A good friend, who’s hosting an annual general meeting (AGM) for his LPs in his first year of the fund, pinged me the other day asking if he should include the IRR metrics in his presentation day of. For context, it was negative because well, that’s how the math works. It’s almost always negative for any venture fund you invest in, in years 1-3. As you’re investing more money, the portfolio has yet to get marked up and raise a new round. So alas, negative rate of return.
Given that he had a lot of first-time LPs in his fund, he wasn’t sure if they would understand the context of the IRR metric if he just put it on a slide. So he was biased with not including it. To which I responded with… of course you should. For the bread and butter of being a fiduciary of capital, you should always bias towards transparency and honesty. But you should educate them every year in your first three years of the fund on what each number means and what is industry standard. Moreover, the biggest thing you’ll be measured against in the first three years of any fund is the discipline you exhibit. Did you do what you said you were going to do?
Then it brought on a larger question. What should GPs include in their AGMs in the first three years?
So I thought I’d write a blogpost about it.
This won’t be a two-hour documentary, nor a 300-page novel. But rather, just the governing principles of how I think about running annual summits for your LPs. So, as a general compass for the rest of this post:
First things first, the basics. What are the metrics to share?
MOIC and/or TVPI
I prefer both gross and net, but most really just share net
IRR
# of investments (total)
Capital called
Capital deployed
# of investments per pillar/vertical in your thesis (if relevant)
# of investments broken down by stage (if relevant)
Average check size
Average entry ownership
Average entry valuation
Notable wins / progress in portfolio companies, and why it matters
Asks for LPs
Where is the market today?
Where is it going? Notable trends
The first 10 are required as a fiduciary of capital. The last 4 means you’re playing professor for a bit. LPs invest in you for your opinion, for your perspective. Also it’s important to note, if more than 20% of your LPs are first-time LPs, you may want to lean more on being a professor of sorts to set expectations. And how to interpret your data. And yes, it’s worth being honest here. In good and bad times.
Do note that in the first 2-3 years, your IRRs will suck. TVPI will be roughly 1X. DPI is either negligible or non-existent. These are all things that are worth highlighting to first-time LPs in the venture space. Focus on why discipline matters more than performance in the first 3-4 years. Did you do what you said you would do?
Also, it is quite normal to invite both your current fund LPs, as well as the LPs you would like to have one to two funds from now. Although if you’re inviting the latter, do be cognizant on sharing sensitive data about your portfolio. Regardless, the AGM is an opportunity to deepen any relationships — current and future.
And, just like a Dreamforce or TwitchCon or WWDC, it’s a chance to reinvigorate your audience about why they should care about you.
Content at large
I’m not the first to say it, nor is it the first time I’m writing about it. For instance, here and here. But GPs are evaluated on primarily three things: sourcing, picking, winning. There are more yes. GP-thesis fit. Differentiation. Portfolio construction. Ability to build an enduring firm. Selling and exiting positions. And so on. But if VCs can boil everything down to team, market, and product, this is the LP equivalent.
And well, the truth is you’re always being evaluated. Even after the fundraising sprint. As in another 2-3 years, you’re going to ask the same LPs to re-up their capital, just like a founder to a multi-stage VC would.
All that to say, in the AGM, you should find ways to highlight each through the content you present. To share some examples:
How you source
Have your companies share how you first met. The crazier the story, the better.
If you have a community/newsletter/podcast, bring in a really high quality advisor or speaker from there.
If you champion yourself on outbound sourcing, find an impressive speaker that you cold emailed.
How you pick
Showcase 1-2 companies with strong growth
If you had a track record prior to the firm with an obvious win (i.e. you were a seed investor in Airbnb), bring the founder in to speak.
Share market insight that no one else knows. What is your prepared mind?
Request for startups.
How you win
Showcase a skillset that you have through someone else. That someone else can be a former colleague, a name-brand co-investor, or founder. Have them talk about you and that skillset. Stories are always better than facts.
Showcase 1 hot company in your portfolio that everyone wanted to get access to but only very few got in. Have that founder share why they picked you.
Of course, you don’t have to be explicit with the above, but nevertheless, a useful framework for planning content.
Also please don’t have your entire portfolio present. Nor any more than 4-5 companies. Two is ideal. Ideally, you want a diverse cast of speakers. And I mean, diverse by job title.
Gifts
I’m always biased towards gifts. It is one of my primary love languages, but also in any event I host or help host, I think a lot about surprise and suspense.
Surprise is relaying information to someone where they do not expect it. Suspense is relaying information where they expect it, but don’t know how or when it’ll drop. Surprise is what gets people talking about your event after. Suspense is what brings people to the event.
