“Most references will not give a negative reference about someone, but you will have to understand and listen between the lines. What is a good or a bad reference? They might say, ‘I really like him as a person. He’s really nice.’ But this is a person that’s worked together with you in a team, and you’re not saying he’s great with founders or finding the best deals. Maybe he’s not that good.” – Raviv Sapir
Raviv Sapir is an early-stage investor at Vinthera, a fund of funds and venture firm with a hybrid strategy that combines VC fund investments with direct startup investments. With a background in tech and finance, an MBA from HEC Paris, and years of experience mentoring startups and supporting LPs, Raviv brings a sharp eye for high-conviction opportunities and a practical approach to venture. He previously held product roles at leading Israeli startups and served in a technological unit within the Israeli Defense Forces. His work across geographies, sectors, and investment stages gives him a uniquely holistic and global perspective on the venture ecosystem.
[00:00] Intro [03:31] Swimming since he was 7 [09:49] Breaking down each GP’s track record and dynamics in a partnership [11:25] Telltale signs that a partnership will last [12:50] An example of questionable GP dynamics [21:45] Virtual partnerships [25:43] GPs working out of coworking spaces [28:30] Commonly held LP assumptions [32:16] A big red flag GPs often say [34:27] What does Raviv look for during reference calls? [39:41] How does the diligence change for a Fund I/II vs Fund III/IV? [42:26] Qualitative traits Raviv likes to see in a Fund I GP vs Fund II+ GP [44:04] Ideal cadence of reporting and LP/GP touchpoints [46:03] Role of the LPAC across different funds [48:47] Diligence as a function of check size [54:37] What’s Raviv’s favorite episode of Venture Unlocked? [56:23] The podcasts that Raviv listens to
“Some of the small funds perform better but a lot of them–… they perform much worse because the variance in their performance is so big. You might have good odds of succeeding with a small fund but very high odds of performing way worse than the bigger funds.” – Raviv Sapir
“GPs are great at selling. ‘Every time is the best time to invest.’” – Raviv Sapir
“Most [references] will not give a negative reference about someone, but you will have to understand and listen between the lines. What is a good or a bad reference? They might say, ‘I really like him as a person. He’s really nice.’ But this is a person that’s worked together with you in a team, and you’re not saying he’s great with founders or finding the best deals. Maybe he’s not that good.” – Raviv Sapir
“‘Interesting’, especially in the US, is used in a negative way.” – Raviv Sapir
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.
“Get to 70% conviction. 90% means you’re too late. 50% means you haven’t done your homework.” Keith Rabois.
“Do half-ass two things; whole ass one thing.” Ron Swanson.
But the one that stands out the most is: “You either believe or you don’t.” Which I’ve heard many an LP tell me on the podcast. But also across VCs I’ve met over the years. And in full transparency, I struggle with that. Theoretically it makes sense. Building 99% of a car still means you don’t have a working car. There are a thesaurus of synonyms alongside, “I just don’t believe in you.” We’ve all heard it.
“You were an amazing candidate, but unfortunately, the talent pool was really competitive and we decided to move on with someone else. But please do apply again for a job that may be a better fit for you.”
“It’s not you; it’s me.”
“We’re just in different chapters of our lives. And we deserve to meet someone who is where we are.”
“You’re too early for us.”
“You’re out of scope.”
“I just have too much on my plate now, and I just don’t have the bandwidth to focus on this now.”
“Let me run this by my hiring/investment committee/leadership.”
All that just mean “I don’t believe in you.” (But it makes me feel like an asshole if I said it directly to your face. And I don’t want to be perceived as an asshole.) Ashamedly so, I’ve used a few of these myself.
In the investing world, I wonder if there are varying levels of conviction. Phenotypically expressed in varying check sizes. In fact, we have terminology for it now. Core checks. And access checks, or discovery checks, or simply, non-core checks. A core check is a substantial position. A meaningful percentage of the overall fund size. At least 1%. But depending on the portfolio construction, it varies from 1-5% of the fund. A discovery check, on the other hand, is smaller. Oftentimes, less than 0.5% of the fund size. Dipping one’s toes into the water so to speak, as opposed to a headfirst dive or a cannonball to extend the metaphor.
But if conviction really is black and white, should there be varying levels of conviction? Is there such a thing as believing in someone, but only half as much? Or a third as much as someone else?
Moreover one of the greatest lessons we learn over time as investors is that we’re quite terrible, over large sample sizes, with predicting winners out of our portfolio. The three to five biggest winners that put you on the roadmap are often not our three to five “favorite” investments ex ante.
A really good friend of mine once told me (mind you, that both my male friend and I are heterosexual), “The conviction you have in someone to be your girlfriend is different from the conviction you have in someone who is to be your wife. You build that trust over time. And what you look for is different over time.”
