if they aren’t a large enough check, we tell them, ‘We like to reserve this spot for our largest LPs because they have the largest exposure in our fund. We’re open to you being a member in our LPAC, if you increase your check size.” That way, you can leave the ball in their court. Either, they won’t push further or they’ll commit more capital to the fund.” – Eric Bahn
88/ “If you’re in your Fund I or II, like I am, you’re still figuring shit out. You’re still testing what works and resonates and what doesn’t. I ask them, ‘what have you seen other managers do in this situation?’” – Paige Finn Doherty
89/ “The average, for a normal venture fund, is around 5-7 years to call 90% of the capital.” – Chamath Palihapitiya
SPVs/Syndicates
90/ There are two types of syndicate leads: “marketers” and “connoisseurs.” The former focuses on volume, which lead to more noise than signal. The latter focuses on quality, and as “tastemakers” lead to higher signal over noise. As LPs, quality may matter more than quantity, especially when you’re most likely diversified by being in several other syndicates already. Inspired by Julian Weisser.
91/ If you’re warehousing SPVs for your fund, do note that the number of unique LPs in your SPV(s) count towards your accredited investor limit.
92/ If you’re an LP in an SPV and agree for it to be warehoused into a fund, you are forgoing your right to the individual deal for access to the fund’s portfolio of deals.
93/ As the syndicate lead, set the minimum check size at or less than your own check size.
94/ Your GP commit into your SPV is directly proportional to your net worth. The greater your net worth, the more you’re expected to contribute. Any less, would be a negative signal. That said, the less of a net worth you have, the more you’re expected to be a great curator of deals.
Succession planning
95/ “The best way to think about succession planning is that you have to have team members at different parts of their life. Different generations. Even if they’re non-founding partners, if they all retire at the same time, you can’t build a legacy.” – An investor with 9-figure AUM
96/ Structure your fund to have a generational off-ramp for compensation. A lot of funds are structured so that payout is done through the management company, and so owning equity in the management company becomes increasingly more expensive as the firm matures and has greater AUM, etc. So the next generation, in order to succeed the firm, must buy out the previous generation’s equity. So, leadership transitions are not easy. Instead, structure your firm so that the management company doesn’t have value, where the value is at the GP. So transitions are a lot easier. – Maha Ibrahim
Tax planning
97/ When invest in a startup via SAFEs or convertible notes, your QSBS timer counts when the SAFE converts on equity round, not during the convertible round.
98/ As a GP who takes management fees through a management company, often LLC, you don’t receive W-2’s. As such, you can’t withhold taxes, so you have to be disciplined on cash management. “Outside of federal and state tax, there is a massive self-employment tax of 12.4% on up to $147,000 of earnings. And an additional 2.9% on any earnings.” – Jarrid Tingle
99/ The origin of the 1% GP commit comes from taxation laws prior to 1996. But even now, “in order for GPs to avoid their carried interest being taxed as ordinary income vs. long-term capital gains, many GPs still follow safe harbor.” – Courtney McCrea and Sara Zulkosky. While this isolates GPs who aren’t independently wealthy or are well-capitalized, in lieu of the typical cash contribution, I see a lot more emerging GPs warehouse deals and recycle carry.
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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.
An old college friend reached out to me not too long ago and asked me if I had any tips to share on getting a mentor. And the first thing I responded with is: “Don’t ask people to be your mentor. In fact, don’t even mention the word mentorship.”
You see, mentorship is a loaded word. It comes with baggage. Centuries of it. Hell, millennia of it. And apparently, dating as far back as 3,000 years ago to Homer’s Odyssey. Mentorship comes with an expectation of commitment. While that amount of commitment differs per person, a mentorship ask from a stranger is an amorphous expectation of time and energy from a busy person who likely has a laundry list of other priorities. Without any precedence or context, it’s hard to make that decision with asymmetric information.
The best pairs of mentorship have always been a two-way street. It takes two to tango. If we were to take the equation of a line:
y = mx + b
… a mentee wants a mentor whose current b, or position and experience level in time, is greater than their own. A mentor wants a mentee whose m (rate of learning, iteration, and hustle) is as great or greater than their own. The bet is that at some point in the future, at least in my experience, mentors would like to learn from their mentees as well, and/or see it paid forward.
Yet, I see so many mentees out there who discount their own value in the relationship. One of my mentors shared with me a few years ago that the older you are, the younger your mentors should be. And I’ve carried that in my heart ever since. More recently, I found that line in the form of a tweet from Samir Kaji.
Was at a VC quarterly meeting today and the topic of aging out in VC/tech came up (which I think is BS)
Their response on how they stay fresh in mental models was around the thinking of "the older you get, the younger your mentors should be".
I can’t claim to have mentored tons of folks, but I also realize both from anecdotal experience and talking with my mentors that the best thing about mentorship is the feedback. That the mentors learn about the result of their advice as an opportunity to finetune their own learnings.
Take for example, my office hours. Of the hundred or so people I’ve met through open office hours, I’ve probably shared the same piece of advice at most five times. It gets even more interesting when you consider that the vast majority of people I’ve met via office hours come for fundraising advice. Somewhere in the ballpark of 80% of people. While there are similar thematic questions I ask people to consider, the best advice is tailored to every unique situation. That said, my advice, like any others’, starts as a product of my own anecdotal experience. A sample size of one. And as we learned in Stats 1 in high school or college, that’s a poor sample size. So, one of the best ways for me to refine my own learnings is either:
Act on it again and again. But there are some things in life I can’t do again. For instance, high school or freshman year of college or my first job. Those are experiences entombed in amber that unless I had a time machine, they’re one and done.
Learn how other people execute on that advice and what resulted of it.
One of the many joys of writing this blog is that every so often a kind reader reaches out to me and shares the results of them implementing the thoughts I’ve shared here. Then they let me know I’m either full of s**t or I drastically helped them grow. And I love both forms of feedback equally as much. After all, it’s the rate of compounded learning that helps me mature — even if it’s outside of my own anecdotal experience. Feedback and learning of others’ results gives me a sample size greater than one. The same is true for other mentors, advisors, and investors out there.
So, what does that mean tactically?
Start with the ask.
There’s a metaphorical saying in the world of venture that investors invest in lines, not dots. They want to see progression rather than stagnation. So in reaching out to anyone you’d want to learn from, don’t lead with “Can I have 30 minutes of your time?” Instead, lead with a question. Why are you reaching out? What question can only they answer?
So, that means, “should I get an MBA?” is not a good question to ask. It’s generic, doesn’t contextualize the question, and you can figure out how to do so on the internet. On the flip side, a better question would be: “I saw that you graduated from Wharton before breaking into VC. So I’m curious, did you always know you wanted to be in VC, or was that something you discovered in B-school? And what experiences did you gain in B-school that set you up for VC?”
Moreover, show you’ve spent time in the idea maze before proposing the question to the person you want to learn from. “I’ve read about X and Y, and have thought about or tried A and B already with these results. But the question still gnaws at me.”
Why does this contextualization matter? One, it gives that person context to better answer your question. Two, the last thing any person giving advice wants is for their advice to dissipate into the cosmos. For their advice to go to naught. And if you show that you’ve spend blood, sweat and tears already pondering the problem, then you’re more likely to take their advice seriously. In effect, their advice will be a lot more meaningful. And, chances are you’re going to be a lot less whimsical than the average person asking for their time. Use someone’s time in a way that won’t feel wasted.
Follow up even if they ghost you.
If they respond the first time, great. And if not, don’t give up until you’ve sent at least three emails. If they don’t respond the first time, they just might not have seen it. If they don’t respond after the ninth email, they’re just not interested.
And with each email follow up, tell them when you plan to follow up since you assume they’re busy. “If you’re too busy, I completely understand and I’ll follow up in two weeks.” On the last email if no response, thank them for their time and wish them well.
Don’t set recurring meetings (initially).
First of all, it’s a heavy ask to anyone — stranger or not. Second of all, there’s no promise that their time (and your time) won’t be wasted. Third, do you even have that much to ask about? Most of the time, you don’t. What you think you want and what you actually need are usually very different. It’s an iterative process.
Instead, start with a single question. Ask it. If they’re free for a meeting, set 20 minutes (here‘s why I like 20, instead of 30). If not, get their thoughts asynchronously. Get advice. Act on the advice (or not, but be intentional if not). The most important part is to share your results with the origin of that advice.
So, when you close out that initial meeting, ask if you can reach out to them 24 or 48 hours later after you’ve had time to mull on it or act on it. Timeframe will vary. And if you do follow up shortly after without results, limit any additional ask to 1-2 questions, max. Ideally it should take them 2-3 minutes to respond to. For any advice that takes a longer feedback loop, set a time in the future (two weeks, a month, 2 months, etc.) later to reach back out to share your learnings. And sometimes, that means you didn’t implement their advice. Why not? What did you learn from doing the counterfactual?
When you reach back out to share your learnings, see if you can jump on another 20 minute call, or shorter. And get their thoughts on the facts. Possibly get more advice. And do that again and again. Until at some point — my litmus test is usually 3-4 of these discrete exchanges, in no particular frequency —, I ask if we can get something recurring on the calendar. Nothing long. Stick to 20 minutes. And set an end date for the recurring nature. I usually do 4-5 times as the first run through.
At the end of those recurring meetings, be honest and mutually evaluate: Was it a good use of everyone’s time? If not, end it, but reach back out periodically to share your thanks, especially around the holiday season. If it does work, set another set of recurring meetings and reevaluate again in X time. And voila, you have yourself a mentor (in the traditional sense).
One more note on this… if that person is extremely busy and you know they are, sometimes a more personal touch to the email is recording a Loom and asking your question in front of a camera to that person in particular. For any Loom video, I wouldn’t go over a minute of recording time. Keep it concise, and use text to describe everything else.
Build a platform where they can share their advice with others.
Either start a podcast or a blog. Or help them find an audience that is outside of yourself —a fireside chat, a club, a non-profit, posting a Twitter thread or LinkedIn post, and so on. Their time is limited, and if they’re likely to give that same piece of advice to many others, help them find the tribe of people who are willing to listen to their advice. So instead of their advice being one-to-one, it’s one-to-many. In sum, a larger impact radius.
Of course, the caveat here is if the advice you seek is personal experience that isn’t suited for a stage, then don’t do it.
In closing
Some of the mentors I have today are folks I’ve known for years, but neither of us remember the discrete date in which it all started. Simply put, “it just happened.” There are others where we’ve never explicitly said we were mentor and mentee. Yet, I learn just as much if not more than if I had explicitly asked for mentorship. The same is true for some of the “mentees” I have.
At the same time, I wouldn’t discount the fact that you can truly find mentors everywhere in your life. Too many people focus on only finding strategic mentors, but fail to see the value in tactical and peer mentors, which I wrote more about three years back.
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.
Before we dive into this blogpost, I’ve been asked by my legal friends to include the below disclaimer. I have a version of this at the bottom of every blogpost, but nevertheless, it doesn’t hurt to reiterate it again.
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.
Back in the hallowed halls of my elementary school, I had a principal whose presence was always larger than life. He was often the optimist and, with words alone, could figuratively turn water into wine, and any mistake into an opportunity. Ironically, there was a sign that hung above the door to his office that read: Opportunity is nowhere. An odd sign that seemed to be the Hyde to his Jekyll.
I spent a whole year contemplating why. And on the last day of third grade, I finally mustered the courage to ask him.
“Mr. M, why do you have that sign above your door?”
“What sign?”
“The sign that says ‘Opportunity is nowhere.'”
He paused and chuckled, “David, it looks like I bought the wrong sign. It’s supposed to say ‘Opportunity is now here.’ But now that you mention it, you could say the only difference between no opportunities and endless opportunities is just one small space.”
In the venture market, that small space blossomed in late 2020. In a flurry of SPACs, secondary markets, and tech IPOs, exit opportunities for venture-backed companies were flourishing. There were multiple paths to liquidity. Tech employees saw their net worth grow, and more accredited investors were minted by the day. Alumni syndicates grew in membership and deal volume.
With a surplus of capital in the market, the money had to go somewhere. Not to savings accounts. But to goods and services. Crypto and NFTs. Startups. And other capital allocators.
Adjacently, the COVID days saw the (re)emergence of new markets. Ecommerce. Fintech. Remote work. Future of work. Web3 and the metaverse. Just to name a few.
In 2021, VC fundraising activity surpassed $100B in funds raised for the first time. $128.3 billion across 730 funds, to be exact. Carta also saw a massive jump in the number of Fund I’s created last year. More than ever before, there was an abundance in opportunities to invest in venture funds.
Anecdotally, in my work at On Deck Angels and at DECODE, I’ve seen a rise in the number of opportunities to invest into funds as well. Via various other platforms as well:
Revere — where you can discover and evaluate venture fund managers through a unique rating framework. They’ve also recently launched explorevc.com for those curious about who’s in their pipeline;
Allocate — an end-to-end platform that covers everything from discovery to capital calls and keeping track of your portfolio;
Arlan Hamilton famously raised $5M of her fund via Republic, an equity crowdfunding platform. More recently, Cathie Wood announced the opportunity for non-accredited investors to invest in the ARK Venture Fund through Titan.
There was and still is a wealth of noise, but a poverty of “signal” — a word that may have lost its true meaning in these past few years. When signal is everywhere, it is nowhere. So more than ever before, more than opportunities, what the world needs more of are frameworks. Frameworks on how to differentiate for yourself signal from noise.
There is a wealth of content and discourse in the broader world for investors, which include advice on personal finance, investing in stocks, option trading, and of course, quite a bit, in the world of startup investing. But surprisingly little in the realm of investing in venture funds. The only ones I could find were OpenLP and SuperLP, which if you know me I had to ask both of their authors for their latest insights here as well.
