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.”
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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.
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.
A capital allocator is someone who balances the humility that they are not the world’s best at something (or might never be) with the deep belief in the long-term potential of an asset class (even if that means they will play a less active role in the future of that asset class).
As always, the last holiday period was a time for introspection and reflection. Many of the conversations I had were around request for startups (RFS) with VCs and request for funds (RFF) with LPs. Many of the latter focused on spaces and problems that individuals and family offices personally care a lot about.
In the essence of putting my vote for all the below, I’m going to phrase them as questions and pontifications rather than statements. Since I don’t have the capital to invest in such organizations, but also it is highly likely that these organizations need no external sources of capital. In fact, a number of the family offices I’ve conversed with have enough capital where they no longer use external bank providers for lending, but borrow and invest only within the families.
Is there a world where the LP is the sourcing engine for the GPs in their portfolio?
Like Deep Checks, but catalyzed by a single institution with large brand appeal. The problem is two-fold:
Most LPs are not good at identifying great deals at the pre-seed and seed stage.
Many LPs love co-investment opportunities. They’ve historically invested in brand-name funds expecting such opportunities, but largely evidenced in the 2020 to early 2022 hype cycle, most got no calls from their VCs at all. So, they’ve moved towards emerging managers who don’t have reserves to cash in on their top deal flow.
If an LP is willing to be a sourcing engine which complements their portfolio funds’ deal flow, that LP will have a chance to build (a) conviction earlier, and (b) build relationships with founders earlier. And in the sourcing/picking/winning framework, outsource the picking element to people who have more refined tastes built upon years of being boots on the ground.
Of course, said LP cannot enforce that GP invests in a certain type of company in which its sourcing engine brings in. That’ll defeat the purpose of investing in GPs in the first place, as well as diversifying risk.
Is there a world where a deeply networked LP leverages their network to support the underlying startup portfolio?
There are a number of fund-of-funds in the world who offer their geographical connections to help a portfolio fund’s startup grow in their respective market, but I’ve seen comparatively few, if any, LPs who offer their deep networks as advisors/mentors to portfolio founders.
For the most part, a VC is likely to better connected to tech talent, executives and founders. But quite a few family offices and endowments have their own deeply entrenched networks. Endowments have alumni networks. Family offices, depending on their source of wealth, are well-connected in the industry that created their wealth. Luxury brands. Oil and gas, as well as renewable energy. Infrastructure. CPG. Pharmaceutical drugs. Transportation. And the list goes on.
In other words, the LP would help a VC win deals based on their expansive combined networks. And sometimes the best advice a founder can get is not from another founder or VC, but someone tangential to the ecosystem who has seen the world from a birds eye view.
I’ve written before that there are three kinds of mentors: peer, tactical, and strategic. And you need all three.
Peer: Someone with similar level of experience as you do
Tactical: Someone who’s 2-5 years out and who can check your blind side
Strategic: Someone who’s attained success in a particular field and is often 10+ years out from where you are. They offer the macro and big-picture perspective, and help you define long-term goals.
Founders often have their peers already. And if not that, there are a number of communities, forums, and groups out there where founders can exchange notes with each other. Many VCs often bring their founders together to co-mingle as well in annual or quarterly get-togethers.
VCs themselves often act as tactical mentors, and given how their portfolios grow also have access to a plethora of tactical mentors for any given company.
LPs with their large networks of people who run multi-billion dollar enterprises (often not tech), many of whom achieved financial success independently, have access to people who could be strategic mentors for founders in their fund-of-fund’s underlying portfolio.
Request for Funds of Funds?
This isn’t a particularly traditional fund model or fund-of-funds model, but nevertheless would be an interesting product for asset owners. Namely large institutions who are looking for product diversification and who have little to no short-term and medium-term liquidity needs. Large single family offices, pensions, and potentially some endowments and foundations.
Is there a smaller product that focuses on vintage diversification from both an entry and exit perspective?
Most investors focus on entry vintage diversification, not as much for exits. Some LPs do, to make sure they have liquidity in every vintage. While I’ve seen only a small, small number of funds and fund-of-funds do this, I wonder if this is something that is more interesting to a broader customer base of LPs.