So back to the original question: Is conviction black and white? Is there really only belief and disbelief? Is there such a thing as I kind of believe? Or I believe but…?
While I don’t have a black and white answer to this black and white question, I’m inclined to believe yes. It is black and white. It just depends where you put the bar. The bar for you to date someone is different from the bar for you to marry someone. The bar to approve an investment to return a $10M fund is different from the bar to return a $1B fund. And, the bar to invest in an asset in a power law-driven industry, like venture, is different from the bar to invest in an asset in a normally-distributed industry, like real estate or public markets. What’s black for one is white for another.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
“A lot of family office principals, unless they’ve worked in finance – they should not be solely making the decision on which RIA to hire.” – Scott Saslow
Scott Saslow is the founder, CEO, and family office principal for ONE WORLD. He’s also the founder and CEO of The Institute of Executive Development, as well as the author of Building a Sustainable Family Office: An Insider’s Guide to What Works and What Doesn’t, which at the time of the podcast launch is the only book written for family office principals by a family office principal. Scott is also the host of the podcast Family Office Principals where he interviews principals on how families can be made to be more resilient. Prior, he’s also found independent success at both Microsoft and Seibel Systems.
[00:00] Intro [02:09] The significance of ‘ojos abiertos’ [05:49] Scott’s relationship with his dad [07:46] The irony of Scott’s first job [11:19] Family business vs family office [13:50] The corporate structure of a family office [17:39] From multi family office to single family office [18:54] The steps to pick a MFO to work with [22:37] The 3 main functions a family office has [31:00] Why Scott passed on SpaceX [36:07] Why Scott invested in Ulu Ventures [44:23] What makes Dan Morse special
“A lot of family office principals, unless they’ve worked in finance – they should not be solely making the decision on which RIA to hire.” – Scott Saslow
“The three main functions that family offices tend to have are investment management, accounting and taxes, and estate planning and legal.” – Scott Saslow
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.
In a previous era, in a more disconnected world, prior to social media and instant cellular connection, not everyone knew everyone. Information was traded in hushed rooms. And so, who you knew became the modicum of influence. The definition of being an insider.
Today who you know no longer matters. Networks overlap. There are tons of third places that bring people together for off-the-record discussions. And just knowing someone isn’t enough to exert influence. The network of who I know is just as large or small as the next person over. While people still use who you know as the proxy for being an insider, that definition has lost its luster. Because even if you didn’t know someone, almost everyone is one click, one message, or one email away.
It’s no longer about who you know, but about who trusts what you know. If two people were to send the same email forwardable to me, I’m more likely to take the email intro from the person I trust more.
It’s even more important when it comes to references and diligence. Most allocators who invest in the venture world aren’t as connected. For the most part, if this isn’t the only asset class they’re involved in, they don’t have to be. They’re paid to be generalists. And by function of that, when they do their on-list references, it’s hard to get the raw truth from the strangers they talk to. It’s different if you live and breathe this space. Then you need to know enough people well where either they can serve as the reference or vouch for you to a reference. That requires not only knowing the right people, but also maintaining a strong bond with them.
I can’t speak for other industries as much, though I imagine it may be quite synonymous with venture. But in venture, most people trade favors. It’s a relationship-driven business for a reason. The problem is most people only make withdrawals from their karmic bank account. Many of whom are in karmic debt. Rather than karmic surplus. VCs especially.
There’s this tweet Brian Halligan of Hubspot fame wrote that I stumbled upon yet I quite like.
VC's are good at making withdrawals from favor banks.
VC's could be better at making deposits into favor banks.
The humble truth is that some people say I’m an insider. Yet, I don’t think I am. I know a certain few people really, really well. I know many people kind of well. And I know jack shit about the vast majority of people in our industry. I’ve always thought that my number one priority is to do right by the people I do know. I’ve also been blessed they’ve been kind enough to let me and have vouched for me.
There was a line that RXBAR’s Peter Rahal said recently that really stuck with me. “Strategy is choosing what not to do.” To analogize that to an insider, in my experience, a true insider is an insider because they choose who not to spend a disproportionate amount of time with. An insider is often not cavalier with how they spend their time and who they spend their time with. They’ve either learned from scar tissue or model the ability of others who are insiders.
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.
Backs turned against the stage. And facing the audience, suspended in anticipation of who’ll walk out on stage.
A lone individual slowly walks out and as she does, the melody starts.
1… 2… 3… in a bellowing, deep yet clear vocal, “OHHHHHHHHHHH~”
Boom. Boom! Boom!! Boom!!!
All four chairs turn. And the crowd goes wild.