As we were wrapping up our conversation on a sweltering late summer day, Martin Tobias, founding partner at Incisive Ventures, told me:
“Somebody should write a book like Jason Calacanis’ Angels, but for LPs.”
And he’s completely right. While that is a larger endeavor altogether, hopefully, this blogpost serves as a preamble for a greater conversation.
Who is the emerging LP?
An LP, or a limited partner, in the context of this essay, is someone who invests indirectly, rather than directly into startups. While investors in syndicates and SPVs are also counted as LPs, for the purpose of this piece, I’ll focus on people who invest in funds.
If you’re an emerging LP, you’re most likely writing checks into Fund I’s. Maybe Fund II’s, if you’re lucky, can write larger checks ($250-500K+), you have something a GP wants, or some permutation of the above.
Effectively, this blogpost is dedicated to the investor looking to invest in fund managers who have yet to prove their institutional track record. And just like investing into a pre-seed founder, searching for product-market fit, the checks you are writing are… belief capital.
If it’s belief capital, assuming the GP has the underlying mechanics down (portfolio construction, fund strategy, etc.), it’s all about people. And if it’s all about people (I’m overgeneralizing), how you win as an LP is determined by your ability to differentiate the top decile from the top quartile. Part of that requires some level of intuition. But I am ill-equipped to speak on LP intuition, as opposed to VC intuition. So, I had to ask folks with more miles on their odometer.
Asher Siddiqui shared it best in our conversation from the perspective of an emerging fund manager:
“Here’s the problem that I have. Imagine you’re an emerging fund manager and you think you’re hot shit. How long do you think it takes before you figure out if you are?
“The average deployment period is 2-3 years. You launch Fund I in Year 1 and launch Fund II between Year 2 and 3. You close the second fund around Year 4. By Year 7-8, you now have some DPI from Fund I, early DPI from Fund II, and are now writing your first checks from Fund III.
“The truth is no one knows if you’re a great fund manager until you’re eight to ten years in. That means if you’re meeting a great manager, you’re meeting them when they’re already at Fund III, or when they’re raising Fund IV.”
Similarly, the truth is as an emerging LP, you probably don’t have the opportunity to invest in “hot shit.” Why?
Top-tier funds are oversubscribed, and have a waitlist to even get the chance to invest.
And if you could, due to the size of their funds, you need to be able to write checks on the magnitude of 7-figures and up.
Rather the buffet you have before you is the opportunity to support the best before they’re the best. So instead of looking for lagging indicators, like TVPI, DPI, and IRR, the conversations that sparked this blogpost is intended to look for leading, predictive indicators. But as you might guess, there is no one right answer in foresight. But I do hope the below serve as tools in your toolkit as you grow your arsenal of frameworks for investing in GPs.
As a quick note, wanted to share some quick definitions I wish I knew at one point in my life:
TVPI: Total-value-to-paid-in capital, aka paper returns
DPI: Distributions-to-paid-in capital, aka the actual money you get back, or Chris Douvos calls it: “the moolah in the coolah”
IRR: Internal rate of return, aka how fast your money appreciates per year
Net IRR: your IRR after fees, carry, expenses are accounted for, and what LPs care about more than gross IRR
GP: General partner of a VC firm, aka the head honcho at a firm
Finding the best LPs
The world of fund investing is, for lack of better words, opaque. There’s no public Rolodex of limited partners. If you stick around the venture world long enough, there are familiar names that regularly pop up in fund pitch decks or during VC happy hour. And outside of the big institutions who write $5M+ checks that you might find on ad hoc expeditions into the world of the internet, the two best places I’ve found so far for information on LPs is Sapphire Partners’ OpenLP.com. And scouring AngelList’s syndicates and PCN (Private Capital Network) for their LP networks, neither of which are public either.
At the same time, most individual LPs don’t go “shopping” for deals. They invest opportunistically into people they know and trust or alongside people they trust. In a way, this blogpost is also designed to help the individual LPs below shop for deals. By sharing the fact they LP publicly, my sell to them was that maybe this blogpost will the earliest semblances of fund deal flow to them.
Just as a fund manager brings smaller LPs on for very specific reasons, an LP should have a similar rationale to why they are investing in a GP. It’s a two-way street.
Methodology and a table of contents
I’m going to preface by saying: This isn’t an academic research paper. So as such, I may not have followed all the best practices in doing academic research. Nevertheless, I promise you won’t be disappointed. The below found its genesis scratching a personal itch that grew into:
How can I best support emerging GPs?
A first step into demystifying the black box of LP investing
Help individual LPs build thought leadership and discoverability, aka deal flow
And, building an investing playbook for pre-product-market fit funds
To each individual, I asked just four questions:
Apart from TVPI and IRR, what are leading indicators that differentiate the great GPs from the good GPs? In other words, the top decile from the top quartile?
In fairness, I iterated on the wording of this question the most because a few LPs I asked early on only had one answer: track record. And track record — in other words, TVPI and IRR, especially DPI, are lagging indicators.
Any red flags about emerging GPs that new LPs should be aware of?
What common pieces of advice should emerging LPs ignore, if any?
This was one that either completely hit or completely missed. The latter due to the fact, that there isn’t much advice, period, that is shared between LPs who don’t already know each other. One of the main reasons I believe this blogpost should exist.
Anything else you think first-time LPs should be aware of?
Some shared over text. Others over email. And a handful of others across calls and coffee.
As such, I’ve segmented this blogpost into five main sections:
In the words of my friend and colleague Gautam, “A big part of direct early-stage investing is more than just financial return. The same holds true as an LP, especially as an emerging LP. Be very clear about why you’re an LP. An investor who invested in the same fund as I did called his LP commitment the most expensive newsletter subscription he’s ever been a part of.”
Why you should be an LP
“The most important question to answer is why do you want to be an LP? To me, there are three reasons:
You want to build a career in this space – potentially a fund of funds, or manage someone’s family office.
You’re not the best at picking individually good startup deals to invest in, and you want to be strategic. For example, if David has the best deal flow in web3*, and I don’t, I want to invest in David.
This manager also has access to top deals – top deals that would otherwise be impossible for you to get into. If you invest in the fund, you also get access to the fund’s pro rata rights.”
— Shiva Singh Sangwan, 1947 Rise *Author’s Note: I don’t have the best deal flow in web3, but am flattered to be the example.
“I’m also a startup investor myself. My goal is still to uncover the best investments out there. So, there are 5 reasons as to why I invest in funds:
Investing in outliers: I invest in funds who have access to opportunities I may have missed myself. I don’t want to miss the next Gong.
Knowledge and network expansion: I want to expand my knowledge and network of what and who is out there. To become a better fund manager and uncover what’s happening out there in the market, I read other GP’s investor updates. I learn from what they learn.
Expanding my deal flow: I invest in others’ funds to get to invest in the companies they’ve invested in, and earning my right to, by being as valuable as an LP as possible.
Learning: I’m able to learn about areas that I’m very interested in. For example, I’ve spend the past year trying to learn more about web3, so I invested in web3 funds. I read the GPs’ investor updates and have effectively built a braintrust of GPs who are experts in web3.
Regional coverage: I LP into funds in emerging markets, namely, India, Southeast Asia, and Europe. I want to back someone who’s just starting with a Fund I, in a region I don’t have coverage on.”
— Sriram Krishnan, Kearny Jackson
Why you should NOT be an LP
“Venture isn’t a winning strategy for retail investors. Many investors cite that new funds outperform the S&P 500 or Russell 2000, but the truth is most venture funds have a low probability of beating the NASDAQ. Those that say otherwise are ignorant. Venture, as an asset class, is worse than the best public market alternative ($QQQ) unless you are getting the best outcomes. You need to be in the quartile, by looking for the top decile. Only then can you beat the public markets.
“If you don’t fully understand what that game is – one you’re not going to get your capital back for 10-12 years, then stick to public markets and small checks angel investing to satisfy startup investing curiosity. People are often insular to what they see and believe, especially on Twitter. Everyone is talking their own book. Do your homework.”
— @Cashflow_Cowboy
“Adjust expectations. People think that they’re going to always make 10x on their money, but I’m reminded of a story from early in my career.
“In the aftermath of the dotcom bubble, a time during which a looooottt of people made a lot of money, a big endowment that had one of the top venture portfolios looked at their relationships in their totality and found that only three of their managers exceeded a TVPI of greater than 2.5x for the whole of their relationship (across all the funds). And if you look at VC as a whole, returns have only very rarely met the lofty expectations that most people have. We’re looking back at an extraordinary time, but I think that when people look back, especially at a landscape littered with dilettante funds, that we’ll say that as the TVPI matured into DPI (the ‘moolah in da coolah’) times were pretty good, maybe even great, but not all the trees grew to the sky like some thought they would.”
— Chris Douvos, Ahoy Capital
“My biggest piece of advice for this audience is to actually not invest in venture. Most of the entrepreneurial network over-indexes investments to venture capital or start-ups. But our career is probably already over-indexed to this high risk asset class. I encourage entrepreneurs who start to invest to look at real estate, stocks, private equity, or private debt/BDCs. You can actually buy private debt on the public markets, called BDCs – business development corporations – that are loans out of companies and pay 10-15% yield. Or mid-market private equity generates ~20% IRR’s with far higher confidence than a venture fund. Asset allocation across these different profiles are key.”
— Vijen Patel, 81 Collection
What Makes a Phenomenal GP (As Opposed to just a Good One)
For the purpose of this section, I’m going to depart from the usual metrics – like a 3x net multiple, or a 25%+ IRR for funds longer than 5 years. Why? Since (a) if those metrics exist, these funds are no longer non-obvious, and the likelihood of you having access to these funds as an emerging LP is slim (and fund performance speaks for itself), or (b) if they don’t exist, you’re going to rely on qualitative measures — just as you would investing in most early-stage startups pre-PMF.
Consistent, clear, and preemptive communication
“Most managers are not that great when it comes to transparency around fund operations. Things like: What are your latest investments? What’s the thesis behind some of those investments? How are they performing over time?
“Some of these things get answered, if I’m lucky, on a quarterly basis, but often on an annual basis or less. So if you find a team that’s consistent about sharing progress on a monthly or at the very least on a quarterly basis and are really responsive to answering your emails and any phone calls, that’s a good sign behind a team that’s working very hard to serve the interest of its LPs and treating the job like a fiduciary.
“I’ll put a little bit of side note here. This kind of behavior is great with founders, too. When founders are really great about communications, it correlates very well to their performance over time.”
— Eric Bahn, Hustle Fund
“The six funds that I’ve invested in so far (listed here if that’s helpful) have all been communicative, stayed true to their thesis, and given me opportunities to learn and help to the extent that I had hoped for.”
— Rebekah Bastian, OwnTrail
“Sometimes things don’t perfectly line up — a GP might discover new opportunities or areas of interest as they start investing in a fund. Or increased competition. If strategy changes have occurred, ideally the GP would have been flagging this to their LPs over the course of the two years but for a new prospective LP being able to speak to the changes is important.”
— Beezer Clarkson, Sapphire Partners
The best have a unique perspective
“As an LP who also invests directly into startups, we seek GPs who have something unique – some kind of insight. It’s not always about having the highest net return. These days, there’s not enough GPs who have a unique angle on the market. It could be how they diligence deals, how they set their investment strategy, or what top investments look like.”
— Anonymous LP, $30B AUM Fund
“The funds we have known that are top decile have a point of view, this can be expressed as being thesis driven, but doesn’t have to be. It does though provide a reason for why they invest in what they do and why an entrepreneur picks them.
“They have also, in our experience, have had multiple fund returners within one fund. Not always, if an exit is large enough with respect to the size of the fund, it is possible to have a top decile fund with just one fund returner. The power law is alive and well in the top decile funds we’ve seen. This means swinging for the fences with respect to a fund’s investments as well as supporting this with a portfolio allocation and management strategy that enables a significant exit to provide for strong returns.”
— Beezer Clarkson, Sapphire Partners
“Every investor claims to have a value. There are very few cases where investors pitch otherwise. Sector specific funds may have a real value add for very early stage startups.
Uniqueness is not about investing into a vertical or type of technology, but about their ability to measure the size of an idea. Great managers know how to identify big ideas that others aren’t seeing. Even more true if you run a big fund; you must be investing in even bigger outcomes.”
— Itay Rotem, EdRITECH
Is this strategy repeatable?
“Differentiating between ‘top decile’ and ‘top quartile’ is really just going to be luck, for the most part. If you’re simply measuring and assessing ‘good GPs’ from the great ones, by track record, here would be my top few:
“What % of the portfolio comes from the top 1, 2 or 3? If you can deliver a top-quartile return WITHOUT your one winner / ‘lucky bet’, that’s really good.
What % of companies successfully got funded from investment to the next round?
Seed —> Series A should be >35%
Series A —> Series B should be >50%
Series B —> Series C should be >50%
Series C —> Series D+ should be >60%”
— Aman Verjee, Practical VC
“For GPs with young track records, we look at what the contributing companies are. Who are the fund returners? And can they replicate the same strategy? When diligencing GPs, we also talk to the founders they invest in. Essentially, whether there is founder/GP fit.”
— Anonymous LP, $30B AUM Fund
“I look for someone who’s very consistent. They have the integrity to stick to their word. They’re not deal-chasing, deploying all their capital in less than two years, and trying to raise their next fund too quickly. Typically, you’re signing up for multiple funds. If the deployment window is very small, the GP makes frequent capital calls, which means you’re committing more capital in less time.”
— Sam Huleatt, On Deck
“TVPI and IRR tend to be lagging indicators, not leading ones (for many reasons — including irrelevance of these metrics earlier than 5 years, changing motivations, engagement, and so on for investors, and shift in fund size/strategy, noting the Maples Dictum that your fund size IS your strategy).