Of those I’ve seen so far:
Crypto funds that hold both token-based assets and equity-based assets. The token-based ones are expected to deliver DPI within years 4-8. The equity-based assets are expected to deliver DPI within years 8-12.
Funds-of-funds that hold multiple asset classes within a single LP entity. Secondaries for 3-6-year time horizons. Buyouts for 5-8-year time horizons. And venture capital for 8-12 year time horizons. Some also hold venture debt assets and cryptocurrency themselves.
Large multi-stage billion-dollar plus VC funds that have a suite of product offerings for LPs.
There are many emerging LPs and LPs who see VC as an access class who can’t write massive checks, but need to hedge their bets when writing into a speculative asset class.
While I’m still working to collect more data on this, I do wonder. In modern history, market cycles happen every 8-12 years. Venture funds exist on 10-12 year time horizons. Theoretically, that means if you’re investing in the least expensive entry windows, you’re also existing in the lowest revenue multiple windows. And if you’re investing in the most expensive vintages, you’re also existing in the great markets. Which effectively means, the delta between “buying low” and “selling high” are roughly the same no matter which markets your entry point is.
The data seems to suggest that so far, but the publicly available datasets (i.e. Pitchbook) have heavy survivorship bias. There’s no incentive for funds that fizzle out midway or near the end to report their metrics. Carta is really interesting, but their datasets aren’t robust till after 2017.
As an allocator, it just means you just need to be in every vintage. It makes me wonder if it really matters to be investing in down or up markets. Probably not. As the sages who have invested through multiple cycles tell me. Though I wonder if underwriting venture funds to 15 years changes anything on the DPI front across multiple vintages.
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.
“When investing in funds, you are investing in a blind pool of human potential.” – Adam Marchick
Over the past twenty years, Adam Marchick has had unique experiences as a founder, general partner (GP), and limited partner (LP). Most recently, Adam managed the venture capital portfolio at Emory’s endowment, a $2 billion portfolio within the $10 billion endowment. Prior to Emory, Adam spent ten years building two companies, the most recent being Alpine.AI, which was acquired by Headspace. Simultaneously, Adam was a Sequoia Scout and built an angel portfolio of over 25 companies. Adam was a direct investor at Menlo Ventures and Bain Capital Ventures, sourcing and supporting companies including Carbonite (IPO), Rent The Runway (IPO), Rapid7 (IPO), Archer (M&A), and AeroScout (M&A). He started his career in engineering and product roles at Facebook, Oracle, and startups.
[00:00] Intro [03:14] Who is Kathy Ku? [06:20] Lesson from Sheryl Sandberg [06:39] Lesson from Justin Osofsky [07:46] How Facebook became the proving grounds for Adam [09:26] The cultural pillars of great organizations [10:40] When to push forward and when to slow down [12:39] Adam’s first investment: Dell [14:20] What did Adam do on Day 1 when he first became an LP [17:00] Emory’s co-investment criteria [20:02] Private equity co-invests vs venture co-invests [21:15] Teaser into Akkadian’s strategy [23:03] Underwriting blind pools of human potential [29:03] Why does Adam look at 10 antiportfolio companies when doing diligence? [32:11] What excites and scares Adam about VC [35:36] Engineering serendipity [37:52] Where is voice technology going? [39:45] How does Adam think about maintaining relationships? [43:20] Thank you to Alchemist Accelerator for sponsoring! [44:20] If you enjoyed this season finale, it would mean a lot if you could share it with 1 other person who you think would love it!
“What’s so freeing is when you can bring your personality to work. It’s so much less cognitive load when you can be yourself.” – Sheryl Sandberg’s advice to Adam Marchick
“Take your work seriously, not yourself.” – Adam Marchick
“Be really transparent, and even document and share your co-investment criteria.” – Mike Dauber, Sunil Dhaliwal’s advice to Adam Marchick
“For an endowment doing co-invests, you should never squint.” – Adam Marchick
“When investing in funds, you are investing in a blind pool of human potential.” – Adam Marchick
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.