The earlier section on content is suspense. Gifts are usually surprises at AGMs.
In terms of what kinds of gifts to give, the most important guiding principle here is to be thoughtful. As Zig Ziglar / Mark Suster once said, ” People don’t care how much you know until they know how much you care.”
It’s less about the gift you give; it’s more important about how you deliver it.
Some examples of thoughtful ones I’ve seen at AGMs in the past:
A GP’s favorite book they read that year
A signed copy by the author of a deeply meaningful book that shaped the way the GP thinks today
A letter at each LP’s seat of the first interaction between the GP and each of the LPs.
In closing
AGMs are the one of the few times in a year, hell, in fund cycle, to remind LPs of why they love you. Are they thinking about you when they put together the following year’s budget and allocation schedule?
And yes, you do need to remind LPs on why they love you. Just like, even if you’re in a happy marriage, every so often, you need a date night. Keep the kids at home. Get a babysitter. And do something wild with your spouse.
Pat Grady has this great line. “If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good.” In a similar way, you want to be a schedule maker, not a schedule taker. And to do so, you need to get people excited. And well, you need to be unique. You need people to look forward to your AGM, and not see it as a chore. Since, let’s be honest; if I’ve been to two dozen or so AGMs, not as an LP in most of them, then a seasoned LP is definitely invited to many more.
Earlier this year, I flew over to San Diego for an AGM. I found out two other friends were also flying in to SD for an AGM that same Thursday. The three of us agreed to catch up during the happy hour, assuming all of us were going to the same one. Turns out, we each went to a different AGM. Same day, same time. All within a 10-minute Uber ride from each other. Spoiler, we later escaped our respective events during the happy hours to catch up elsewhere.
Along the same wavelength, in October this year, I was moderating a talk in a building, where there were two other AGMs happening in the same building at the same time. And three others within a five-block radius in SF… at the same time. Those were only the ones I knew of. That said, it was SF Tech Week.
Simply, you’re fighting for attention. And everything above is just table stakes. It’s the bare minimum. But what sets the great ones apart from the forgettable ones is a reminder of what makes that GP or set of GPs special. Their own flavor. Their own touch. And it’s a combination of thoughtfulness and personality. And if you have those, the small bumps in the road don’t matter.
Hope the above helps.
P.S. Why am I sharing this?
I don’t think knowledge is ever perennially proprietary. Today it may be, tomorrow it will not.
If you’re a GP reading this, this is pretty much exactly what I share with all the funds I’ve worked with to help plan their annual summits for LPs. So, you won’t have to hire me anymore to help you with your annual summits. I don’t care about making a living helping other people plan and organize AGMs. But I would like to go to higher quality events in general. 🙂
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.
It’s fundraising season again. For founders. And for investors.
It may have been a product of the content I’ve been writing and the events I’ve been hosting. It could also be a product of my job title. But in the last few months, I’ve met a great deal of fund managers — from Fund I to Fund XIII. With a strong skew to the right. In other words, vastly Fund I through III.
And given the current market, there is the same pressing question from all: How should I pitch my fund?
And subsequent to that, who should I talk to? Or can you intro me to any LPs?
And in all these conversations, I’m reminded of a great piece Jason Lemkin once wrote on hiring the right VP of Marketing. I won’t go too much into depth since I’ve written about it here. But if you have a spare five minutes, I highly recommend the read. As such, the framework I share with fund managers is:
Fund I and II, it’s all about lead generation.
Fund III and IV, it’s about product marketing. The product is the fund. The product is the partners’ decision making.
Fund V and onwards, it’s all about brand marketing.
I’ll elaborate.
Now I’ll preface with most emerging funds won’t have the capacity to bring on an investor relations person, so the onus lies with the founding partners themselves.
Lead generation
Barely anyone knows you exist. You need to be out there. You’re pre-product-market fit. And you need to sell why you are the best sub-$50 million fund to return three times your LPs’ money back. Five times if you’re pre-seed or seed. LPs are looking for GP-thesis fit. But more importantly for you, this looks very much like a sales game, not a marketing game.
Generating demand where there is none is key. How do you best tell a story no one’s heard of?
You have to break an arm and a leg to close LPs outside of your initial friends and family. You have to show you care. Or as Mark Suster recently said (quoting Zig Ziglar), “People don’t care how much you know until they know how much you care.”
You’re going to events. Trade-show equivalents. You’re hosting your own. Your asking co-investors to be your LPs. You’re asking for LP intros to largely high net-worth individuals, who’ll be your beachhead “customers” before you prove the promise you’re selling capital allocators. And just as much as they’re looking for the right people to marry for the next 10 years or 20 years (latter if you’re working together for at least three funds), you need to qualify them as well. And while yes, it’s important to keep your funnel wide, you need to have a strong idea of who’s a good fit and who isn’t from the very beginning. If it helps, here are some of my favorite pre-qualifying questions.