“For me, the thing that tilts the odds in favor of a manager having the potential to be ‘great’ is that they are leveraging some sort of ecosystem. That can be an ecosystem built on years of success (Sequoia) or ‘prepared mind’ like Accel back in the day, or deep entrenchment in a mafia (Founders Fund). Additionally, some people build fertile ecosystems like First Round or True by investing time and attention in targeted and intentional ways. I try to look for people that are entrenched in some kind of robust ecosystem and match the moment when their upward-sloping line of experience as an investor intersects the (generally) downward sloping line of hunger. For more specifics on my thought process, see the most recent (five years old LOL) post on Super LP.”
— Chris Douvos, Ahoy Capital
“Over the long run of course, it’s DPI, but it’s about consistency of returns, which typically is a byproduct of them understanding where their definable edges (finding product/market fit), and ruthlessly exploiting those edges through building repeatable processes on sourcing, decision making, team building, etc.”
— Samir Kaji, Allocate
“This portfolio can’t be a one-hit wonder. Is there enough gold in the middle after you take the top two and the bottom two investments out?
“There’s a Rome in everyone’s future. You go up and then you go down. There are many funds that generated outsized alpha in the last decade but are not what they used to be.
“If you’re leveraging a network, is that alumni network today the same as it was yesterday. Did most of the smart, driven people leave? Are you borrowing or are you using that network? Were you there at the right vintage?
“Also, bet on people who do what they said they would do. Where did the returns come from? If the top returns came from their 20% discretionary funds, and not their 80% core fund, is that something worth betting on again as an LP? I would rather back a 3x return from an on-thesis fund than someone who gave me a 6x who came from off-thesis. The latter is because it came from sheer dumb luck. The question is, what do they do with that dumb luck? Do they pivot and learn, or continue to go rogue / play the roulette?
“Think about why LPs give money to GPs. Anyone can go into Vegas and play the roulette. The best GPs can do something I cannot do and they do it repeatedly.”
— Asher Siddiqui, Sukna Ventures
Access > proprietary deal flow
“We have felt for a number of years now (including pre-COVID) that the concept of ‘proprietary deal flow’ is not really a thing. Proprietary access however is something we think is true, powerful and not simple to achieve (hence why powerful ).”
— Beezer Clarkson, Sapphire Partners
“I look for emerging managers who have a highly differentiated platform offering or differentiated deal flow. In addition, for someone who has won before, like winning great deals, they’re likely to win again.”
— Sriram Krishnan, Kearny Jackson
“For an emerging GP, it’s all about access. Do I have the confidence that the best founders will seek out this GP?
How I evaluate access for a solo GP is different from how I evaluated a platform. For platforms, their external brand plays a big role. What are other founders saying about them? I talk to founders they’ve backed because ultimately, founders are their customers.
For solo GPs, I evaluate the GP on their personal brand, and his or her own insight on how they are thinking about the fund as a product. Here, I think of it as more of a bet on the founder of the firm, and not a fund bet.”
— Gautam Shewakramani, Inuka Capital
“GPs also need to be able to quantify that unique access. I’m an LP in a fund that puts on a regular conference and runs a community of 30,000 [redacted job title]. Their thesis was that they’re going to fund the best ideas that come out of their [redacted] community.
“The same is true for Packy McCormick. His thesis is: ‘I help startups tell their stories. I have all these readers who are VCs and founders, and they’re going to invite me into their deal.’ So, the quantitative thing is how big is his mailing list and how fast is it growing.
“It’s the ability to quantify things that you as the GP think are proprietary about your particular access to this market segment. It’s more than just how many LinkedIn friends you have or how many Twitter followers you have; it’s specific to your thesis.
“For my thesis, I get referred deals because I’m an LP in 17 funds. I invest in deals that are too early for these other funds, and I can get them follow-on financing because I know directly the LPs in the follow-on funds. And the fact that I’m an LP in 17 funds gives credibility to that thesis.
“One of my theses is that I’m a really good pre-seed investor because my companies get a higher percentage of follow-on financing than your average VC. Mine is 72%. Techstars is 30%. I’m two and a half times better than Techstars at getting follow-on financing.”
— Martin Tobias, Incisive Ventures
“I’m an LP in 17 venture capital funds, and it’s very clear what separates the best from the good. Deal flow.
“I also think we are entering a new era where you’ll see specialized, smaller funds that will generate great performance because of domain expertise and proximity to the nucleus of innovation. I get really excited about this group, and think some of these <$50M funds could generate 5x+ returns.
“For this group, I look for two things:
The team climbing the hill: Why is this team special in being able to attract great deal flow? Examples could be knowledge expertise, distribution, prior experience, geographic coverage, but a compelling edge is critical.
The hill that team is climbing: Ultimately, macro matters a lot. We like to attribute performance to skill, but timing, sector, and luck play a large part of success. The worst manager in crypto in 2015 probably did pretty well. The worst fintech manager in 2010 probably crushed it. I think about what will be the area in 2030 that everyone wishes they had exposure to today.”
— Vijen Patel, 81 Collection
They don’t have to ask “How can I help?”
“Most investors are not helpful. I started a company, raised some VC money, then some from angels. And I realized that our most helpful investors were angels. I came to understand that there are two kinds of helpful investors:
Reactively helpful
Proactively helpful
“For the former, you would have a problem, reach out to your investor, and they would really help you. For the latter, it’s Alex. Alex was one of our first investors. He would often come into our office, and without being prompted, proceed to write code against our APIs. And I thought, if I were to be a VC one day, I wanted to be just like him — very hands on. I knew he would be a real value-add investor.”
— Brent Goldman, Lancelot Ventures *Alex is a fictitious name of a real person.
“It boils down to three questions that are all interrelated:
Does this fund manager have a brand?
Does he/she have access? Do founders need them more than the manager needs the founders?
And does he/she have something unique to provide to founders?”
— Shiva Singh Sangwan, 1947 Rise
“At the pre-seed level, where I invest, a great fund manager is someone who gets a startup to a ‘real’ round of funding. I think it’s like fording a river: a good fund attracts founders to their boat, then ferries them across to the other side. For this service, they are rewarded with allocation in a round that’s underpriced once they reach the shore.
“Great funds are ones that have a sustained, repeatable process for attracting founders and a reliable methodology to get them across. This can look like focusing on a geography, focusing on a sector, focusing on an underserved founder market, acting as a scout for a larger fund who likes your deals, or some combination of the above.
“The returns from pre-seed are really about getting early and cheaply enough to have made the risk worth it.”
— Paul Griffiths, 15 & Change
Are they hungry?
“I work with some good fund managers, but why are they not great? Why are they only in the top quartile, and not the top decile? They have all the ingredients of being great. They have amazing pedigree, and they went to the right high school, the right college, and worked at all the top startups in their vintage. But… they’re not hungry. They haven’t had enough adversity in their life.
“I have seen prospective LPs only look at a GP’s career history, and not their life history. You need that extra data point, that context. To take a holistic view of the unique set of experiences of a human being, and not just the professional. You look at their thesis, and their history; you look at it from birth to today; you look at their whole life and career history, and look at their thesis. If the thesis doesn’t make complete and perfect sense, then I don’t think this is a ‘great‘ fund manager. If it fits like a glove, then yes, they could be.
“I don’t believe in luck. I believe you create your own luck. How do you create your own luck? You create chaos, which creates opportunities — you then leverage your past experience and your drive to capitalize on that opportunity….”
— Asher Siddiqui, Sukna Ventures
The devil is in the details of their portfolio construction model
“They need to have thought about deployment (schedules) and fund size. One of the quotes we both like is ‘Your fund size is your strategy.’ A fund of $10 million should have a very different strategy than a $50 million or $100 million fund.”
— Sam Huleatt, On Deck
“To us, the difference between good and very good is portfolio management. How do they think about reserves to follow on? Do they look to increase allocation into the winners?
“There’s a big difference between managing a $5 million fund and a $20-30 million one and $500 million one. How you look at portfolio management and allocation is different. Everyone tells you they can give you a 5x return, but I only need 3x DPI! Even the best firms out there struggle to return 3x on certain funds.
“Your size is your strategy. We take into account the geography you invest into. In Israel, we don’t have decacorns. And because the exits are lower, the fund size should also be lower.”
— Itay Rotem, EdRITECH
Mixed references are not as bad as you think
“I’ve backed a lot of funds across the private markets, in both private equity and venture capital, and great investors may have divisive personalities. You want to back special talents, and they may rub people the wrong way. That said, there is a difference between a prickly personality and a bad actor not treating founders right, and not being ethical in their dealings.”
— Anonymous LP, Private Wealth Management Firm
Does the GP have investor-market fit?
“Success builds upon success in venture. I’m never going to attract the best talent in the neobank or fintech space. They don’t know who I am and I don’t have true domain expertise. But if you’re doing something in retail or in hardware, I can really help and you likely know what Tide Cleaners is. Folks in retail find a way to get in front of me, and likewise, I can meaningfully help these companies. Product market fit applies to VC’s, too. And we don’t talk about this enough, but also LP’s.”
— Vijen Patel, 81 Collection
The best have long time horizons
“Luck aside, I index greatly on energy, fire, thoughtfulness, and passion. Some founders or operators raise a fund after an exit because they don’t know what to do next and have money in the bank. LPs need to discern as best as possible how committed these people are to the job of investing. How much does the GP resonate with the founders they’re backing?
“GPs who are only building, but don’t understand roughly what they’re building towards tend not to resonate with me. GPs who have founder friendliness talking points, but few examples of hard conversations with founders don’t resonate with me. I get concerned when GPs don’t appear to have an understanding of what kind of bet they’re actually making. The great GPs have long-run perspectives and are willing to adapt. Startups have to execute miracles to achieve great financial outcomes. I want to see GPs have a rough mathematical understanding of their bets based on their assumptions and stories. What’s a reasonable amount of capital to startups to their milestones, knowing your home runs are going to go much further than your initial projections? What does SaaS multiples going down from 10-15x to around 8x mean? Was the GP banking on elevated multiples persisting for the math to work?”
— @Cashflow_Cowboy
“I want to invest in people who are going to build multiple funds, so the long-term commitment to the space is critical.
“Every fund thinks they’re solving a unique problem – most are not. A happy outcome is backing a GP that you believe in, so I’d prioritize character over potential returns. At the end of the day, you’re getting into a decade-long relationship, so you’d better like the GP as a person, not just the asset class.”
— Paul Griffiths, 15 & Change
Luck is a skill
“The thing is everyone’s smart, and between the top decile and quartile, luck is a big differentiator.”
— @Cashflow_Cowboy
“The difference between top quartile and top decile is one of luck. I believe that it is impossible to predict ex ante.”
— Chris Douvos, Ahoy Capital
“Outlier performance is a combination of luck and skill (luck is needed for massive outlier funds), but the best fund managers require less luck to consistently outperform because they have well constructed operating frameworks.”
— Samir Kaji, Allocate
“In my early days in venture, I spoke with several investors on the Midas list. And every single one of them attributed their success to luck and timing. They still view themselves as learning and actively track their anti portfolio to see what they missed. They’re humble, and still suffer from imposter syndrome. When I ask them these two questions:
Which were the startups that you thought were going to be winners?
What startups put you on the Midas list?
“There will be some overlap, but more often than not, it’ll be a different set of names. Investing in GPs is a bit like startup investing. It’s a bit of a roulette wheel. What you’re doing is improving the odds. Any LP or GP who says otherwise is full of shit.”
— Asher Siddiqui, Sukna Ventures
The best change the status quo
“I believe great GPs aren’t just impacting the success of their portfolio companies and their LPs, but are changing entire systems that are historically pretty broken in the VC ecosystem. The vast majority of LPs, VCs and funded founders have tended to be pretty homogenous in terms of the identities they hold and approaches they take to building & funding companies. By breaking through those biases and pattern matching, not only will a new kind of emerging fund manager see better returns, but they’ll also dismantle a lot of the systemic inequities that have prevailed. TL;DR: Good managers see healthy returns, great managers see those returns and leave things better than they found them. (I wrote a bit about some of those inequitable systems here if you’d like to link to it)”
— Rebekah Bastian, OwnTrail
GP Red Flags
Logo and trend shopping
“There is a concept of just logo shopping. A lot of decks are loaded up with a bunch of logos of great companies that the GPs have invested in the past.
“There are people who say they’re seed investors were able to get a slice of allocation of some hot company at the Series C or Series D for a $5,000 or $10,000 check. There’s nothing inherently wrong with that as an investor. But the way that it’s framed often looks like that they were seed investors in these hot companies as well.
“So, there’s some of that window dressing. I think that is a red flag. It just is on the edges of honesty that I’ve never really liked.”
— Eric Bahn, Hustle Fund
“When GPs claim to invest in a deal, one red flag is when they were only an angel in a syndicate, and the founders don’t even know the investor by name. We also look at deal attribution for GPs from bigger funds. How involved were they in winning deals at their last fund? So, we do backchannel checks.”
— Anonymous LP, $30B AUM Fund
“I’m wary of trend followers. People who follow trends without having anything unique to add to founders building in the space.”
— Martin Tobias, Incisive Ventures
Not playing the long game
“Another [red flag] is when GPs change the terms when fundraising. As a GP gets more interest, we’ve seen some GPs change the terms – from 2% fees to 2.5 or 3%. It raises some concerns that they are opportunists which might be viewed as a sign that they weren’t committed to building a long, durable fund.”
— Anonymous LP, $30B AUM Fund
“There is never a full alignment between LPs and GP. There are many potential conflicts when it comes to VC management. You don’t want to invest in people who will not hesitate to screw you. Don’t invest in people you don’t trust. There’s a thin line between greediness and discipline. We don’t invest in investors who are too opportunistic. Discipline and strategy consistency (with an amount of flexibility) is important.
