When your message lands in someone’s inbox, do they let out a sigh of relief – excited to click into that email – or are they dreading to click it open – knowing fully well that you may be tracking their open rate?
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.
If you’re helpful, and I don’t mean that you think you’re helpful, you’ll get the former response. Communication, or for that matter, feedback and help, is not measured by what leaves your mouth, but by how much reaches the other person’s ears. If otherwise, you get the latter.
As the saying goes, a friend in need is a friend indeed. It is no less true in the world of startups. Your brand is built on times when others need you most. And there are two types of moments when others need you most:
When they’re in deep shit, and
When they’re an outsider.
The former needs no introduction.
There are 10-15 moments in a startup’s journey when shits hits the fan. And if you’re on speed dial when that happens, founders will remember you for life.
So, let me elaborate on the latter.
Insiders and outsiders
Who’s an insider? Insiders are:
Founders of unicorn startups
Early team members or executives at $1B+ companies
Investors who were some of the first ones to back at least one (ideally many) unicorn companies
Or best friends with at least one of the world’s top investors (or any of the above)
Who’s an outsider? Everyone else. That’s 99.99% of people out there. And I might be missing a few 9’s after the decimal.
Seedscout’s Mat Sherman wrote a great Twitter thread at the beginning of this year, one I’ve cited here and here about how founders who are outsiders can win at fundraising.
The no bullshit guide to raising angel funding/venture capital as an outsider.
If you take the other side of the table as an investor, specifically an early-stage investor, our job is to increase the aperture at the top. We define the archetypes of founders who will get funded by downstream capital. We decide what the funnel looks like. Simply put, we decide what obvious looks like.
Helping one outsider become an insider
If you’re someone who’s excited about putting ‘investor’ on your resume and is willing to put in the legwork for at least a decade to become a great one… Frankly put, if you intend to make early-stage investing your career, then you need to bet one someone non-obvious. Just one. You don’t need to help every founder out there, but every founder you do promise your time to must be worth it.
To me, there are four obvious reasons to bet on one non-obvious founder:
Brand: You’re building a long-term career in the venture space. This/these founders are going to be your reference checks when you raise a fund. And even if you don’t, the startup world is small. Gossip – both good and bad – travel fast. What makes or breaks a business is not in the capital, but in the people. Venture investing is in the business of people.
Deal flow: When that founders’ teammates goes off to build their own businesses, they’ll remember what you did for the founder(s). As such, you’ll be the first person they call when they start great companies.
Value-add: You gain tactical operational expertise. You learn the most when shit hits the fan, not when it’s smooth sailing.
Empathy. You understand to your core what it’s like to build a business today, which will be invaluable in relating to and with founders. Founders you work with in the future know you are capable of being truly founder-friendly, and that it isn’t just lip service.
In closing
When you bet on one non-obvious founder, you don’t have to invest in them (although that would help your own track record). But you need to be on their speed dial. You need to be willing to pick up their calls on weekends and at 2AM in the morning.
It’s going to be tough. Not nearly as tough as being the founder her/himself, but still tough. And it might not go according to plan. In most cases, it doesn’t. But when that founder tries again. You’re there again. Eventually, with superhuman grit and persistence, both of you (and more) will get there.
That is how you build a brand in the world of venture capital. Something I’m personally working towards.
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.
In the month before I started this blog in 2019, I had written 20 odd blogposts as a safety net in case I ran out of ideas in my weekly cadence. Most of which never had the chance to stand in the limelight, including my first one on intuition. Particularly, my one on intuition. Over the years, I’ve honed my own “intuition” – if I may be bold enough to call it that – on vetting startups. My intuition today is very different beast from my intuition 2.5 years back. This essay is a product of such constantly evolving self-discovery.
The spark of my intuition
When I first started my career in VC at Berkeley’s SkyDeck, I reached out to about 70-80 investors for a coffee chat, in which I posed one of my now favorite questions. What is the difference between a good and a great VC? Unsurprisingly, but frustratingly enough, most of the answers came in the form of “intuition.” Or its cousin, “pattern recognition.”
To me, who was still so new to venture, that was the best and worst non-answer I could get. Yet despite knowing that there was truth in their answer, I was still directionless. It wasn’t until an afternoon walk through San Francisco’s South Park with a very generous, but curt gentleman who carried quite the luggage beneath both of his eyes that I got the answer I wasn’t looking for.
“See a shitload of startups. When you see 10, pick your top 2. Then see 100, pick your top 2. Then see 1000, and again, pick your top 2. You’re going to notice that your podium will look quite different the more founders you meet with and the more startups you see.”