You’ve now gotten to a stage where your strategy is known. Founders and LPs self-select themselves into investing in you or not. For instance, if you know you can win on a diversified strategy betting with portfolio sizes north of 50, all the LPs that look for concentrated portfolios or strong reserve strategies will turn the cheek.
You’ve built a strategy off of the scare tissue from Fund I. Now you’re selling that strategy. Are you fishing in ponds that other GPs are not? In other words, is it differentiated? And how?
It’s an interesting exercise but it’s usually not the first thing you think of, but the third. When you really dig into your fund’s soul. Why do founders come for you? Why will they choose you over all the other 4000 VC fund options out there? Equally as helpful to do a “Why did you choose me” survey with your founders.
The big question for LPs now is: Is this repeatable?
Why? Your initial LPs for Fund I, maybe II, are smaller checkwriters, given the size of most Fund I’s and II’s. A lot of them know, even innately, that as you scale in assets under management, you will eventually graduate from their check size. But starting from Fund III, and maybe even Fund II, you’re targeting sophisticated and larger LPs, who are looking to build that 20+ year relationship. And for them repeatability and consistency is important.
Brand marketing
When you’ve finally settled into your quartile, which usually takes at least 6-7 years of track record, you’re now focused on largely selling the returns on your previous fund. Your product works. For some funds, they diversify into other product offerings, or bring on new partners to manage new verticals and initiatives.
Just like a Super Bowl ad needs to be played at least seven times or in the marketing world the 7-11-4 strategy (you need at least seven hours of interaction, 11 touchpoints, and in four separate locations) before one remembers and hopefully buys your product, you’re trying to help LPs keep you top of mind. Again not hard and fast rules, but a useful reference point of just how much work it takes to stay top of mind.
That could mean a focus on content — a newsletter, podcast, great/frequent LP updates, social media and so on. Or great AGMs (annual general meetings). And hosting events. Or being that awesome co-investor that pops up other emerging managers’ pitch decks. Strong communication is key — either directly or indirectly — so that when you raise your next fund, your LPs are ready and have pre-allocated to re-up in your fund.
In closing
Now the purpose of all this segmentation isn’t to just be snotty about it, but that the focus for pitching and closing LPs varies per the number of your fund. Don’t try to do everything at the same time. It’s not worth it, and neither do you have the resources, time or bandwidth. Stick to one strategy and get really good at it.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
The most provocative part was when she posed the question: If you need an app to make friends, is that a negative signal?
The solution, in her words, “the long term winner here is likely to be… interest-graph social networks.” Furthermore, “platforms that give people an ‘excuse’ to gather, either IRL or digitally” are immensely powerful. Where friendship is a byproduct of usage but not the main or sole purpose of being on these platforms.
I agree that dual-purposed social networks and platforms are a wonderful solution, but, and I may be biased, I don’t think it’s the only solution.
As a former power user of networking or friend apps like Shapr and Lunchclub (yes, I used an app to make friends), I’ve made some great friends via both of those platforms. But at the same time, I was an early user for both. Both had yet to be widely adopted at the time.
For Lunchclub, I was using it at a time when everything was in-person, and you only had the option to meet people on Fridays at 2PM or 5PM at either Sightglass Coffee on 7th Street or Caffe Centro in South Park in SF. The latter unfortunately closed recently. And that was it. There were no other options. I had often joked with friends that as you were meeting your friend match that week at Sightglass, you would be sitting next to the person you would match with next week AND the person sitting five feet over would be who you matched with last week. It was a tight community, even if it was an unintentionally designed community. A group of hackers, early adopters, investors, and people just doing cool things.
Then, as Lunchclub pursued scale, quality declined. And as Olivia shares in her thread above, bad actors ruined the experience altogether. The same was true for Shapr. For Clubhouse. Just to name a few.
But dating apps nailed it. They’ve reached widespread adoption. Olivia postulates it’s because they offer data points and filters that you can’t find anywhere else. For instance, who’s single. She’s right. But there’s another reason. These apps promote interest in others. Or amplifying inherent motivation to be on said apps.
Let me elaborate.
Be interesting and interested
I’ve written about the above line before. Here. And here. And likely a few other places that’s escaping my memory at the time of writing this piece.
The thing is most platforms promote being interesting. The heavy profile customizations. The ability to share your own thoughts. Platforms that incentivize you to go from a consumer to a creator. A lot of it is about me. Look at me. Look at how cool I am. How cool my life is. The strive for perfection.