— Itay Rotem, EdRITECH
“Too many GPs today are obviously dilettantes. The average fund lasts twice as long as the average American marriage, so it’s a long-term commitment to your partners. I get the sense that a lot of new GPs are becoming VCs in the same way a lot of college kids end up going to law school: it just seemed like the next obvious thing to do/the path of least resistance.”
— Chris Douvos, Ahoy Capital
“This is personal for each LP. I believe the GP’s job is to maximize returns for their LPs. So, there’s a tradeoff between GPs playing the long game and having a fiduciary responsibility to return money in the short run. So, a red flag for me is when the GPs don’t play the long game.
“There’s this weird nobility in venture, especially in the pre-seed. Sajith Pai wrote a great piece on this. Your first investor is almost like a priest. As the first check into a company, you should be a good priest. Is this person someone who will be a strong supporter of the founder, which could come at odds with short-term financial return? I won’t get immediate distributions. But at the same time, over a fund life, this could generate better financial returns across a portfolio of founders or in the form of access to better deals driven by reputation or founder friendliness.”
— Gautam Shewakramani, Inuka Capital
“People say they’re going to deploy over the next 2.5 years. But guess what everyone did in 2021. They deployed their entire fund. So LPs are asking, ‘What are you doing? We had all of this scheduled out, but you deployed so quickly, and so now we’re out of money. We can’t do your re-ups for next year, or we can’t back new managers right now.’ It’s been a real issue that has kept so much money on the sidelines.
“Saying you’re going to do something, then not doing it is a huge red flag. Do what you say you’re going to do. This is a relationship game. If you’re breaking trust, you’re playing the short game instead of the long game.”
— Vijen Patel, 81 Collection
Small funds, big reserves
“I’m wary of small funds with big reserves. For example, a $50 million fund with 50% reserves. What it means is you’re getting less shots on goals. For Fund I’s, it’s all about shots on goals.”
— Martin Tobias, Incisive Ventures
They lack honesty and self-awareness
“A big one is a lack of openness of what didn’t go right. Some GPs exhibit a lot of arrogance. They claim they’re great at everything. That’s not possible, and definitely not true. Everyone has flaws, but the inability to share them is a red flag for me.
“Good GPs are also very self aware of what they are and what they aren’t. These GPs manage their time well. They find partners to build a team that has complementary skill sets to their own. When I ask: Why are you not winning deals?, they have a great answer. If they can’t answer that, they probably have work to do understanding their own pitch. Moreover, the best GPs are consistent with their stories while open and willing to evolve.”
— @Cashflow_Cowboy
“For funds I declined to invest in, it came down to the person. They often take credit than share credit. I doubted their skills and ability to follow through. A lot of projects were often started but never finished.“
— Brent Goldman, Lancelot Ventures
“Managers that don’t appreciate that this is a journey, not a sprint. It’s the same as assessing a startup founder. We look for behavioral cues: approachability, willingness to accept feedback, and ability to go through pivots.
“At Revere, we share our ratings for GPs with our GPs. Say I give someone a four out of five on team, and they come back and insist on five out of five across the board. How receptive the GP is to constructive feedback (and address it) is a very telling indicator.“
— Eric Woo, Revere VC
“Usually GPs are really good at (typically) 2 or at most 3 of the following 6 things, in order to be top-decile:
Portfolio construction & management
Access to deals / networking
Ability to win deals
Company selection / financial analysis / assessing PMF and future value accretion
Active management to “add value” to those companies
Exits
“… And maybe fundraising / cost of capital.
“But if they aren’t aware of what they’re good at, that’s troubling. Once they know what they do to excel (and what they won’t) they usually become very good at focusing on what matters.
“Here are some examples:
Potential GP: ‘I am really good at all 6 GP characteristics above!’ Me: ‘Don’t call me, I’ll call you.’
Potential GP: ‘I am really good being a board member, I’m the best. I can make any shit company successful once I’m involved. I did this for three eCommerce companies in the 1980s, and I really think I can ‘turn around’ and exit eCommerce, adtech, fintech, digital health, AI / ML, beauty and fashion, etc. They’re all the same.’ Me: ‘Ummm…’
Potential GP: ‘I am great at deal sourcing from XXX network, and I specialize in AI. But vertical-wise, I see a lot of stuff, so I do a lot of stuff.’ Me: ‘Cool.’
“I also like to see more focused funds. A lack of ability to zero in on a particular thesis (e.g. B2B SaaS with certain characteristics) is at least a yellow flag, though if the GP’s core competencies support a generalized approach that’s fine.”
— Aman Verjee, Practical VC
The GPs are too founder-friendly
“Emerging GPs tend to be too founder-friendly. A great VC is like a personal trainer, not a cheerleader.”
— Chris Douvos, Ahoy Capital
There’s no follow-on strategy
“Another red flag is not having a follow-on strategy. If you’re a small fund, you are funding companies that will never get to profitability with the money you gave them. So they all have to raise additional financing. If you don’t have reserves in your fund, you need to prove that you know other funds or have an SPV or angel network that can fund your companies. If you don’t have an answer for how you’re going to be able to fund the companies in the next round or at least introduce them, that’s a flag.”
— Martin Tobias, Incisive Ventures
The follow-on SPVs take management fees
“They’re charging excessive fees on SPVs to LPs. Many LPs who invest in small emerging managers are in part doing so because they want the co-investment opportunities. And those co-investment opportunities should be at fairly favorable terms. The most favorable terms I’ve seen are zero and ten. I’m not saying everyone has to do it at that, but I have seen VCs try to do it at three and thirty – at premium terms relative to the fund. I think it’s a flag on the emerging manager if he/she is proposing to charge management fees on SPVs at all.”
— Martin Tobias, Incisive Ventures
They lack communication skills
“GPs sometimes don’t follow up with what the LP asked for. The follow up is very generic. For example, if the LP wants to co invest in XYZ sector, can you send names in the portfolio that might be interesting to them?”
— Anonymous LP, $30B AUM Fund
“Bad communicators who only answer with curt and short responses is a red flag.”
— @Cashflow_Cowboy
They don’t know the numbers or the rules of the game
“Plenty, but to extract one, we’ve found that managers that don’t know the numbers (i.e. what enterprise value within your portfolio will you need to get to a 3x+) is a huge red flag and leads to poor portfolio construction and decision-making. Saying you are going to return a 5X+ easily is not respecting how difficult it is, and probably comes with a lack of understanding of basic fund math.”
— Samir Kaji, Allocate
“Managers that don’t understand basic portfolio construction and fund modeling. You would be amazed how many don’t even have a spreadsheet that tracks current investments.”
— Eric Woo, Revere VC
“Emerging GPs tend to overestimate the value of prior experience and underestimate the value of investing skills like portfolio construction and discipline (not just on things like price, but also on things like security selection — for instance, not understanding the problems with SAFEs).”
— Chris Douvos, Ahoy Capital
“If they are carrying companies at valuations that seem out of whack, or indefensible (or if they can’t really articulate their valuation policy) that’s no bueno. That is ALWAYS a signal that the GP is not going to be aligned with me… I’ve known some very strong investors who have played this game and it’s a real problem for me personally.”
— Aman Verjee, Practical VC
They play the AUM and management fee game
“I think fund size is a real issue. The law of funds is really interesting. If you get a million-dollar allocation early on into a unicorn and it’s a smaller fund, you can return the fund multiple times over. If you do that with a $400 million fund, it’s harder to make those numbers work.
“So as an investor, you can play one of three types of games:
You can spit out rapid funds.
You can raise massive funds.
Or you can make massive carry.
“The amount of funds and management fees that have been raised recently are out of control. If you can think about taking 2% management fees on a $500 million fund – and obviously you got costs and expenses – you’re bringing home an annual income of $10 million. And that’s just one fund, and you do another and another. So, are you trying to create value or play the AUM game? And that is a red flag for me. I like small, steady, disciplined managers who are deeply passionate about early-stage and a certain sector. That typically means they won’t scale to a $1B fund.”
— Vijen Patel, 81 Collection
No investing experience
“Just like the only way to get good at wine is to drink a lot of wine. The only way to get good at investing is to see a lot of deals. A red flag would be a GP with no investing experience.”
— Lo Toney, Plexo Capital
Common Advice To Ignore
While far les prominent than investors advising founders on how they should run their business or startup investing advice at broad, there’s a small handful of commonly shared pieces of advice that new LPs often get. Certain pieces of advice might serve larger LPs who work with a different set of parameters than you do. The important part is understanding the why.
Having artificial timelines
“LPs also shouldn’t give artificial timelines. Most family offices and individuals don’t have deployment schedules. A big endowment, like Harvard, does.”
— Anonymous LP, $30B AUM Fund
The same is true for LPs as it is for GPs: Chasing logos
“Just because you spun out of a big firm doesn’t mean you’re going to do well as a new firm. These emerging managers are going to look good on paper, but they might not necessarily know what it’s like living in a chaotic environment. It’s not the same environment they grew up in when they were at a16z, or had another great name behind them. Different resources, different support, so different mentality. Connection with founders is incredibly important and you want to understand how that applies in a different environment.”
— @Cashflow_Cowboy
“I don’t know if this is advice that is shared, but many LPs over-index things like logos, GP commits, and early fund performance (which means very little within the first 3 years).”
— Samir Kaji, Allocate
“A big one is around geographic and pedigree bias. There is a trope that’s formed that if you’re a founder of GP that’s based in the San Francisco Bay Area — maybe went to Stanford or Harvard or MIT, that will position you into the very best networks to be successful.
“I’m not saying that just because you possess those characteristics that you can’t be successful. In fact, there are plenty that are. But there are also are a lot of really talented people outside of those networks too.
“I think a lot about this Warren Buffett rule: ‘To make a lot of money, you have to be both contrarian and right.’ Look a bit more widely in your funnel and invest in managers who don’t look like yourself and come from non-traditional networks and backgrounds. They’re identifying founders who may be working on some pretty amazing stuff that’s being overlooked.”
— Eric Bahn, Hustle Fund
Diversification for the sake of diversification
“Many emerging LPs are told to look for differentiation, but some things are differentiated in how bad (or mediocre) they are. Hedge fund managers say they’re seeking alpha, but sometimes you find it and it has a negative sign in front of it. What really matters is sustainable competitive advantage. How do you demonstrate and articulate your SCA? What is your unfair advantage in an extremely noisy market (and it’s gotta be more than just: ‘we’re part of the SF cool kid crowd/look at our AngelList track record of $50k checks’).”
— Chris Douvos, Ahoy Capital
Should you bet on emerging GPs?
“‘Stay away from Fund I/II.’ This is the wrong advice. Don’t underestimate new GPs. Being a new GP is like being a founder; it’s a long-term commitment. And two, stay away from GPs who don’t have resilience and are not hungry to win.”
— Cindy Bi, CapitalX
Do ownership targets matter?
“There’s a lot of surface level ‘buyer beware.’ Everyone talks about ownership targets. ‘Are you hitting your ownership targets?’ For large funds, that 15-20% ownership matters. You want the proceeds of the outcome to meaningfully impact the fund. Ownership is less important for a first or second time fund, which are smaller funds where a single great outcome, even at low ownership, can return the fund.“
— Eric Woo, Revere VC
Using fund-of-funds to get into emerging funds
“I would encourage a lot of emerging LPs to not go into fund-of-funds. As an emerging manager, I want fund-of-funds to invest in my fund. But as an LP, you get double-feed. If you’re going to invest into venture funds, invest directly in the manager yourself.
“What the fund-of-funds will tell you is that they can get you into funds you can’t get into. I’m also starting to see fund-of-funds for emerging managers, which I think is a great thing. For incredibly large LPs, I think it makes sense. They get access to someone else who’s going to do all the diligence on emerging managers. But that’s not for an emerging LP whose check size is $250K to a million dollar LP commitment. Fund-of-funds are for people with a billion dollars who are already invested in Sequoia and are writing $5-10 million checks.
“Typically you would pay one and ten for fund-of-funds. Then that fund-of-funds pays two and twenty. So you’re three and thirty behind as a fund-of-funds LP.
“For emerging LPs, it’s a good exercise to invest directly in emerging managers because it’ll help with your direct investment practices as well. If you invest in fund-of-funds, you’re never going to have those co-investment opportunities because you never build a relationship with the manager.“
— Martin Tobias, Incisive Ventures
Additional Tactical Tips
The below are tips that everyone were kind enough to share, but didn’t fit into the above categories. Nevertheless, I find them to be powerful in expanding how you think about being an LP.
You’re never too good to reach out.
“I will say about a third of my LP investments were into fund managers I never worked with before. I hear of these new GPs from talking with my network. If I like what they do, I’ll reach out via Twitter.”
— Sriram Krishnan, Kearny Jackson
“For every fund I’ve been in, I reached out to them, not the other way around. Every time I invest in a fund that’s either because I know the GP personally, or I know someone who knows the GP.”
— Brent Goldman, Lancelot Ventures
See if the GP has flexibility on the minimum check size
“One thing that can be helpful to know for first-time LPs: GPs often have some flexibility on their minimum check size. I’m a pretty small check (particularly since I’ve been living on a founder salary!), but I can bring other things to the table to help the GPs I invest in (e.g. I highlighted Janine Sickmeyer from Overlooked Ventures in my Forbes column, I’m an advisor to Zecca Lehn from Responsibly Ventures, I send them deal flow from my AuthenTech community of founders). I’ve had luck with reaching out and saying ‘I really believe in what you’re doing. Please let me know if you get enough large checks and have room for some smaller LP investments.’ They’ll usually need to get enough big investments first since there are SEC limits on how many LPs they can have, and then they can let in some smaller, value-add LPs.”
— Rebekah Bastian, OwnTrail
There are multiple ways to do reference checks
“There’s a two-part reference call check that I love that I learned from Scott Cook, who is the founder of Intuit. You ask, ‘I want you to tell me about David. Rate him from 1 to 10. 10 being absolutely perfect, and 1 being horrific.’ And you can basically ignore everything that is said. Most people say 8 or 9. You know they have their answer prepared.