“The thing about working with self-motivated people and driven people, on their worst day, they are pushing themselves very hard and your job is to reduce the stress in that conversation.”
It’s something Nakul Mandan from Audacious said in a Superclusters episode earlier in Season 4. And a line that’s been gnawing at me for the past few weeks. Particularly, “your job is to reduce the stress in that conversation.” So it got me thinking… Are the entrepreneurs I back stressed (enough)?
I know what you’re thinking. But before you come at me with pitchforks and torches, here me out. If you get to the end of this essay and still feel as strongly, feel free to take a swing at me.
First off, let me define some terms in the above question. An “entrepreneur” is someone who starts something that doesn’t exist in the world already. To me, that is a startup founder, a local restaurant, an emerging fund manager, and so on. I use this term pretty liberally. “Enough” is in moderation. A balance of feeling the pressure and urgency, but not enough to make one go insane. By definition, entrepreneurs — people who dare challenge the world and create something that hasn’t existed before — are ambitious. And ambitious, action-oriented doers are, to Nakul’s point, often hard on themselves. So everything in moderation. As a friend once told me, if you’re doing anything ambitious, a third of your days will be epic. A third will be okay. And a third will absolutely suck. As long as your days feel like that proportionally, you’re on the right track.
So… are the entrepreneurs I back stressed (enough)?
Let’s start with no. Are they the underdog still, pre-product-market fit, stagnating, losing market share, and/or in a crisis?
If not, carry on. It’s okay to not be stressed all the time. In fact, it’s probably not helpful to be stressed all the time.
If so — that they are the underdogs, stagnating or in a crisis — AND they’re not feeling stressed, I do wonder from time to time. And I’d be lying if some part of me didn’t feel buyer’s remorse. Because that means one of three things:
They’ve lost their ability to care. About the product. The market. The team. Or simply, their own ambition. That’s the worst.
Conversely, they don’t feel comfortable enough to be vulnerable with me. And that, in part, not to sugarcoat things, is because of me.
They never cared enough or were ambitious enough in the first place. And that’s something I have to take back to the drawing board so that I learn the next time around.
Nevertheless, regardless of which of the three, it warrants a conversation. A difficult one. One where I try to understand their current motivations, what’s changed. If their motivations still hold true, then I, in Danny Meyer’s words, add “constant, gentle pressure.” For those curious, Chapter 9 of his book. Nevertheless, my job is to give them the activation energy to hopefully get them back on track.
If things change, great. I eventually go back to the first question. Are the entrepreneurs stressed? If not, then I let them on a few things:
I’ll spend less time time with them to prioritize the rest of my portfolio.
If they have any of the money left, they can keep the money. FYI, if it wasn’t my personal angel money, but someone else’s capital (of which I’m a fiduciary), depending on how much they have left, it may lead to a different conclusion. But in general, I view it as a write-off.
Wish them the best of luck in their next chapter.
If they feel the fire burning again (for good reason), they should let me know. And I’m happy to have another conversation.
Now… what happens if the entrepreneurs are stressed. Then I try to figure out if it’s anxiety or stress. Let me define.
Anxiety is caused by things you cannot control. For instance, the market. Other people you cannot control. Or black swan events. Stress, on the other hand, is caused by things you can control. Your own mistakes. Mistakes made by people you hired. Volume of work that needs to be done. Procrastination. Mistakes that can be actively mitigated. For instance, missing the deadline for a quarterly report. Missing payroll due to insufficient funds. Layoffs. Bad performance. Media, publicity, and perception. Something Danny Meyer calls, “writing a great last chapter.” As Danny Meyer puts it, “the worst mistake is not to figure out some way to end up in a better place after having made a mistake.”
If it’s anxiety, my role is to calm the founders. Be the mental support they need. Help them see the bigger picture. Build contingency plans.
If it’s stress, my role is to help them build an action plan. Help get key decision-makers and doers in the same room. Get the founders in front of advisors who can help them think through key considerations and check their blind side (assuming it’s not me. Most of the time it isn’t.). Of course, you need to timebox “thinking” time. There’s a great saying. “There are no right choices; only choices we make right.”