Recently, Plexo‘s Lo Toney told our fellows at DECODE the exact same thing:
And so, in hopes to guide someone in my shoes when I first started, here’s how I think about building intuition. Of course, I am a human and will always be a work in progress. It’s likely that next year I will see things differently than I see them today. Nevertheless this essay is a record of my thoughts today in early 2022.
Where to find a “shitload” of startups
There are multiple avenues these days for deal flow, including, but not limited to:
Accelerators and their respective demo days, like YC, ODX, Techstars, and what’s quite popular these days, Stonks
Hackathons, albeit most of these are ideas pre-incorporation
Classrooms
Pitch competitions
Events, like conferences and trade shows
Newsletters and publications
Podcasts
Twitter
Friends, family members, and former colleagues
When I first jumped into venture, I used to ask my friends who I knew were early adopters (a product of going to a school in the Bay Area, like Berkeley) of products to recommend me 3-5 startups/products every other week. When they did, I would treat them out to boba. And if they introduced me to the founders for those products that I’d be excited to talk to, I’d treat my friends out to a small meal – around $10-15. At the same time, at SkyDeck, I tried to sit in on as many meetings as I could, particularly the ones around deal evaluation at the beginning of every cohort.
While I do recommend all of the above, the best training grounds for developing intuition is when you talk to founders yourself.
The five senses
Google defines intuition as “the ability to understand something immediately, without the need for conscious reasoning.”
Source: Google
So, by definition, intuition is subconscious – built upon the brain’s natural ability to recognize patterns. An apt synonym, according to the trillion-plus dollar company… “sixth sense.” A sixth sense birthed from the intense neural processing of the five other senses. So, it was only logical for me to understand the sixth sense by first fully comprehending my five others. That said, I use the five-sense nomenclature loosely, but it nevertheless has become my guiding framework for venture decisions over the years.
Smell
“I invested based on my sense of smell.” These are the very words Softbank’s Masayoshi Son shared about his early investment in Alibaba. And he said the same about his investment into Yahoo! In fairness, his words make for good PR. And may just seem like smokes and mirrors. But for Son to have chosen Jack Ma out of the 20 prospective Chinese entrepreneurs he met with to invest in, he must be onto something.
There are two ways to develop an acute sense of smell as an investor, which you can develop in tandem.
Spending a lot of time looking into the market
Talking to many founders
On the former, we’ve been seeing a number of funds incubate their own startup ideas as a result of investors becoming deep subject-matter experts, but are discontent with the current ideas or teams on the market right now. Two examples include General Catalyst and Founders Fund. Draw market maps. Write research reports. Follow the experts on socials or on their blogs. Even better, talk to them as well. As a general warning, it’s hard being a generalist here. I would pick a few industries and/or functions you’re excited about or knowledgeable in already. Go deep before you go wide.
A few questions that have served me well include:
What kind of inflection points are we at in the market? In what areas have headwinds become tailwinds?
What are the technological, political, and/or socio-economic trends to be aware of right now? And where do these trends set up the world tomorrow to be?
I really encourage investors here to dream a little bit. To envision a world given these trends in which you’d be excited to have future generations live in.
On the latter, while Masayoshi talked to only 20, you can assume you he went through at least ten times that number of decks and business ideas. There’s no better practice than being in the field. Assuming you’ve taken step one (i.e. researching the market), one of the best litmus tests I’ve used to gauge a founder is their ability to riff on adjacent subjects to the business with me. Are they capable of going on tangents that really demonstrate domain expertise? Or are they caught up in the myopia of just their business?
Taste
There’s two kinds of tastes in which I look for, almost subconsciously, now.
Have they tasted excellence?
Have they tasted blood?
On excellence, many investors out there look for prior success in the field. For instance, previously founder of a unicorn exit, early employee or key executive at a now-successful company, or former big-time investor. Admittedly, there are only a small handful of these individuals out there. But I knew in my early days of scouting, I was at a massive disadvantage here for two major reasons.
I didn’t have strong connections with most of this subset of the entrepreneurial market.
This was also a founder persona I didn’t have unique insight to. In fact, it was general consensus to always take first meetings with these individuals in the venture industry. And as I learned early in my venture career, you make money either if you’re right on consensus or right on non-consensus. The latter of which is counted in multiples instead of percentages, which I’ve written about here and here.
In knowing so, I look for excellence, period. Have they tasted earned glory in any discipline? Do they know what it’s like to succeed in their field? And do they know what it takes to get there? On the flip side, do they know how hard it was to get there?