“But then the second question is, ‘What will get David to a 10?’ And that’s where you hear the truth. That’s where you can pay attention.”
— Eric Bahn, Hustle Fund
“Investing into a fund is much like investing in startups. Why does this person have an unfair advantage over everyone else? I talk to the founding GP. I read VC Guide – think Yelp reviews for investors by founders. And if I think the team has an unfair advantage, I invest.”
— Brent Goldman, Lancelot Ventures
“Ask to talk to other current LPs – you can learn a lot about how you will be treated once the fund has your money.”
— Paul Griffiths, 15 & Change
“Being an LP is a ground game. It requires talking to founders and co-investors, and you won’t get much from surface-level reference checking.
“There’s no specific number that I shoot for. I once heard an LP claim to have completed 80 reference checks for one commitment. To me, that seemed like they were doing diligence for the sake of doing diligence. You could have gotten to the same answer well before 80. I reached close to 20 checks in diligence on a fund once, but I often need far less than that. The more important thing is you’re answering the questions you have that pop up in your diligence, that you only do whatever references that you need to get to a yes or no.”
— Anonymous LP, Private Wealth Management Firm
“We are all operating in the business of emotions and trust. It’s best to build trust by word of mouth or references. I’ve never invested in a fund without talking to another manager or entrepreneur in the portfolio. This is across the stack. Top $100B asset managers do 20 back references on $100M venture capitalists. $100M venture capitalists do 20 back references on $10M start-ups. And $10M start-ups do back references on employees. Together, with the bond of trust, this system creates an impact on the world.
“In practice, for example, I don’t have a lot of domain expertise in web 3, but I have plenty of friends who do. So before I invested in [name redacted], I called four people and they all told me this manager was one of the top five.
“This is the under-pinning of asset allocation, but unfortunately this also leads to systematic issues. In fact, I would say this referral network is part of the issue of neglected founders, industries, and geographies not being able to get funded. It’s a huge issue in our country that 2% of women get all VC dollars. That’s horrendous and that means that >50% of our population only gets 2% of funding. That isn’t right. We need more capital to flow to underrepresented or neglected founders or industries or managers. These new managers may not have the network to build traction, but I’m loving all the new amazing, specialized emerging managers doing great work with new strategies popping up.”
— Vijen Patel, 81 Collection
“Do reference calls. Talk to some founders they’ve invested in. Talk to startups in their anti-portfolio. And talk to some of the founders that didn’t work out. For the latter, how did they manage that? What do the founders think of them? If you only talk to the winners in their portfolio, they look like cheerleaders who got lucky and got into some great companies.”
— Asher Siddiqui, Sukna Ventures
Follow-on investors aren’t as big of a differentiator as you might think.
“Top-tier follow-on investors in the past 48 months are no longer a differentiator. Existing managers all talk about mark-ups. Most managers that aren’t incompetent have markups and brand name follow-on investors over the last three years.”
— @Cashflow_Cowboy
Get granular with a fund’s follow-on investors
“A lot of LPs act like they care about which funds are making investments alongside emerging managers. But who those follow-on investors and co-investors are will mean different things to different people based on the following factors.
Which partner at that established fund is actually leading the deal? Is it someone with a track record or a more junior partner?
Which fund are they investing from? Is it their core fund, or a satellite one they’re experimenting with?
“You ultimately need to get to know the people behind every investment decision.”
— Anonymous LP, Private Wealth Management Firm
March 30th is more important than you think
“Ask when you will get your K-1s and insist that it is before March 30th, otherwise you will be stuck extending every year and that’s just a pain.”
— Paul Griffiths, 15 & Change
Don’t rush into investment decisions
“We don’t rush into investment decisions. It takes us time to reach conviction. Unlike early stage VC, in a fund-of-funds, you expect returns from all your investments. Conviction is required to reach trust. We might not rush into the first vintage, but based on how well we get to know the fund manager, might jump into the second vintage.”
— Itay Rotem, EdRITECH
“There are also a lot of venture funds out there, take your time and meet with a range of GPs before you invest to get a feel for what the investment opportunities are and what feels right for you for your LP program.”
— Beezer Clarkson, Sapphire Partners
“Yes, meet at least 20-30 managers before you make an investment, or use a partner. Like anything, at first you will like almost everything, but it takes reps to truly start to build pattern recognition, and manager investing is a probability based exercise; meeting just a few won’t provide enough data points to have a good sense of what meaningful differentiation looks like (i.e.. meaningful differentiation increases the probability of consistent success, much like counting cards in blackjack. It doesn’t guarantee a payout, but you want someone that has their own version of ‘counting cards’.”
— Samir Kaji, Allocate
“Emerging LPs shouldn’t be taking any advice or making any decisions until they’ve met with at least 100 investment firms (and as many different types of firms as they can).
“The reality is that LPs don’t help each other as much as they should. There’s this cooperation versus competition dynamic, this friendly competitiveness, and LPs will be more helpful in less access-constrained deals. That’s something you need to understand as a new LP.”
— Anonymous LP, Private Wealth Management Firm
TVPI hides good portfolio construction
“When I do portfolio diligence, I don’t just look at the multiples, but I look at how well the portfolio companies are doing. I take the top performer and bottom performer out and look at how performance stacks up in the middle. How have they constructed their portfolio? Do the GPs know how to invest in good businesses?
“I’m not just bothered by my TVPI. I also try to look at the companies and the revenue they’re bringing in. Some of a fund’s portfolio companies that haven’t raised a subsequent round, which may not look as good in TVPI, but they may not have needed to raise any subsequent capital to scale further. The point is to assess the quality of the underlying portfolio of ‘businesses’ — so factor that in and look at likely exit opportunities for those companies.”
— Asher Siddiqui, Sukna Ventures
Don’t invest in ESG for the sake of ESG
“Avoid ‘ESG’ if they reduce financial returns, are comprised of unaudited made-up metrics that won’t get reported (e.g. ‘we love the environment, and will only invest in ‘green’ companies’ but the LPA doesn’t provide mention of reportable, audited environmental goals or KPIs, or define what ‘green’ means).”
— Aman Verjee, Practical VC
Past performance is not indicative of future performance
“It takes three funds worth of track record to make it meaningful. But even then, it’s even more complicated. Your strategy and risk-to-return profile for a $5 million Fund I will look meaningfully different than yours for a $150 million Fund III. I wouldn’t recommend relying on these blunt instruments for the emerging manager category. So the advice here is that LPs cannot rely on past performance of earlier funds if the latest fund’s strategy has shifted.”
— Eric Woo, Revere VC
Have an LP thesis
“LPs should have a portfolio construction model. What percent are you investing in generalist funds? What percent in thesis-driven ones? And also, what stages? Pre-seed? Seed? A- and B-funds? Multi-stage?
“You should take the total amount you want to put into funds and separate it with a portfolio construction model that makes sense for your risk tolerance.
“Is your portfolio allocation driven by financial returns or certain goals you have? A lot of LPs might want to invest for non-financial reasons – could be diversity, geographic coverage, verticals, or stage. They might want to support female founders, or ESG. Just like I encourage angels to have a thesis, LPs should have one too. Why am I doing this?”
— Martin Tobias, Incisive Ventures
Why are you helpful as an LP?
“As an LP, you also have to think of your unique value-add. If you have a brand, your name helps with credibility of the fund and helps the GP reach more LPs. On the other hand, you have to think about what kind of LPs a GP would offer their pro rata rights to? For an SPV strategy, those are LPs who:
Backed and believed in the GP from Day 1.
Has written big checks, and/or
Can help the fund’s portfolio companies.”
— Shiva Singh Sangwan, 1947 Rise
“We did have several of those established, persistent performers in the PE/VC portfolio in my prior role though, and that’s because those GPs look for more than just money. They may be looking for someone who’s strategic to their portfolio, but more so they’re looking for kindred spirits. Show why you’re also a convicted investor, like them, because they’re really just looking for true believers.”
— Anonymous LP, Private Wealth Management Firm
Don’t put your eggs in one basket.
“Putting money into an early-stage fund is a very, very high-risk alternative asset category. Every normal family office puts maybe 10 to 15% of their total net worth behind this asset category. Don’t concentrate behind a single manager. Spread it across five, possibly ten, managers who have truly varied networks.”
— Eric Bahn, Hustle Fund
“Invest in a larger number of fund managers than you might think is appropriate. Focus on smaller, tightly managed micro-VCs (I’m assuming that the LP can’t get into the Sequoia / Founders Fund / Benchmark types). Really dig into their strategy, their edge, and their pipeline. And, spend time with them and learn the trade, get into their co-investment program and be ready to execute!”
— Aman Verjee, Practical VC
“Does it make sense to have 17 funds all in web3? Or 17 funds in fintech? Or even 8 in web3 and 9 in fintech? My own fund is counter-cyclical, and I think an LP needs to build a portfolio of top managers across the economy. Healthcare, IoT, fintech, web 3, and other differentiated strategies can comprise an excellent portfolio.
“If an entrepreneur is building in climate tech, there are 10 amazing funds out there who really know climate tech. If you’re building in web3, there are several funds that are so close to the nucleus of innovation and that’s what it matters. But if you’re building in hard industries, we’re trying to become one of the ten. A portfolio that consists of a basket of these top ten funds makes a lot of sense if you believe in investing in venture.”
— Vijen Patel, 81 Collection
“LPs can get very excited about tech and venture. They still need to remember this is a high-risk asset class. They should have clarity of what their expectations are. Venture used to traditionally be 5% of private equity. This is funny money – play money. It’s less so now, but still is. LPs do it because it has the potential to provide outsized, risk adjusted, returns.”
— Asher Siddiqui, Sukna Ventures
Patience is a virtue
“It may take seven to ten years (or longer) to see any real return, so be patient.”
— Cindy Bi, CapitalX
“The reason I chose a lot of managers is also so I can start tracking data. I won’t do re-ups right away because I want to see how they’ll perform over a couple decades or even over 6 years.”
— Vijen Patel, 81 Collection
In closing
The above is by no means all-encompassing as you refine your craft as an LP. Nevertheless, if you’re looking to dive deeper into the art of investing in non-obvious capital allocators, I hope this blogpost serves as a launchpad for your career. Make new mistakes rather than old ones. The world is better off learning from and supporting each other.
If you learned something from the above, I urge you to reach out to any of the above legends and share your appreciation with them. And if you employ any of their tactics, let them know how empowering it was.
Trust me, it’ll go a long way.
*I’ve made light edits to the above quotes for clarity and since my hand can only take so many notes per second.
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.
These past two years, we’ve seen many investors and founders alike lose their pricing discipline. A number of whom believed anything north of a 10-15x multiple was the new normal. Expectedly, it wasn’t here to last. And I fear there may be an overcorrection to revert back to the mean.
Signal was heavily weighted on the names of other investors, whereas it’s now weighted on strictly traction and revenue. As Samir Kajipublished not too long ago, “The market reset provides a return to a rational environment where underwriting of deals has shifted away from a “growth at all costs” mentality, and inclined toward fundamental metrics such as margins, capital efficiency, and the current public market comps.”
The pandemic years
I’ve written before why it’s better to get 70% conviction, than 50 or 90%. 50% is a gamble. And for the past two years, investors made many more and much larger gambles than would have been kosher. When capital became a commodity and we saw a convergence of value adds in the early-stage investing world, one of the only differentiators between firms became more capital, better terms, or more introductions. Quantity became the selling point rather than quality. Subsequently, that also bolstered many a founder to take bigger risks.
Companies were overcapitalized. Companies then hired more talent than they needed, which meant, on average, each employee needed to do less work than previously required. It wasn’t rare that we saw the best talent out there working more than one job. In fact, in a study by Nielsen, over 50% of talent worked for two companies without either knowing. As such, we’ve the trimming of fat over the past few months with massive company layoffs.
Very few investors were going to spend an extra week or two to dig deeper – do a little more homework to get the extra 20% conviction. Why? Because if they did, they’d miss the funding window. They’d miss the opportunity to invest in the next big thing.
I also saw many founders working on 10% improvements and features, rather than building robust, 10x, non-cyclical products. Founders rushed to product-market fit, followed by massive injections to put fuel on the fire, as opposed to taking time to A/B test for channel-market fit and minimum lovable products. Founders also became less scrappy with the surplus of capital. Growth at all costs was revitalized as the memo of the future. We were left with a world that too quickly forgot the importance of cash in the bank in the few months from March of 2020 till the summer.
Where is money after the market correction?
Today, investors are going for 90%, much of that on fundamentals, rather than a technical analysis on markets. People have become more focused on the beta portfolios than the alpha in portfolios – not saying the latter isn’t important. It still is.
The good news is that there are still many more dollars to deploy. The nine- and ten-figure funds aren’t going anywhere. The bad news is while there’s technically already money allocated to invest in early-stage companies, they’re getting deployed more slowly. But we’ve seen a slowdown in the deployment of capital. And while capital calls are usually leading indicators of capital deployment schedules, they became lagging indicators in March’s slowdown.
What are capital calls? No LP keeps a massive amount of money parked in a checking account with 0% interest, aka a VC fund. So, capital calls are a VC’s legal right to call forth a portion of the money promised to them by LPs. Usually capital calls are made semi-annually.
From 2015 to 2018, this metric hovered in the 20% range, however a step change came into effect in 2019 and we’ve been sitting in the 30% range ever since. pic.twitter.com/fF3kOWMGe9
Last year we saw capital call schedules rise from 20% to 32%. As such, timelines were compressed. Funds were deployed in 1.5-2 years. I even saw one-year deployment periods. Today, I’m anecdotally seeing funds revert to a 3-4 year timeline.
What does that mean for founders?