And finally, help the entrepreneurs execute the plan. Sometimes, that requires getting my hands dirty. And that’s what I’m here for. To increase the metabolism of the organization. Or at the very minimum, leadership. Stress is often caused by indigestion of tasks that need to be done.
Alas, the job of an investor, given we’re not in the driver’s seat, that we don’t always have complete information, is to reduce the stress of the founder when we have that conversation. More often than not, ambitious founders are hard enough on themselves.
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.
“The first layer is setting up your own strategy. The second layer is portfolio construction. How do you do your portfolio construction based on the strategy you set out to do? And then manager selection comes last. Within the portfolio construction target, how do you pick managers that fit that ‘mandate?’” – Jay Rongjie Wang
Jay Rongjie Wang is the founding Chief Investment Officer of Primitiva Global, where she runs a family-backed Multi-asset Strategy. She also works extensively with emerging VC managers, and sits on the Selection Committee of Bridge Funding Global.
Jay’s background uniquely combines software engineering (at the world’s largest fintech platform) and institutional investing (at top funds including Fidelity and Sequoia), as well as general management (3x executive in tech startups). Jay has lived in 5 different countries across 9 major cities, giving her a global perspective.
Jay obtained her B.A and M.Sci in Physics from Cambridge University and M.B.A from INSEAD. In 2023 she was listed as an Entrepreneurial Pioneer Under 35 by Hurun Wealth.
[00:00] Intro [04:12] Life atop a Daoist mountain [10:27] Qigong and tai chi [12:21] What is dao? [19:18] The weapon that Jay specializes in [21:08] Why did Jay leave the Daoist temple? [24:24] The motivations behind Jay’s career shifts [30:05] The difference between underwriting a VC fund and a fund-of-funds [33:08] How does Jay get to know a fund manager? [36:31] The 3-layer process for building an allocation strategy [38:01] Picking the initial asset class [45:29] How much Jay allocates to venture [48:43] What does “reasonably diversified” mean? [49:15] Figuring out the portfolio construction model [54:59] At what point do you stop maximizing for portfolio returns? [56:57] How Jay calculates a 200X target return on direct investments [57:53] Data on returns as a function of portfolio size [1:01:42] The biggest challenge once you’ve picked your strategy [1:04:40] Selecting the right fund managers [1:14:17] The difference between guqin and piano [1:18:42] Intuition versus discipline [1:24:08] Post-credit scene [1:27:47] Thank you to Alchemist Accelerator for sponsoring! [1:28:48] If you enjoyed this episode, it would mean a lot if you could share it with one friend who’d also get a kick out of this!
“If you have the deal flow and you have the energy and have the skills to construct your own portfolio, then funds-of-funds obviously are more complimentary than necessary.” – Jay Rongjie Wang
“The first layer is setting up your own strategy. The second layer is portfolio construction. How do you do your portfolio construction based on the strategy you set out to do? And then manager selection comes last. Within the portfolio construction target, how do you pick managers that fit that ‘mandate?’” – Jay Rongjie Wang
“The later the stage you go, […] capital becomes more anonymous, and […] the more you converge to public market returns.” – Jay Rongjie Wang
“I only put the regenerative part of a wealth pool into venture. […] That number – how much money you are putting into venture capital per year largely dictates which game you’re playing.” – Jay Rongjie Wang
“Your average median of a fund-of-funds is higher than a venture capital fund, and the variance, the standard deviation, is lower. So it is possible for a VC fund to have 40%, 50%, or higher IRR. It’s much, much less likely for a fund-of-funds to achieve that, but also the likelihood of losing money is much, much lower for a fund-of-funds.” – Jay Rongjie Wang
“The reason why we diversify is to improve return per unit of risk taken.” – Jay Rongjie Wang
“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.” – Jay Rongjie Wang
“Once you have a strategy, the hardest thing for me is to stick to that strategy because you just meet those amazing managers, amazing funds all the time.” – Jay Rongjie Wang
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.