As a kid, The Voice was one of those guilty pleasures I had. The centerpiece in a Venn diagram of music, showmanship, and raw talent. Each contestant was judged on nothing more than the raw horsepower their vocals carried. Quite literally, sometimes. For the judges, the call-to-action was quite simple. You had to cast your vote before the song ended. In other words, you must show you wanted to bring a contestant on your team, trusting instinct and years of experience before you saw what they looked like or how they presented themselves. And that… that was awesome!
A decade and a half later, now sitting in the world of private market investments, I find the same parallels in startup and GP pitch decks.
I’m specifically referring to decks you send investors before you have a chance to talk to them. Whether it’s via the cold outreach, a submission on their website, or attached in a warm intro.
A teaser deck is not meant to be finished.
‘Cause if they do, you’ve lost them before you had a chance to talk to them. There is no glory in an investor flipping through every page. There is no glory in finally seeing the call-to-action at the very end of the deck. Usually an email or a how much you’re raising.
While it’s in the title, let me re-underscore. Investors should never read a deck from beginning to end. Each slide should, in theory, give the investor the activation energy to book a call or meeting with you. The sooner in the slide deck you can convince someone to book a meeting, the better. The longer you take to convince an investor, be it VC or LP, the less likely they’ll take that first meeting. The purpose of a viewing deck is to get to the first meeting, not the investment decision. There is nothing a deck can single-handedly do to convince an investor to invest. If the brief can, the fiduciary is not doing their job.
Instead, what a deck should have, in my humble opinion… as early as possible:
Your fund’s greatest highlight — It could be your 10X DPI across 8 years of investing. Could be the fact that you literally built the modern large language model infrastructure. Or that you took your last company public. Or that every. single. CISO. In the Fortune 50 list is an LP. It must deliver the wow factor. The surprise. Something people don’t expect. The primary reason an LP has to talk to you.
Your biggest elephant in the room — In a world where 75% of funds say they’re top quartile, you need to stop being the salesperson, and start being the honest businessperson. There are, undeniably, risks of getting in business with you. To think otherwise is stupid. The question here with a capital Q, is are you self-aware enough to know your biggest flaw? Or can you not recognize your own blind side? Admittedly, this second one is a selfish desire to see more funds with this. Because 99.9% of funds don’t share this. And LPs are tired of overly-promotional decks.
Of course, there are other reasons an LP will take the first meeting.
The person introducing you is a person the LP deeply trusts.
Your outreach is highly personalized. I’d like to stress the word highly.
The LP typically doesn’t receive that much deal flow.
The LP is in learning mode / revamping the portfolio. Likely, but not always, a new CIO.
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.
As part of a new project I’m working on with a friend, I’ve spent the last few months doing a lot of research into the history of technology and Silicon Valley, and talking to a lot of primary and secondary sources. One of the rabbit holes I went down last week led me to a really interesting story on deal dynamics back in 1968.
For the historian reading this, you may already know that was the year of the Apollo 8 mission. The assassination of both Martin Luther King Jr. and Robert F Kennedy. The Tet Offensive in Vietnam is launched. Also, the year the Beatles’ Magical Mystery Tour album tops music charts and stays there for eight straight weeks. And their White Album goes to number one on December 28th that year too. 2001: A Space Odyssey premieres. Legendary skateboarder Tony Hawk is born.
For the tech historian, that’s the year Intel was founded.
“They came to me with no business plan.” — Arthur Rock
The last two of the Traitorous 8. Gordon Moore and Bob Noyce. Bob Noyce co-invented the integrated circuit. And Gordon Moore coined a term many technologists are familiar with. Moore’s Law. That the number of transistors on a chip double every two years. In 1968, the two last bastions finally left. Instead of promoting Bob to be CEO, the team at Fairchild chose to hire externally. And that was the straw that broke the camel’s back.
The first investor the two went to was Arthur Rock to start a new semiconductor company, with no business plan. Although, eventually, they wrote a single-paged, double-spaced business plan.
Around the same time, Pitch Johnson from Draper and Johnson (Draper comes from Bill Draper’s name) had just sold his portfolio at D&J to Sutter Hill, and Bill himself had joined Sutter Hill right after. Pitch was catching up with Bob, who he had known for a long time having been on the board of Coherent together. Their families had met each other several times. And planes have always been a fascination for both of them. After all, both of them were pilots.
Bob said, “I’m starting a company making integrated circuits, I hope you’ll be interested.”
Pitch responded with an offer of “a couple hundred K”, said that Bill may also be interested, and, “Well, anything you’re doing, Bob, of course I’d be interested.”
As Arthur Rock was putting together that deal, Bob asked Pitch to call Arthur. Pitch reaches out to Arthur, and Arthur tells him to “call [him] back next week.”
Next week comes by. Pitch calls again. And Arthur says, “I’ve done the deal, and you’re not in it.”