You should prepare for the worst. Things may turn out differently, and that’ll be great, but don’t expect it will. Over the next two years, there will only be a third to half as much capital to deploy into private companies. That also means your competition has increased two- to three-fold.
Focus on your gross margins, your customer acquisition costs (CAC), and your burn multiples. For software companies, aim for greater than 50% gross margins. Your CAC payback periods should be at most a year. And get your burn multiple to one. In other words, you bring back a $1 for every $1 you’re spending. If you’re south of that, great! Instead of raising venture money, see if you can use non-dilutive capital, aka revenue, to help you grow. For those, that are still growing north of three times per year on ARR after you hit $1M ARR, then venture capital is a very viable option.
If you’re raising a new round, show that you’ve hit your milestones and that you have a road to your next set of milestones to raise your next round in 12-18 months. If you’re raising a bridge (or preemptive) round, you’re on a tighter schedule. You need to show you can hit milestones deserving of a new round within six months or less.
Sometimes even when you have all the above, investors still won’t bat an eye. So, at the end of the day, I always go back to the sage advice my friend shared with me. Teach your investor something new. Mike Maples Jr calls it the earned secret. a16z calls it spending time in the idea maze. I don’t care what you call it. Investors pay their tuition to work alongside the best. If you want investors fighting over you, you need to show them value from Day 1.
One reason investors are more willing to express unconventional opinions than people running other businesses is that they don't mind alienating fools. A cookie company boycotted by fools would lose a lot of money. Whereas a VC boycotted by fools would be better off.
In the past two years, when people became bullish, I became bearish. I didn’t trust myself to find signal in hot markets. For example, while I believe in the amazing potential of blockchain and the future of web3, I intentionally chose to look at consumer solutions that were not tied to the chain, unable to justify for most ideas, why the chain was necessary to solve the problem. I found many founders stumbling on a solution, then finding a problem to fit in the solution. Rather than the other way around.
Today, I’m more bullish than ever (when others are bearish). An investor will generate much more outsized alpha being in the nonobvious and non-consensus than being in the consensus. And we’re swimming in an ocean of non-consensus today. As Keith Raboistalked about earlier this year, don’t focus on just optimizing for the beta where you’ll only be optimizing for incremental returns. Focus on the alpha.
Innovation is secular to the macro-economic trends. It’s exactly in this time that I’m excited to uncover the next world-defining teams. That said, I’m looking for world-defining insights I’ve never heard of or seen before.
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.
Earlier this week, I came across a curious quote while reading Sammy Abdullah’s notes on the book eBoys by Randall Stross, chronicling the founding and early days of Benchmark. In it, the quote read: “What’s it like recruiting when the stock price is so high? Really hard. The options offered to new employees were certain to be valueless, as they would depend on the stock ascending still higher. I mean, it’s at such a ridiculous level, there’s going to be a big fall here. The question is sort of when and how.”
2022’s VC landscape
After an insane 1.5-year run, I’ve seen valuation multiples that were 100-200x a company’s revenue get funded. At the end of the day, venture capital is belief capital. And it is not my place to criticize someone else’s belief, but I know that same belief will falter in the coming months to year. We’ve already seen public market stocks fall and VC exit values plummet 90% in Q1 this year. Tiger Global fell 7% in 2021 – its first annual loss since 2016. $10,000 invested in the basket of IPOs for 2021 would be worth $5,500 today. We’re in a correction soon. Or as Martin who I’ve had the pleasure to meet via On Deck calls it, the “Great Asset Repricing.” When exactly? I don’t know.
That said, as a function of the great repricing, VCs are coming in with more aggressive terms to hedge their bets. Greater liquidation preferences. More aggressive anti-dilution provisions. For LPs into late-stage capital allocators, they’re expecting greater minimum hurdle rates. In other words, they expect investors to have an internal rate of return (IRR) of at least 20%. Every year, an investor’s assets need to be worth 20% more than the year before. This is up from 10-12% from back in 2021, which I cited in last week’s blogpost.
And as Martin surmises, we’ll see a lot more inside rounds (investors re-upping in their own portfolio) for two reasons:
Insiders have more information.
Insiders tend to be more conservative on valuation.
And “companies without significant traction to face a very tough fundraising environment in the near term.”
What the hell does all this esoteric jargon mean for employees?
The best private companies are still playing ball with the ball on their side of the court. They have leverage. But most companies that were funded in the past one and a half years won’t. As such, there are four things that will and have already started to happen:
You don’t raise. Cut your burn rate. Stay close to the money. Extend your runway, but set clear expectations. That’s what Alinea did at the start of the pandemic. Your team is in it for the long run. Many may choose to leave, but that is the reality.
You raise, but on a flat or down round. This is better for your employees that you plan to hire, since there is a better chance that their shares will appreciate in the next funding window. But you’re not getting any fancy press releases.
You raise on an up round. That’s great. You make the headlines on TC or Forbes. But it increases the pressure for both your current team members and new hires. VCs add in more aggressive terms. No one’s getting paid until investors get 2-3x their money back via a liquidity event or exit. As a founder, you have more pressure to shoot for a bigger exit than you would have needed to shoot for otherwise. Or else, the team that bled for you for years will get little to no upside for their time and effort.
Or, you go out. Monetarily, no one wins.
So what can you do as a startup employee? Or as a prospective startup employee?
Ask questions on revenue drivers. What do growth metrics look like for the last three months? How does churn and net retention look like? When do they plan to raise their next round? And simply, how much revenue is the company generating? Does the price-to-sales multiple make sense? For example, is the latest valuation of the company 200x the company’s revenue or 50x. The former is likely to come with more insane expectations from their investors. In December last year, Retool wrote a great piece why they chose to raise at a lower valuation and why that makes sense for their team members, which I highly recommend checking out.
Of course, as a startup employee, you want your shares to increase in value, but too much too quickly can be detrimental. We’ve seen the recent example with Fast. They were last valued at $580M according to Pitchbook, but were only making $600K in revenue, but was burning $10M a month. Almost a 1000x multiple!
A growth-stage startup grounded on fundamentals (i.e. traction) will likely still be able to raise. A startup funded on promises that has yet to deliver may not be able to. As Samir Kaji tweeted yesterday:
The late-stage market has definitely re-priced for net-new deals. For those that are expecting across the board big write-downs this year, you may have so many companies are still sitting on a lot of $, and won't need to access the capital markets this year. But next year…
Contrary to popular opinion, a company’s valuation is not how much a startup is worth, but rather it is a bet on the chance they will be as big as their incumbent competitor. Take Yuga Labs as an example. They recently raised $450M on a $4B valuation from a16z and a number of other incredible investors. With that capital injection, they are building Otherside, their take on the metaverse integrating their various NFT properties. Epic Games, on the other hand, is valued at $31.5B. $32 billion for ease of calculation. Yuga’s $4B valuation is a bet their investors are taking that Yuga has a 12.5% chance (4/32) to be as big as Epic, and by transitive property, Fortnite.
As an employee, the bet you make is not with capital, but with time – the world’s scarcest resource. We’re coming into a world soon where cash is king. Make your judgments accordingly.
To close, I had to cite Brian Rumao‘s tweet, early investor in Fast. He boiled it down beautifully in 280 characters.
Lesson 8: Investors lose at most 1x their capital. Employees lose much more.
I feel for Fast employees who lost their jobs and equity overnight.
Most startups don't fail this fast after raising $100M+. Remind yourself that the shutdown is more painful for employees than angels.
Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Back in mid-2020, I started writing a piece on 99 Pieces of Unsolicited, (Possibly) Ungooglable Startup Advice. There was no ETA on the piece. I had no idea when I would publish it, other than the fact, that I would only do so once I hit the number 99. Yet, just like how I was inspired to write how similar founders and funders are, it finally dawned on me to start writing a similar piece for investors around mid-2021. The funny thing, is though I started this essay half a year later, I finished writing it one and a half months sooner while I was still on advice #95 for the former.
Of course, you can bet your socks I’ve started my next list of unsolicited advice for investors already. Once again, with no ETA. As I learn more, the subsequent insight that leads to an “A-ha!” moment will need to go deeper and more granular. And who knows, the format is likely to change.
I often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve more nuance, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites for investors below cover everything, in no particular order other than categorical resonance, including:
Unfortunately, many of the below advice came from private conversations so I’m unable to share their names. Unless they’ve publicly talked about it. Nevertheless, I promise you won’t be disappointed.
As any Rolodex of advice goes, you will not resonate with every single one, nor should you. Every piece of advice is a product of someone’s anecdotal experience. While each may differ in their gravitas, I hope that each of the below will serve as a tool in your toolkit for and if the time comes when you need it most.
To preface again, 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.
General advice
1/ To be in venture capital, you fundamentally have to be an optimist. You have to believe in a better tomorrow than today.
2/ “Everyone has a plan until they get punched in the mouth.” – Mike Tyson. Told to me by an LP who invests in emerging and diverse managers.
3/ Have good fluidity of startup information. “No founder wants to meet a partner and have to answer the same questions again and again. Best partnerships sync and with every discussion, process the questioning.” – Harry Stebbings
4/ The lesson is to buy low, sell high. Not to buy lowest, sell highest.
5/ “The New York Times test. Don’t do anything you wouldn’t want to see on the front page of the NY Times.” – Peter Hebert
6/ “It takes 20 years to build a reputation and five minutes to ruin it.” – Warren Buffett
7/ When you’re starting off as an investor, bet on one non-obvious founder – a real underdog. Support them along their entire journey. Even if there’s no huge exit, the next one will be bigger. When their VPs go off and start their own businesses, they’ll think of you first as well.
8/ When planning for the next generation of your firm’s successors, hire and mentor a cohort of brilliant investors, instead of focusing on finding the best individual. Investing is often a lonely journey, and it’s much easier to grow into a role if they have people to grow together and commiserate with.
9/ “When exit prices are great, entry prices are lousy. When entry prices are great, exit prices are lousy.” – David Sacks
10/ Illiquidity is a feature, not a bug. – Samir Kaji
11/ Three left turns make a right turn. There is no one way to break into VC. Oftentimes, it’s the ones with the most colorful backgrounds that provide the most perspective forward.
12/ “Whenever you find yourself in the majority, it is time to pause and reflect.” As an early stage investor, I find Mark Twain’s quote to be quite insightful.
13/ “It’s not about figuring out what’s wrong; it’s about figuring out what is so right. The job of an investor is to figure out what is so overwhelmingly great, or so tantalizingly promising that it’s worth dealing with all the stuff that’s broken.” – Pat Grady retelling a story with Roelof Botha
15/ Track your deal flow. Here’s how I track mine. Another incredible syndicate lead with over 5x TVPI (total value to paid in capital) I met keeps it even simpler. A spreadsheet with just 4 columns.
Company
Valuation in
Valuation out
Co-investors – This is where you start sharing deal flow with each other here.
16/ One of your best sources of deal flow might not be from other investors, but those who are adjacent to the venture ecosystem, like startup lawyers and VC attorneys.
17/ A WhatsApp group with your portfolio is a great tool for diligencing investments, not as much for sourcing deals.
18/ “Decide once you have 70% conviction.” – Keith Rabois. Don’t make decisions with 40% conviction since that’s just gambling. Don’t wait till 90% conviction because you’ll miss the deal for being too slow.
19/ Ask questions to founders where they show grit over a repeated period of time. They need to show some form of excellence in their life, but it doesn’t have to be in their current field. From a pre-seed manager with 3 unicorns in a portfolio of 70.
20/ As an emerging manager, one of the best reasons for investing in emerging markets: Do you want to see the deals that the top 0.1% see? Or do you want to see the deals that the 0.1% passed on? From the same pre-seed manager with 3 unicorns in a portfolio of 70.
21/ Every day, open your calendar for just one hour (two 30-minute slots) to founders you wouldn’t have had otherwise. Your network will compound. From a manager who’s invested in multiple unicorns and does the above from 10-11PM every night.
22/ The bigger your check size, the harder you have to fight to get into the round.
23/ The best investors frontload their diligence so they can have smarter first conversations with founders.
24/ Perform immersion-based diligence. Become super consumers and super users of a category, as close as you can get to subject-matter experts. That way you know very quickly after meeting a founder if their product is differentiated or unique. While you’re at it, write 2-3 page bug report stress-testing the product. Founders really do appreciate it.
26/ When a founder can’t take no for an answer and pushes back, “I always have to accept the possibility that I’m making a mistake.” The venture business keeps me humble, but these are the benchmarks that the team and I all believe in. Inspired by JCal and Molly Wood.
27/ Win deals by “sucking the oxygen out of the air.” In investing there are two ways to invest: picking or getting picked. Picking is naturally in a non-competitive space. Getting picked is the exact opposite. You have to eat competition for breakfast. And when you’re competing for a deal everyone wants to get into, you have to be top-of-mind. You need to increase the surface area in which founders remember you, not just to take their time, but to be really, really valuable in as much time as you can spend with them. Inspired by Pat Grady on an anecdote about Sarah Guo.
Pitching to LPs
28/ Surprises suck. On Samir Kaji’s podcast, Guy Perelmuter of GRIDS Capital once said: “There’s only one thing that LPs hate more than losing money. It’s surprises.” More here.
29/ Fund I: You’re selling a promise. Fund II: You’re selling a strategy. And, Fund III: You’re selling the returns on Fund I.
30/ Steven Spielberg didn’t know what E.T. should look like, so he had everyone write down people they respected. And so E.T. looked a bit like everyone on that list, including Carl Sandburg, Albert Einstein and Ernest Hemingway. In a very similar way, come up with a list of your ideal LPs. And create a fund based on what they like to see and what you can bring to the table. Oftentimes, it’s easier to ask them for personal checks than checks out of their fund.
31/ Ask the founders you back for intros to their other investors as potential LPs in your fund.