On the other hand, for blood, I want to know a founder’s propensity for conflict resolution. When was the last time they fundamentally disagreed with their co-founders? And how did they resolve it? Conflicts are inevitable. They’re bound to arise when you’re putting so much at stake for a common goal. I care less about the fact that they do come up, but more about that when they do, the team doesn’t just fall apart.
Every once in a while, I might disagree with the founder as well. And hear I look for the founder’s knee-jerk reaction and their ability to engage in thoughtful discussion. That does not mean they cannot disagree. Neither am I looking for another yes-person. But are they capable of helping me, and themselves, explore new horizons? Are they open-minded enough to entertain new possibilities, but still hold a remarkable level of focus to their 12-month horizon?
Touch
How high-touch or low-touch is this business? How much legwork does an investor need to do for this business to 10x its KPIs (within the next 12 months)?
For me, during my first meeting with the founder, ideally before, I try to answer two very simple questions:
What is the biggest risk of this business?
And is the person who can solve this risk on the team slide/in the room?
99% of the time, the person who can solve the biggest risk of the business has to be in the room. For instance, if it’s a machine-learning (ML) product, it’s a technical risk. So at least one of the co-founders must be a technical genius, not three MBAs. If it’s a B2B SaaS product, it’s a distribution risk. Meaning someone on the team must have deep connections to key decision makers to their target customers. In the early days, that’s really just at least one to two big-name customers. And ten other referenceable businesses. The second biggest risk is sales, and that I count on the founders’ ability to hustle.
1% of the time, and this is probably an exaggeration, you just have to really believe in the founder AND the product or market.
Hearing
Do founders spend more time talking, or more importantly, listening to their customers than they do in Rapunzel’s tower?
While I don’t ask all of them (since we’re guaranteed to run out of time before we run out of topics), here are the questions I consider when assessing how boots-on-the-ground a founder is:
What are customers saying about their product? The good? And the bad?
How did they acquire their first users/customers outside of their existing first degree network? Where from? What messaging do they use?
What is their customer win rate? In knowing so, what worked and what didn’t? At what point in the onboarding process do customers churn? What are their assumptions for why churn happens?
Do they know the numbers of their business (and ideally the market) like the back of their hand? For numbers of the market, are they able to recall the sources of most important numbers? For product metrics, how well do they know the main ones, like engagement, churn, monthly growth rates (over the past 3 months), net retention, and so on? Every so often, there’s a number or two, the founders are not aware of. And it’s fine. The test is once they realize their blind spot, how quickly do they move to patch it up? Subsequently, report back to me about their updated data measurements.
Of course, my job is not to distract founders. And I really try my best not to, so I don’t ask they measure superfluous metrics, unless I really do believe they’re crucial to the business.
Because I usually talk with founders who are pre-product-market fit, I usually lead with the question, “what does product-market fit look like to you?” Are they able to arrive at an actionable and measurable metric to optimize for? And can they back up why that metric is a good proxy for product-market fit?
(In)Sight
Can this founder teach me something new? Something that I never thought of or heard before, but makes complete sense. Is it a preposterous idea but backed by logic? Or does the founder have an original (and money-making) angle to what is already unoriginal? As an investor, especially as you see more startup ideas, the latter question is likely to surface more than the former.
Once the original insight is uncovered, it is then up to me to figure out the potential energy of the insight. How far can this insight take this team? Is it likely that this insight will uncover more insights down the road?
As an investor, you want to be right on the insight and team, not one or the other. Mike Maples Jr. articulates it best when he said, “We realize, oh no, this team doesn’t have the stuff to bend the arc of the present to that different future. Because I like to say, it’s not enough. […] I’d say that’s the first mistake we’ve made is we were right about the insight, but we were wrong about the team.”
“I’d say the reverse mistake we’ve made is the team just seems awesome, and we just can’t look past the fact that they didn’t articulate good inflections, and they can’t articulate a radically different future. They end up executing to a local maximum, and we have an okay, but not great outcome.”
In closing
Seedscout’s Mat Sherman wrote a great Twitter thread last month to help founders who are outsiders raise venture funding.
The no bullshit guide to raising angel funding/venture capital as an outsider.
The fact of the matter is that despite the venture industry being a rather well-connected circle of individuals and firms, most entrepreneurs – both currently and aspiring – are outsiders. If you can’t hit up a close friend to write you a couple million dollars, you’re an outsider. This essay, while written for new investors, hopefully, is equally useful as a guide for founders looking for some insight as to how investors think. Or at the very minimum, how I think.
Any thoughts here are mine and mine alone. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