Dejected, Pitch picks up the phone to call Bob back, “Art doesn’t want me in the deal.”
Surprised, Bob calls Arthur and Arthur, in the tough, but honest Arthur way, responds, “Am I going to do the deal, or is Pitch going to do the deal?”
Inevitably, Pitch and Bill lost out on investing in Intel. Intel ended up raising $2.5M for 50% of the company.
At the end of last year, I was catching up with a senior partner at a large multi-stage fund. At one point in the conversation, he asked me, “Wanna see how lead investors work with each other?”
Before I could even reply, although I would have said “Yes” regardless, he pulls out his phone and shows me a text thread he has with another Series A lead investor.
The text starts: “Looking at [redacted company]. Any thoughts?”
The other guy responds back: “We are too.”
And the thread ends after one single exchange.
As much as VC has evolved and became a little more mainstream, deal dynamics with lead investors, or at least perceived-to-be lead investors, seem to hold. Of course, as a caveat, not every interaction is like this.
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.
I was reading Chris Neumann’s latest post earlier this week, “Fundraising Sucks. Get Over It.” True to its name, it does. In all the ways possible. Especially if you’re an outsider. In it, there is a truism, among many others:
“If investors are repeatedly telling you that the market is too small or the opportunity isn’t big enough, what they might be saying is, ‘the market is too small for VCs,’ not that it’s a bad idea.”
Which reminded me of a post I wrote late last year. To which, I thought I’d elaborate on. As a founder, how do you know if a market is too small for a VC?
Or when a VC tells you, your market is too small, what do they mean?
Spoiler alert: What’s small for one may not be small for another. Let me elaborate.
If a fund has reserves — in other words, they write follow-on checks —, assume 50-60% dilution between entry to exit ownership. If they don’t, expect 75-80% dilution on their ownership. Of course, these may be on the higher end. Sometimes, there’s less dilution. You, the founder, need fewer rounds to get to profitability, or better yet, an exit.
Tactically, what that means is if a first-check only seed investor wants to invest in your company for 10%, by exit, they’ll have around 2%. Say they’re a $50M fund. Investors are always looking for fund returners, knowing that most of their investments will strike out and they’re really better on each company’s potential to be that one great, truly transformative company. And so… to return the fund or break even on the fund, you need to be at least a $2.5B company. In other words, 2% of $2.5B is $50M.
Of course, seed stage funds are usually underwritten to a 4-5X net. Roughly 5-6X gross return. Usually 50-70% of the returns come from one investment. So, to have a 5X gross on a $50M seed fund, they need to have a portfolio whose enterprise value is $12.5B. A single investment should exit between $6 and $9B, roughly.
So… if a VC cannot seeing you exiting for that amount, they’ll tell you your market is too small. Maybe it’s due to historical exits in your industry. Maybe it’s due to a lack of strategic acquirers who’d buy you at that price. Or maybe it’s that you’re too cash intensive that you need to raise more rounds to get to an exit that is meaningful. And in the process of which, take on a hefty preference stack. Fancy schmancy term for all those investors who collectively include a larger than 1X liquidation preference in their term sheet. Aka downside protection.
That said, let’s take another example. $50M seed fund, concentrated portfolio fund. They like to come in for 20% and will invest in at least 1-2 rounds after. By exit, they might dilute down to 10%. To return the fund, they only need a $500M exit. To 5X gross the fund, they’ll need only $2.5B of enterprise value. Half of which will come from a single company. Meaning instead of needing to be almost a decacorn at exit to impress the VC, you only need to be a unicorn. Still impressive, but let’s be real. Unicorn exits are easier to achieve than decacorn exits.
Next time, you’re about to have a VC pitch meeting, do your homework. And try not to spend too much time with investors who may give you the feedback of “your market is too small.”
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.
What are the essential elements of a “good” VC fund strategy vs. “lucky”?
What elements can you control and what can you not?
How long does it take to develop “skill” and can you speed it up w/ (intentional) practice?
Anyone can shoot a three-pointer every once in a while.
Steph Curry is undeniably one of the best shooters of our time. If not, of all time. Even if you don’t watch ball, one can’t help but appreciate what a marksman Steph is. In case you haven’t, just look at the clip below of his shots during the 2024 Olympics.
From the 2024 Olympics
As the Under Armour commercial with Michael Phelps once put it, “it’s what you do in the dark that puts you in the light.” For Steph, it’s the metaphoric 10,000 hours taking, making, and missing shots. For the uninitiated, what might be most fascinating is that not all shots are created equal, specifically… not all misses are created equal.
There was a piece back in 2021 by Mark Medina where he wrote, “If the ball failed to drop through the middle of the rim, Curry and Payne simply counted that attempt as a missed shot.” Even if he missed, the difference between missing by a wide margin versus hitting the rim mattered. The difference between hitting the front of the rim versus the backboard or the back rim mattered. The former meant you were more likely to make the shot after the a bounce than the other. Not all misses are created equal.