32/ The return hurdles for LPs are different per fund type: *subject to market motions. Timestamped in Sept 2021 by Samir Kaji
Nano-fund (<$20M): 5-7x+
Seed fund: 3-5x+
Series A: 3x+
Growth: 2-2.5x+
Crossover/late growth (driven by IRR, not multiples): 10-12%+
33/ “If you know one family office, you know one family office.” Said by one of the largest LPs in venture funds. Each family office situation is uniquely different.
34/ Family offices are surprisingly closed off to cold emails, but often share a lot of deal flow with each other. Have co-investors or founders introduce you to them.
35/ It takes on average 2 months for an institutional LP to do diligence and reference checks. Plan accordingly.
36/ LPs look for:
Track record (could be as an individual angel as well)
Value add
Operational excellence
37/ Data shows that first-time/emerging managers are more likely to deliver outperformance than their counterparts, but as one, you still need to show you have experience investing.
38/ People, including LPs, tend to remember stories, more than they do data. Teach your LPs something interesting.
39/ LPs have started looking more into two trends: private investments and impact/ESG initiatives. By nature of you reading this blogpost, you’re most likely the former already. The latter is worth considering as part of your thesis.
40/ Every coffee is worthwhile in some form.
41/ LP diligence into VCs break down into two types: investment and operational DD.
Investment DD includes team, incentive alignment, strategy, performance, current market, and terms/fees.
Team: What does leadership look like? How diverse are you?
Alignment: Do you have performance-based compensation?
Strategy: What sectors are you investing into? What does your underwriting discipline look like?
Performance: What do your exits look like? Are you exits repeatable?
Market: What are the current industry valuations? Economies of scale?
Terms/fees: Are they LP friendly? Are the fees based on alphas or betas? Are they aligned with your value add?
Operational DD includes business model, operational controls, tech platforms, service providers, compliance and risk.
42/ If you’re pitching to other venture funds to be LPs, say for $250K checks, larger funds (i.e. $1B fund) typically have fund allocations because check size is negligible. And a value add as deal flow for them at the A. Whereas, smaller funds don’t because it is a meaningful size of their fund. So, GPs write personal checks.
43/ If you’re planning to raise a fund, think of it like raising 10 Series A rounds. For most Series A rounds, a founder talks to about 50 investors. So for a Fund I, you’re likely to talk to 500 LPs to close one.
44/ Send potential LPs quarterly LP updates, especially institutions. Institutions will most likely not invest in your Fund I or II, but keep them up to date on the latest deals you’re getting into, so you’re primed for Fund III.
45/ Family offices want to get in top funds but most can’t because top funds have huge waitlists. Yet they still want access to the same deals as top funds get access to. They’re in learning mode. Your best sell to family offices is, therefore, to have:
Tier 1 investors as your fund’s LPs
Tier 1 investors as co-investors
Deals that they wanted to get into anyway
46/ Your Fund I LPs are going to be mostly individual angels. They believe in you and your promise, and are less worried about financial returns.
47/ Institutional LPs are looking for returns and consistency. If you say you’ll do 70% core checks and 30% discovery checks, they’re checking to see if you stick to it. Institutions aren’t in learning mode, instead you as a fund manager fit into a very specific category in their portfolio. Subsequently, you’re competing with other funds with similar foci/theses as you do.
48/ Be transparent with your IRRs. If you know you have inflated IRRs due to massive markups that are annualized, let your (potential) LPs know. For early stage, that’s probably 25-30%+. Especially when you’re in today’s frothy market (timestamped Jan 2022). Or as Jason Calacanis says it for his first scout fund that had crazy IRRs, “It’s only down from here.”
49/ Don’t waste a disproportionate amount of time convincing potential LPs about the viability of your thesis. Shoot for folks who can already see your vision. If you manage to convince an LP that didn’t previously agree, they may or may not end up micromanaging you if your thesis doesn’t work out as “expected.” Inspired by Elizabeth Yin.
50/ “The irony for us was LPs asking about portfolio construction was a sign that the meeting was going poorly.” – Jarrid Tingle.
51/ Institutional LPs prefer you to have a concentrated startup portfolio – less than 30 companies. They already have diversification across funds, so they’re maximizing the chance that their portfolio has fund returners. That said, you’re probably not raising institutional capital until Fund III. Inspired by Jarrid Tingle.
52/ If you’re an emerging manager with a fund is less than 4 years old, boasting high IRR (i.e. 50%+) is meaningless to sophisticated and institutional LPs. Focus on real comparative advantages instead. – Samir Kaji.
53/ When raising early checks from LPs, ask for double the minimum check size. Some LPs will negotiate down, and when they only have to commit half of what they thought they had to, they leave feeling like they won.
54/ When potential LPs aren’t responding to your follow ups/LP updates, send one more follow up saying: “I am assuming you are not interested in investing into our fund. If I am wrong, please let me know or else this will be your last update.” Told to me by a Fund III manager who used this as her conversion strategy.
55/ It’s easier to have larger checkwriters ($500K+) commit than smaller checkwriters (<$100K). $500K is a much smaller proportion of larger checkwriters’ net worth than checkwriters who write $100K checks. And as such, smaller checkwriters write less checks, have less “disposable income”, and push back/negotiate a lot more with fund managers before committing. Told to me by a Fund III manager.
Fund strategy/management
56/ As an investor, if you want to maintain your ownership, you have to continue requesting pro-rata rights at each round.
58/ “Opportunity funds are pre-established blind pool vehicles that eliminate the timing issues that come with deal-by-deal SPVs. Opportunity funds sometimes have reduced economics from traditional 2/20 structures, including management fees that are sometimes charged on deployed, not committed capital. Unlike individual SPVs, losses from one portfolio company in an opportunity fund offset gains from another when factoring in carried interest.” – Samir Kaji. See the full breakdown of pros and cons of opportunity funds here.
59/ There are two ways to generate alphas.
Get in early.
Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.
60/ Sometimes being right is more important than being in the non-consensus. Inspired by Kanyi Maqubela.
Market risk as a function of ownership – What is the financial upside if exit happens? Is it meaningful enough to the fund size?
Judgment risk – Are you picking the right companies?
Win rate risk – How can you help your portfolio companies win? What is your value add?
62/ By Fund III, you should start having institutional capital in your investor base.
63/ The closer you get to investing in growth or startups post-product-market fit, the closer your capital is to optimization capital. Founders will likely succeed with or without you, but your name on the cap table will hopefully get them there faster and more efficiently.
64/ If you’re a traditional venture fund, you have to invest in venture-qualifying opportunities, like direct startup investments. But you can invest up to 20% of your fund’s capital in non-venture-qualifying opportunities, like tokens/SAFTs (simple agreement for future tokens), real estate, secondaries, and so on.
65/ If increased multiples coming out of various vintage funds, feel free to deviate from the normal 2-20. Many funds have 25 or 30% carry now, or accelerators where 20% scales with multiples (and often with a catch-up back to 1.0x at higher carry). – Samir Kaji
66/ Normally, fund managers take 2% management fees, usually over 10 years, totaling 20% over the lifetime of the fund. These days, I’m seeing a number of emerging managers take larger management fees over less years. For example, 10% as a one-off. Or 5% over 2-3 years.
67/ “The razor I apply to investing and startups is that every decision that increases your probability of wild outlier success should also increase your probability of total failure. If you want to be a shot at being a 10x returning fund? You’ll have to take on the higher likelihood of being a 1x. If you think you’re going to build the next Stripe? You’re going to have to run the risk of going nowhere.” – Finn Murphy
69/ The longer you delay/deprioritize having diverse partners, the harder it’ll be to hire your first one.
Advising founders/executives
70/ A founder’s greatest weakness is his/her/their distraction. Don’t contribute to the noise.
71/ It’s far more powerful to ask good questions to founders than give “good answers”. The founders have a larger dataset about the business than you do. Let them connect the dots, but help them reframe problems through questions.
72/ You are not in the driver’s seat. The founder is.
73/ A great reason for not taking a board seat is that if you disagree with the founders, disagree privately. Heard from a prolific late-stage VC.
74/ Advice is cheap. Differentiate between being a mentor and an ally. Mentors give free advice when founders ask. Allies go out of their way to help you. Be an ally.
75/ The best way to be recognized for your value-add is to be consistent. What is one thing you can help with? And stick to it.
76/ Productize your answers. Every time a founder asks you a question, it’s likely others have the same one. Build an FAQ. Ideally publicly.
77/ If you have the choice, always opt to be kind rather than to be nice. You will help founders so much more by telling them the truth (i.e. why you’re not excited about their business) than defaulting on an excuse outside of their control (i.e. I need to talk with my partners or I’ve already deployed all the capital in this fund). While the latter may be true, if you’re truly excited about a founder and their product, you’ll make it happen.
78/ Help founders with their firsts. It doesn’t have to be their first check, but could also be their first hire, engineer, office space, sale, co-founder, team dispute, and so on.
79/ There are four big ways you can help founders: fundraising, hiring, sales pipeline, and strategy. Figure out what you’re good at and double down on that.
80/ Focus on your check-size to helpfulness ratio (CS:H). What is your unique value add to founders that’ll help them get to their destination faster? Optimize for 5x as a VC. 10x as an angel.
81/ “The job of a board is to hire and fire the CEO. If you think I’m doing a bad job, you should fire me. Otherwise, I’m gonna have to ask you to stay out of my way.” – Frank Slootman to Doug Leone after he was hired as CEO of ServiceNow.
SPVs and syndicates
82/ The top syndicates out there all have 3 traits:
Great team
Great traction
Tier 1 VC
If your deal has all of the above, and if you raise on AngelList, your deal is shared with the Private Capital Network (PCN), which AngelList’s own community of LPs and investors, a lot of which are family offices, who allocate at lest $500K of capital per year.
83/ If you’re raising an AngelList syndicate, you need to raise a minimum of $80K or else the economics don’t really make sense. AL charges an $8K fee.
84/ If you want to include Canadian investors in your syndicate, for regulation purposes, you need to invest 2% of the allocation size or $10K.
85/ Investing a sizeable check as a syndicate lead (e.g. $10K+) is good signal for conviction in the deal, and often gets more attention.
86/ 99% of LPs in syndicates want to be passive capital because they’re investing in 50 other syndicates. You can build relationships individually with them over time, but don’t count on their strategic value.
87/ Historically, smaller checkwriters take up 99% of your time. Conversely, your biggest checkwriters will often take up almost no time. Even more true for syndicates.
88/ LPs don’t care for deals where syndicate leads have time commitment without cash commitment.
89/ Don’t give LPs time to take founders’ time. Most of the time LPs don’t ask good questions, so it’s not worth the effort to set up time for each to meet with founders individually. On the other hand, a good LP update would be to host a webinar or live Q&A session. One to many is better than one to one.
90/ There’s a lot of cannibalism in the syndicate market. The same LPs are in different syndicates.
91/ Choose whether you will or will not send LP updates. Set clear expectations on LP updates. And if you do, stick to that cadence. The people who write you the $1-5K checks are often the loudest and demand monthly updates. If you choose not to, one of my favorite syndicate leads says this to their LPs, “We won’t give any LP updates. I’ve done my diligence, and I won’t give information rights. I have a portfolio of hundreds of deals, and I can’t be expected to give deal-by-deal updates every month or every quarter. So if you are investing, just know you’re along for the ride.” Some LPs won’t like that and won’t invest, but mentioning that upfront will save you from a whole lot of headaches down the road.
92/ If you’re setting up an SPV to solely invest in a fund (or where more than 40% of the SPV is going into the fund), all your SPVs can’t against the 249 LPs cap on a fund <$10M and a 99 cap on a fund >$10. But you can invest in funds if you’re setting up an SPV to invest in more than one fund. Context from Samir Kaji and Mac Conwell.
Evergreen/Rolling funds
93/ Just like vintage years/funds are important for traditional funds, vintage quarters matter to your LPs. If they didn’t give you capital during, say Q2 of 2021, when you invested in the hottest startup on the market, your Q1 and your Q3 LPs don’t have access to those returns.
94/ Whereas GPs typically make capital calls to their LPs every 6 months, AngelList’s Rolling Funds just institutionalized the process by forcing GPs to make capital calls every 3 months.
Angel investing
95/ “The best way to get deal access isn’t to be great with founders—it’s to have other investors think you’re great with founders. Build a high NPS with investors, since they have meaningfully more reach than an operator. But of course, fight hard to be great with founders too or else this will all crash down.” – Aaron Schwartz
96/ Make most of your personal mistakes on your own money as an angel (before you raise a fund).
97/ When you’re starting off, be really good at one thing. Could be GTM, growth, product, sales hires, etc. Make sure the world knows the one thing you’re good at. From there, founders and investors will think of you when they think of that one thing. Unless you’re Sequoia or a16z, it’s far better to be a specialist than a generalist if you want to be top of mind for other investors sharing deal flow.
98/ “As an angel investor, it’s more important to be swimming in a pool of good potential investments than to be an exceptionally good picker. Obviously if you’re able to be both, it’s better 🙂 but if you had to choose between being in a position to see great deals and then picking randomly, or coming across average deals and picking expertly, choose the former.” – Jack Altman
99/ “Just like the only way to get good at wine is to drink a lot of wine. The only way to get good at investing is to see a lot of deals.” – Lo Toney.
Disclaimer: None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
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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.
“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.
Seemingly, everyone these days – from Twitter to podcasts to blogposts (including mine) – talk about buying and investing in startups. What are best practices for investment theses? How do I pick the best companies to invest in? Conversely, how do I get picked or get allocation into hot startups? But people rarely seem to be talking about selling positions. So, if you know me, I hit up two of the smartest people I know – one early-stage, the other growth-stage. Both of whom might be familiar faces on this blog. So I asked them:
How do you think about selling a position? How much does DPI matter for your investors?
The below insights include minor edits for clarity.