Anyone can shoot a 3-pointer. With enough tries. But not everyone can shoot them as consistently as Steph can.
The same holds for investing. Many people, by sheer luck, can find themselves invested in a unicorn. But not everyone can do it repeatedly across vintages. It’s the difference between a single outperforming fund and an enduring firm.
The former isn’t bad. Quite good actually. But it also takes awareness and discipline to know that it may be a once-in-a-lifetime thing. The latter takes work. Lots of it. And the ability to compound excellence.
When one is off, how much are you off? What are the variables that led you to miss? What variables are within your control? And what aren’t? Of those that are, how consistent can you maintain control over those variables?
As such, let me break down a few things that you can control as a GP.
Deal Flow
Are you seeing enough deals? Are you seeing enough GREAT deals? Do you find yourself struggling in certain quarters to find great deals or do you find yourself struggling to choose among the surplus of amazing deals that are already in your inbox? Simply, are you struggling against starvation or indigestion? It’s important to be intellectually honest here, at least to yourself. I know there’s the game of smokes and mirrors that GPs play with LPs when fundraising, but as the Richard Feynman line goes, “The first principle is that you must not fool yourself—and you are the easiest person to fool.”
Value Add
Whereas deal flow is about what companies you see, value add is more about how you win deals. Why and how do you attract the world’s best entrepreneurs to work with you? In a world where the job of a VC is to sell money – in other words, is my dollar greener or is another VC’s dollar greener – you need to answer a simple question: Why does another VC fund need to exist?
What can you provide a founder that no other, or at least, very few other, investors can
While there are many investors out there who say “founders just like me” or “founders share their most vulnerable moments with me”, it’s extremely hard for an LP to underwrite. And what an LP cannot grasp their head around means you’ll disappear into obscurity. The file that sits in the back of the cabinet. You’ll exist, and an LP may even like you, but never enough for them to get to conviction. And to a founder, especially when they’ve previously “made it”, already, you will fall into obsolescence because your value-add will be a commodity at scale. Note the term “at scale.” Yes, you’ll still be able to win deals on personality with your immediate network, and opportunistically with founders that you occasionally click with. But can you do it for the three best deals that come to your desk every quarter for at least the next four years? If you’re building an institutional firm, for the next 20+ years. Even harder to do, when you’re considering thousands of firms are coming out of the woodwork every year. Also, an institutional LP sees at least a few hundred per year.
For starters, I recommend checking out Dave’s piece on what it means to help a company and how it impacts your brand and perception.
Portfolio Size
Deal flow is all about is your aperture wide enough. Are you capturing enough light? Portfolio size is all about how grainy the footage is. With the resolution you opt for, are you capturing enough of the details that could produce a high definition portfolio? In venture, a portfolio of five is on the smaller side. And unless you’re a proven picker, and are able to help your companies meaningfully or you’re in private equity, as a Fund I, you might want to consider a larger portfolio. It’s not uncommon to see portfolios at 30-40 in Fund I that scale down in subsequent funds once the GPs are able to recognize good from great from amazing.
I will also note, with too big of a portfolio, you end up under optimizing returns. As Jay Rongjie Wang once said, ““The reason why we diversify is to improve return per unit of risk taken.” At the same time, “bear in mind, every fund that you add to your portfolio, you’re reducing your upside as well. And that is something a lot of people don’t keep in mind.”
Moonfire Ventures did a study in 2023 and found that “the probability of returning less than 1x the fund decreases as the size of your portfolio grows, and gets close to zero when your portfolio exceeds 200 companies.” That said, “it’s almost impossible to 10x a fund with more than 110 companies in your portfolio.”
First off, how are you measuring your marks? Marc Andreessen explains the concept of marks far better than I can. So not to do the point injustice, I’m just going to link his piece here.
Separately, the earliest proxies of portfolio success happens to revolve around valuations and markups, but to make it more granular, “valuation” really comes down to two things:
Graduation rates
Pro rata / follow-on investments
Graduation rates
When your graduation rates between stages fall below 30%, do you know why? What kinds of founders in your portfolio fail to raise their following round? What kinds of founders graduate to the next stage but not the one after that? Are you deeply familiar with the top reasons founders in your portfolio close up shop or are unable to raise their next round? What are the greatest hesitations downstream investors have when they say no? Is it the same between the seed to Series A and the A to B?
Pro rata / follow-on investments
Of your greatest winners, are you owning enough that an exit here will be deeply meaningful for your portfolio returns. As downstream investors come in, naturally dilution occurs. But owning 5% of a unicorn on exit is 5X better than owning 1% of a unicorn. For a $10M fund, it’s the difference for a single investment 1X-ing your fund and 5X-ing it.
When you lose out on your follow-on investment opportunities, what are the most common reasons you didn’t capitalize? Capital constraints? Conviction or said uglier, buyer’s remorse? Overemphasis on metrics? Lack of information rights?
Then when your winners become more obvious in the late stages and pre-IPO stages, it’s helpful to revisit some of these earlier decisions to help you course-correct in the future.
I will note with the current market, not only are the deal sizes larger (i.e. single round unicorns, in other words, a unicorn is minted after just one round of financing), there are also more opportunities to exit the portfolio than ever before. While M&A is restricted by antitrust laws, and IPOs are limited by overall investor sentiment, there have been a lot of secondary options for early stage investors as well. But that’s likely a blogpost for another day.
In closing
To sum it all up… when you miss, how far do you miss?
Obviously, it’s impossible to control all the variables. You cannot control market dynamics. As Lord Toranaga says in the show Shogun when asked “How does it feel to shape the wind to your will?”, he says “I don’t control the wind. I only study it.” You can’t control the wind, but you can choose which sails to raise, when you raise them, and which direction they point to. Similarly, you also can’t completely control which portfolio companies hit their milestones and raise follow-on capital. For that matter, you also can’t control cofounder splits, founders losing motivation, companies running out of runway, lawsuits from competitors, and so on.
But there are a select few things that you can control and that will change the destiny of your fund. To extend the basketball analogy from the beginning a bit further, you can’t change how tall you are. But you can improve your shooting. You can choose to be a shooter or a passer. You can choose the types of shots you take — 3-pointers, mid-range, and/or dunks. In the venture world, it’s the same.
The choice. Or, things you can change easily:
Industry vertical
Stage
Valuation
Portfolio size
Check size
Follow-on investments
The drills. Or, things you can improve with practice:
Deal flow – both quantity and quality
The kinds of deals you pick
Value add – Does your value-add improve over time? As you grow your network? As you have more shots on goal?
The deals you win – Can you convey your value-add efficiently?
And then, the game itself. The things that are much harder to influence:
Graduation rates
Downstream dilution
Exit outcomes
The market and black swan events themselves
Venture is a game where the feedback cycles are long. To get better at a game, you need reps. And you need fast feedback loops. It’s foolhardy to wait till fund term and DPI to then evaluate your skill. It’s for that reason many investors fail. They fail slowly. While not as fast of a feedback loop as basketball and sports, where success is measured in minutes, if not seconds – where the small details matter – you don’t have to wait a decade to realize if you’re good at the game or not in venture. You have years. Two to three What kinds of companies resonate with the market? What kinds of founders and companies hit $10M ARR? In addition, what are the most common areas that founders need help with? And what kinds of companies are interesting to follow-on capital?
Do note there will always be outliers. StepStone recently came out with a report. Less than 50% of top quartile funds at Year 5 stay there by Year 10. And only 3.7% of bottom-quartile funds make it to the top over a decade. Early success is not always indicative of long-term success. But as a VC, even though we make bets on outliers, as a fund manager, do not bet that you will be the outlier. Stay consistent, especially if you’re looking to build an institutional firm.
One of my favorite Steph Curry clips is when he finds a dead spot on the court. He has such ball control mastery that he knows exactly when his technique fails and when there are forces beyond his control that fail him.
Huge thanks to Dave McClure for inspiring the topic of this post and also for the revisions.
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.
Folks with frequent flyer miles here know that I’m a big fan of Brandon Sanderson’s lessons on creative writing. So, when Brandon Sanderson shared his new course on YouTube, I had to check it out. And I’m glad I did. In it, there’s a story on a Hollywood pilot for a new sitcom.
A team in Hollywood would bring people in, and subsequently tell them that team would ask the test audience what they thought of the pilot episode after they watched it. People would then watch it. After, they would ask, “There was a commercial at break number one. What brand was this commercial for?” Why? They didn’t want people focusing on the commercials, but wanted to understand the efficacy of the commercial. According to Brandon, they used the same sitcom pilot for years, which they used as the constant to test the commercial itself.
As such, Brandon’s advice to writers was that you shouldn’t ask too many leading questions when asking for feedback. Otherwise you’d predispose your audience to the intentions of your script.
Interestingly enough, I wrote a piece last week on how I do references. In it, I also share some of the questions I use during diligence and reference calls. While the questions aren’t intended to deceive, they’re designed to get to the truth. For instance, instead of asking for a person’s weakness, you ask “If you were to hire someone under this person, what qualities would you look for?” If I were to ask a stranger about their friend’s weakness, 9 times out of 10, I’ll get a response that’s a strength in disguise. A stranger has no incentive to tell me negative things about someone they have known for a while.