The notice that you’ve all seen a million times
None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
Shawn Merani (Parade Ventures)
Shawn was instrumental in my early career growth in venture. When I met him years ago, he was still running Flight Ventures, where he wrote early checks into Dollar Shave Club and Cruise Automation and was one of the first syndicates on AngelList. There he led a network-based model of syndicate leads, which I’ve heard been described by others as a “venture partner program on steroids.” Now he’s the solo GP at Parade Ventures, a seed stage venture fund investing in enterprise-themed companies.
“I would preface all of this with the fact we have never fully exited a position before a traditional liquidity event, but more so, have managed our position given the duration of our ownership and to generate returns for our LPs and manage risk.
“We talk to founders all the time, and foster a relationship that grows. When I was writing check sizes for 1-5% of ownership, my engagement then is very different from my engagement with founders now, where we take more concentrated bets.
“When it comes to selling, it’s about influence and information. The larger our ownership, the more information we have access to. And if a company is doing well, we don’t think about selling. In fact, it’s the exact opposite; we buy more. If things are working, we take our pro rata. In some cases, we take more than my ownership target. And founders are willing since we’ve been helping them from the beginning. We know when there’s going to be a 3-4x uptick every 12-18 months. Compounding is powerful.
“Our investors back the fund because they trust us. They don’t talk to the founders as often as we do. They trust our decision when we say we should buy more or keep our shares. There are two ways to talk about DPI:
1. Making money for your current investors, and 2. Telling the story.
“Selling is really a case-by-case scenario, and it really depends on my relationship with the founder. All the equity in which I sold so far has been before Parade. But if we know the company is doing well, we buy more. There are also holding periods to consider under QSBS, which has huge tax benefits.”
For those that are unfamiliar with the terminology, DPI means distributions to paid-in capital. Effectively, how much money you actually return to your investors versus “paper returns”. QSBS, or qualified small business stock, tax exemption allows investors in qualified businesses to avoid 100% of the capital gains tax incurred if they hold their stock for more than 5 years.
Ratan Singh (Fort Ross Ventures)
I posed the same question to someone I’ve been a huge fan of the day I met him – Ratan Singh, Partner at Fort Ross Ventures. He’s an investor in some of the most recognizable businesses today, including the likes of Rescale and Clearcover, as well as holds board seats at Blueshift and Ridecell. You may remember Ratan from a previous essay about speed as a competitive advantage for investors. And you’ll likely see him a lot more on this blog. He summed it up best in our chat when he said, “There are two reasons why an investor needs to care about DPI: time horizon and fund strategy.” Both of which are variables, not constants, between early- and growth-stage investments.
“The true metric at the end of the day is DPI. DPI is turning in money to your investors. And there are two reasons why an investor needs to care about DPI: time horizon and fund strategy.
“Let’s start with time horizon. For a seed stage fund, as you get close to the end of your fund cycle, that’s when DPI matters. What type of vintage is the fund in? In 2021, it’s going to be the 2010 and 2011 funds.
“For the majority of the time, you want to ride your winners. At the end of your time horizon, ask for a one- to two-year extension. Usually LPs want more money or their shares distributed. They’ve already waited 10 years. Two more won’t make a difference, especially if you have some big fund returners in the making.
“For fund strategy, did you meet the objectives for your LPs already? If you have, and you want to sell some of your winnable deals in your portfolio to help raise your Fund II because those are the same LPs that would re-up in your next fund, then you might consider selling.
“The worst reason to sell is that you want to take the wins you currently have since you think the market is overvalued. ‘I’m at the peak.’ Or ‘I want to take chips off the table because there’s something bad that will happen, but that is very hard to predict.’
“There were a bunch of funds at the beginning of this year that sold their entire positions. They were desperate to lock in a win. They sold because they thought the market was at the top. And, they were wrong. I’m against it. Selling early doesn’t fully realize the strategy you have put forth. For us, at the growth stage, we shoot for 48 months to an exit. If it takes longer, did we underwrite it wrong? But even if it does, the case may be that the company is growing a little slower than expected.
“At the early stage, all funds will say 2 to 3x cash-on-cash in the LP presentation. Most funds return 1 to 1.5x, on average, with most funds total DPI at 1.2 to 1.5x, which barely returns the fund. Before your time horizon, everyone likes to cite unrealized gains and mark ups because TVPI’s all they have.
“DPI matters most for funds in the top quartile – the top returners, funds with more than $500 million, or nowadays, $1 billion mega-funds. For the bottom majority of funds, early DPI won’t matter. They would be limiting their upside.
Author’s Note: Notice that 65% of financings lost money for their investors. Source: Correlation Ventures
“The new interesting commentary is that – where the job is getting harder – a lot of crossover funds are making binary bets. Finding the one deal that’s the next Salesforce – the next industry-defining company. And putting a lot of capital to find that one or two companies. Tiger and Coatue, still maintain that 10-12% IRR, but spend a lot to find the company that’ll be the next Databricks. Every generation has their industry-defining companies. And, they’re willing to lose it all to find that one.
“You usually don’t see this at the growth stage. It’s bad for innovation. Everyone is trying to find investments that are scaling. 1000 investments in the past year became unicorns. And there are 3000+ unicorns. Yet, the top five to seven companies are still undercapitalized.”
In closing
As we closed the selling part of our conversation, Ratan shared a great quote from an Economist article:
“Flush with cash amid a deal frenzy, what is the industry to do? One option would be to liquidate portfolios, that is, to sell more assets than it buys, in effect trying to cash in some chips when prices are high. As yet, however, this does not seem to be happening. Take the figures for three big managers, Blackstone, Carlyle and KKR. So far this year for every $1 of assets, in aggregate, that they have sold, they have bought $1.30. Although Carlyle is being more cautious than the other two firms, these figures indicate that the industry overall thinks the good times will roll on.”
In fairness, as the saying goes, the high risk, high reward. Data does show that the funds with the greatest track records have more deals that lose money than those make them more money than they invested.
Interestingly enough, there’s also a huge differential between the world’s most valuable and most funded startups. According to Founder Collective, “the most valuable companies raised half as much capital and produced nearly 4X the value!” All of which echo Ratan’s words. “The top five to seven companies are still undercapitalized.”
The public often looks towards invested capital as a proxy of startup performance. But the data suggests that isn’t the case. In the words of the team at Founder Collective, “capital has no insights.” One of my favorite lines from Ashmeet Sidana of Engineering Capitalframes it is still: “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation.”
But when DPI boils down to selling on multiples at the end of the day, I often reference Samir Kaji‘s tweet on the return hurdles expected of different stages of investors. As you might guess, the return expectations of each type of fund varies based on fund strategy.
Since it was asked, return hurdles for LPs are for different types of funds:
Nano-Fund (<$20MM)- 5-7X+ Traditional Seed Fund – 3-5X+ Series A: 3X+ Growth – 2-2.5X+ Crossover/late growth – IRR driven – 10-12%+
As all things in the world, exiting is just as nuanced and complicated as entering. Hopefully, the above insights will be another set of tools for your toolkit.
If this essay has inspired more questions, here are some further reading materials, courtesy of Ratan:
Thank you Shawn and Ratan for reading over early drafts.
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From market risk to product risk to execution risk, I’ve written many a time the types of risks a founder takes, including here, here, and here. As well as shared that the first and foremost question founders need to answer is: What is the biggest risk of this business? Subsequently, is the person who can solve the biggest risk of this business in the room (or on the team slide)?
Over the weekend, I heard an incredible breakdown of the other side of the table. Rather than the founder, the three types of risks an investor takes. The same of which need to be addressed for LPs to invest. From Kanyi Maqubela on Venture Unlocked.
Market risk as a function of ownership
Judgment risk
Win rate risk
Market risk as a function of ownership
If you’re investing in an consensus market – be it hot, growing, and is garnering a lot of attention, you don’t need a huge percentage. I mentioned before that every year there are only 20 companies that matter. And the goal of a great VC is to get into one of these 20 companies. Ownership doesn’t matter. Even 1% of a $10B outcome is a solid $100 million.
On the other hand, if you’re in a small or non-consensus market, you need a meaningful ownership to justify your bets. For the same $100 million return, you need to maintain 10% at the time of a unicorn exit.
Going back to economics 101, revenue is price multiplied by quantity. Revenue in this case is your returns, your DPI, or your TVPI. Price is the valuation of the business. Quantity is how much you own in that business. Valuation, as a function of market size, and percent ownership are inversely proportional to reach the same returns. The smaller the market, the more ownership matters. The bigger the market, the less it matters.
Judgment risk
At the top of the funnel, the job of any investor is to pick or to get picked. I’ll take the latter first. Getting picked is often far less risky. But far harder to get allocations for, especially if you’re a fund that has ownership targets, vis a vis the market risk above. At the same time, the larger your check size, the harder it is to squeeze into the round.
To generate alphas from picking, there are two ways:
Get in early.
Go to where everyone else said it’ll rain, but it didn’t. Do the opposite of what people do. That said, being in the non-consensus means you’ll strike out a lot and it’ll be hard to find support.
The question to ask yourself here is: What do you know that other investors are overlooking, underestimating, or altogether not seeing? And how did you reach that conclusion as a function of your experience and analysis?
As Kanyi said on the podcast, “We think we’ve got unusually good judgment and nobody else likes this, but we like it for reasons that are unfair.” The unfair part is key.
Win rate risk
Win rate risk breaks down to what unique advantage you, as an investor, bring to the table that will help the company win. In simpler terms, what is your value add? Of the businesses you say “yes” to, can you increase the number of those who win? As an early-stage investor – angel or VC, there are four main ways an investor can help founders:
Access to downstream capital or capital from strategic investors
Access to talent – How can you increase the output of the business?
Sales pipeline – How can you help grow revenue directly?
Strategy – Do you have unique insight into the industry, business model, product, GTM, or team management that will meaningfully move the business forward?
In closing
If you’re an investor, I hope you found the above as useful of a reframing as I did. If you’re a founder reading this, I often find it useful to stand in the shoes of your investors. And in understanding how your investors think, you can better formulate your pitch that’ll align your collective incentives.
The conversation around risk management, at the end of the day, is a conversation of prevention. A realm of prevention while useful to hedge your bets is a strategy to not lose. It’ll help your LPs find comfort in investing dollars into you. But to truly stand as a signal above the rest and to win, you have to look where other investors aren’t. The non-obvious. Specifically the non-obvious that’ll become obvious one day. And you have to do so consistently.
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Years ago, I remember reading somewhere, “Writer’s block is not that you don’t have any ideas. It’s when you don’t have ‘good enough’ ideas.” In my opinion, one of the greatest fatalities of the 2020s is not that people lack ideas. But people have a poor way of capturing ideas when ideas do come to them.
And in the theme of ideating in the busy world we live in today, I wrote a short thread earlier this week on the seven ways I capture ideas.
I carry a physical journal almost everywhere I go. Personally opt for a nice, weighty journal that I can’t wait to write in (none of that spiral bound, thin page notebooks, but that’s personal preference). My favorite brands: Leuchtturm1917/ Moleskine Page density: >150 g/m2
While I’m at it, a good pen. I prefer felt tip or fountain pen. Psychologists do say you tend to remember thoughts more if you physically write them out, over typing them out. For felt tip: Staedtler fineliners Fountain pen: LAMY
Reserve a full page for every idea. Even if your idea is only one sentence, give it space so that in the future you can come back to it and flush it out. As the wise Ron Swanson once said, “Never half-ass two things. Whole-ass one thing.”
Allocate at least 10 minutes to generate ideas. Even if you can’t think of anything for 10 minutes, sit through the whole 10. A few months ago, amidst a catch-up, a founder friend of mine – for lack of better words, a serial builder, having created more apps that I can count – shared with another friend and I something incredibly insightful about finding inspiration. “Not enough people give themselves bored time. To produce ideas, you have to give yourself time to be bored.” These days, I try to allocate 30 minutes of bored time.
I have a whiteboard in my shower. Yes, I take shower thoughts seriously. In fact, this blogpost originated from a shower whiteboarding session earlier this week. I’m not really picky on brand here, since it’s just to get thoughts on a board as quickly as I can, but get rain-proof markers.
Handwritten notes are notoriously hard to track. So, I have a 3-step process for this.
I have a table of contents at the back of every notebook. Usually reserve 4 pages for that. In there, I write down, page #, title of each journal entry, and key/most thought-provoking content.
By the time I finish each journal, I revisit the now-completed table of contents to highlight/circle what resonates with me the most from that table.
A few months later or 1-2 journals later, I revisit the same table of contents, browse through what I highlighted/circled, and for those that STILL resonate, I port over to my Notion, which becomes more or less my evergreen knowledge/idea hub.
When I’m completely lost or need inspiration, I find that the best way to generate ideas is to ask great questions. For questions on people and passions, I’m a big fan of Tim Ferriss and Sean Evans. For startup or VC questions, I love Harry Stebbings and Samir Kaji.
As a bonus eighth tip which I didn’t include in the Twitter thread, if you are still stuck, I find the question “What is the most important question I should be asking myself today?” quite useful.
Some examples of things I write in my idea journal:
Startup ideas
New things I learned in the venture capital space
Blogpost ideas
Introspective thoughts
Phrases and vernacular that other people say or write that I really like
Great questions to ask myself or others
Recipes I come up with
Dreams
Riddles or puzzles
Short stories
Concept art
In sum, anything is fair game. The more I allow my mind to expand without constraints, the more I’m able to draw parallels between seemingly disparate data points and create new meaning. At least for myself.
In closing
I passed by another quote over the years, and the attribution escapes me. “If you have don’t have any ideas, read more. If you have ideas, write more.” I’d extend it even further by saying, when you have a deficit of inspiration, consume. Read and listen more. There is a plethora of content out there today. And they are all more accessible than ever – from books to podcasts to articles to videos. When you have a surplus of inspiration, produce. Write and do more.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
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