But at the same time, my job as an investor, though only a minority investor, is to help their friend grow. And I can’t help them grow if I don’t know what are areas they need to grow in.
As such, the focus isn’t on weaknesses. But shifting the framing to areas where I can complement them. Areas that if they worked on them in the next two years will make them a more robust leader.
There’s also another exercise I’ve really enjoyed working on with founders and emerging managers. I’d host a dinner where most people don’t know each other and what the other people are building. I don’t give them time to introduce themselves, but I ask every single person to bring their deck. During the dinner, they’re required to give their deck to someone else at the table. Each person then has a max of two minutes to look at someone’s deck, with no other context. After two minutes, decks are put away. And each person is required to pitch the startup or the fund as if they were the founder.
It’s a self-awareness exercise. Too often, when we’re looking at our own pitch day in, day out, we tend to lose perspective. We tend to miss things that are obvious to others. Through the above exercise, each person is able to notice what someone with limited time and attention took away from their pitch and what the delta is between what the founder wanted to convey and what the other person ended up conveying.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Recently, I’ve had a lot of conversations with LPs and GPs on excellence. Can someone who has never seen and experienced excellence capable of recognizing it? The context here is that we’re seeing a lot of emerging managers come out of the woodwork. Many of which don’t come from the same classically celebrated institutions that the world is used to seeing. And even if they were, they were in a much later vintage. For instance, a Google employee who joined in 2024 is very different from a Google employee in 2003.
And there seem to be two schools of thought:
No. Only someone who is fortunate enough to be around excellent people in an excellent environment can recognize excellence in others. Because they know just how much one needs to do to get there. Excellence recognizes excellence. So there’s this defaulting to logos and brands that are known concentrations of excellence. Unicorns. Top institutions. Olympians. Delta Force. Green Beret. Three Michelin-starred restaurants.
Yes. But someone must constantly stretch their own definition of excellence and reset their standards each time they experience something more than their most excellent. The rose growing in concrete. The rate of iteration and growth matters for more. Or as Aram Verdiyan onceput it to me, “distance travelled.”
Quite possibly, a chicken and egg problem. Do excellent environments come first or people who are born excellent and subsequently create the environment around themselves?
It’s a question many investors try to answer. The lowest hanging fruit is the outsourcing of excellence recognition to know excellent institutions and known excellent investors. The ex-Sequoia spinout. Ex-KKR. Ex-Palantir. First engineer at Uber. Or hell, they’re backed by Benchmark. Or anchored by PRINCO.
It’s lazy thinking. The same is true for VC investors and LP investors. As emerging manager LPs (and pre-seed investors), we’re paid to do the work. Not paid to have others do the work for us. We’re paid to understand the first principles of excellent environments. To dig where no others are willing to dig.
To use an extreme example, a basketball court can make Kobe Bryant an A-player, but Thomas Keller look like a C-player. Similarly, a kitchen will make Thomas Keller an A-player, but Ariana Huffington a C-player. Environments matter.
When assessing environments and doing references, that’s something that you need to be aware of. What does the underlying environment need to have to make the person you’re diligencing an A-player? Is the game they have willingly chosen to play and knowledgeable enough to play have the optimal environment that will allow them to be an A-player? Is the institution they’re building themselves conducive to elicit the A out of the individual?
Ideally, is there evidence prior to the founding of their own firm that has allowed this player to shine? Why or why not?
Did they have a manager that pushed them to excel? Was there a culture that allowed them to shine? Were they given the trust and resources to thrive?
References
And so, that leads us to references. I want to preface with two comments first.
One, as an investor, you will NEVER get to 100% conviction on an investment. It’s one of the few superlatives I ever use. Yes, you will never. Unless you are the person themselves, you will never understand 100% about a person. And naturally, you will never get to 100% conviction because there will always be an asymmetry of information.
Two, so… your goal should not be to get to total symmetry of information, nor 100% conviction. Instead, your goal is to understand enough about an opportunity so that you can sufficiently de-risk the portfolio. What that means is that when you meet a fund manager (or a founder, for that matter) across 1-2 meetings, you write down all the risk factors you can think of about the investment. You can call it elephants in the room, or red or yellow flags. Tomato. Tomahto.
Then, rank them all. Yes, every single one. From most important to least important. Then, somewhere on that list — and yes, this is deeply subjective — you draw a line. A line that defines your comfort level with an investment. The minimum number of risks you can tolerate before making an investment decision. For some, say those investing in early stage venture or in Fund I or II managers, that minimum number will be pretty high. For others, those whose job is to stay rich, not get rich, that minimum tolerance will be quite low. And that’s okay.
There’s a great line my partner once told me. You like, because; you love, despite. In many ways, the art of investing in a risky asset class is understanding your tolerance. What are you willing to love, despite?
The purpose of diligence, thereinafter, is to de-risk as many of your outstanding questions till you are ready to pull the trigger.
In regards to references, before you go further in this blogpost, I would highly recommend Graham Duncan’s essay “What’s going on here, with this human?” My buddy, Sam, also a brilliant investor, was the person who first shared it with me. And I’m a firm believer that this essay should be in everyone’s reference starter pack. Whether you’re an LP diligencing GPs. Or a VC doing references on founders. Or a hiring manager looking to hire your next team member.
Okay, let’s get numbers out of the way. Depending on the volume of investments you have to make, the numbers will vary. The general consensus is that one or two is too little, especially if it’s a senior hire or a major investment. Kelli Fontaine’s40 reference calls may also be on the more extreme side of things. Anecdotally, it seems most investors I know make between five and ten reference calls. Again, not a hard nor fast rule.
That said, there is often no incentive for someone to tell a stranger bad things about someone who supported them for a long time. It’s why most LPs fail to get honest references because they haven’t established rapport and trust with a founder over time. Oftentimes, even in the moment. So, the general rule of thumb is that you need to keep making reference calls until you get a dissenting opinion. Sometimes, that’s the third call. Other times, is the 23rd call. If you’ve done all the reference calls, and you still haven’t heard from others why you shouldn’t invest, then you haven’t done enough (or done it right).
A self-proclaimed coffee snob once told me the best coffee shops are rated three out of five stars. “Barely any 2-4 stars. But a lot of 5-stars and a lot of 1-stars. The latter complaining about the baristas or owner being mean.” I’m not sure it’s the best analogy, but the way I think about references is I’m trying to get to the ultimate 3-star review. One that can highlight all the things that make that person great, but also understand the risks, the in’s and out’s, of working with said person.
For me, great references require trust and delivery.
Establishing trust and rapport. What you share with me will never find its way back to the person I am calling about.
Is the reference themselves legit? Is this person the best in the world at what they do?
How well does this reference know said person? Have they seen this person at both their highs and lows? At their best and at their worst.
The finer details, the possible risks, and how have they mitigated them in the past.
I will also note that off-list references are usually much more powerful than on-list references. Especially if they don’t know you’re doing diligence on the person you’re doing diligence on. But on-list references are useful to understand who the GP keeps around themselves. After all, you are the average of the people you hang out with most. As the one doing the reference checks, I try to get to a quick answer of whether I think the reference themselves is world-class or not.
While I don’t necessarily have a template or a default list of questions I ask every reference, I do have a few that I love revisiting to set the stage.
Also, the paradox of sharing the questions I ask is simply that I may never be able to use these questions again in the future. That said, references are defined by the follow-up questions. Rarely, if ever, on the initial question. There’s only so much you can glean from the pre-rehearsed version.
So, in good faith, here are a few:
Does the reference know them well?
If I told you this person was [X], how surprised would you be? Now there are two scenarios with what I say in [X]. The first is I pick a career that is the obvious “next step” if I were to only look at the resume. Oftentimes, if a person’s been an engineer their entire life, the next step would be being an engineering executive, rather than starting a fund. So, I often discount those who wouldn’t find it surprising. Those that say it is surprising, I ask why. The second scenario is where I pick a job that based on what I know about the GP in conversations is one I think best suits their skillset (that’s not running their own fund), and see how people react. The rationale as to why it’s surprising or not, again, is what’s interesting, not the initial “surprising/not surprising” answer itself.
If you were invited to this person’s wedding, which table do you think you’d be sitting at?
Have you ever met their spouse? How would you describe their spouse?
Understanding their strengths and weaknesses
Who’s the best person in the world at X? Pick a strength that you think the person you’re doing a reference on has. See what the reference says. Ask why the person they thought of first is the best person in the world at it. If the reference doesn’t mention the GP I’m diligencing, then I stop to consider why.
What are three adjectives you would use to describe your sibling? I’ve written about my rationale for this question before, so I won’t elaborate too much here. Simply, that when most people describe someone else, they describe the other person comparatively to themselves. If I say Sarah is smart, I believe Sarah is smarter than I am. Or… if I say Billy is curious, I believe Billy is more curious than I am.
If I said that this person joined a new company, knowing nothing about this new company, what would your first reaction be?
Congratulate this person on joining!
Do a quick Google or LinkedIn search about the company.
As an angel, consider investing in the company (again, knowing nothing else)
How would you rate this person with regards to X, out of 10? What would get this person to a 10? Out of curiosity, who’s a 10 in your mind?
If you were to hire someone under this person, what qualities would you look for?
If you were to reach out to this person, what do you typically reach out about?
I hate surprises. Is there something I should know now about this person so that I won’t be surprised later?
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.