How can I ever be like the person I’m following? My life is nowhere near as awesome as her/his is. Most social platforms prop users up as a point of comparison.
All that to say, there are a lot of apps that help you be interesting, but not enough that help you be interested. The latter takes work. There’s a line that Mark Susterrecently shared on a podcast, and I love it! Citing the late Zig Ziglar (which by the way, is an awesome name), Mark shared, “People don’t care how much you know until they know how much you care.”
I want to underscore that line one more time.
“People don’t care how much you know until they know how much you care.”
It’s why I love my buddy Rishi’s recent piece on how to build and maintain meaningful relationships.
In Rishi’s essay, he shares that there are three levels to doing your homework — each deeper than the last — and show that you care:
Level 1 – The Basics: LinkedIn, Common Connections, Google, and Company Website
Level 2 – Digging in: Social Media
Level 3 – Going Deep: Podcasts, Writing, YouTube et. al
The purpose isn’t to be all-encompassing, but to show that you care for the human sitting across from you. It’s the intention that matters.
The late David Rockefellerbuilt prolific Rolodexes to show that he cared. In fact, it’s cited that his handwritten notes on others stood five feet tall and accounted for 100,000 people. Alan Fleischmannonce wrote in reference to David Rockefeller that, “If you were so fortunate to be a fly on the wall for any of his countless meetings and interactions, you would hear him inquire about the smallest details of his guest’s life, from a child’s ballet recital to a parent’s recent health concern. Rockefeller’s interactions were said to be ‘transformational, never transactional.'”
And it’s also the small things that matter.
In closing
The reason why I think Lunchclub was so popular in the beginning is in two parts:
The platform reduced the friction — the back-and-forths — of scheduling. They gave you two times, and you either made it or you didn’t.
The platform’s early users were innately curious individuals. When I was invited on the platform, my friend pitched it as, “I’ve learned so much from the people I met.” And my friend was and is already one of the foremost subject-matter experts in her field. The same was true when I began using the platform. People spent more time asking questions than talking about themselves. In fact, in many conversations, it’d be a battle of who can delay talking about themselves more than the other.
People were simply interested. There was no agenda. And no agenda was the best agenda. No one was trying to peddle anything to you. No one was trying to ask you for money or intros. People were the ends in and of themselves, and not a means to an end.
All in all, while there are incredible platforms that help you build friendships through interest and hobby alignment, I do believe there is room for a friend app for the curious. Or at least to help you be a really good friend.
So if you’re building something there, ring me up. That said, no matter how great technology is, with AI and all, every great relationship still needs that human touch. AI and platforms and apps might be able to get you 90% of the way there. But if you don’t complete that last 10% trek, 90% is still incomplete. For those of you reading who are American football fans, running the ball 90 yards from one endzone is still an incomplete. It’s still not a touchdown. You need to run the full 100.
If there’s anything to take away from this blogpost, it’s to be both interesting AND interested. Emphasis on the latter.
And in case you’re curious as to how I approach caring, these might be helpful starting points:
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 2016, I jumped into the VC world, knowing no better than what my forefathers and foremothers taught me. Outside of a handful few, many of the people I looked up to and sought for advice had been in the business for less than a decade. In effect, they started their investing career after the GFC (Global Financial Crisis) in 2008. While they still bore more scar tissue than I did, I learned quickly that the one question to ask founders early on was “What is your last round’s valuation?” or “What valuation are you seeking?” For the latter question, the implicit answer we sought out for was their 12-month revenue. And subsequently, their valuation multiple. In Mark Suster‘s words, we were “praying to the God of Valuation.” But really, their exit multiples matter more than the entry or current multiple.
For fund managers and partners, the question was “What is your IRR or TVPI?” or “What’s your AUM?”. Rather, the answer we should be seeking isn’t some function of their portfolio’s valuations, but the quality of the businesses they invest in.
To be fair, I failed to fully appreciate the latter answer until this year.
The odds aren’t bad, but that doesn’t mean they’re great
Jared Heyman wrote a great piece last year on the probability of success for YC startups. After parsing through the data, he found that after a couple years of survival, a startup is just as likely to go through an exit (i.e. acquisition or go public) as it is to fail (i.e. inactive). Additionally, ~88% of startups reach resolution (exit or inactive) around the 12-year mark.
It’s also interesting to note that the average time it takes for a YC company to exit (if they exit) is seven years. In fact, the time horizon has shortened in the past few years from an average timeline of nine years to five. Of course that’s pre-2022, so the time to exit is likely to increase once again to the mean or longer as:
Markets are less liquid. Valuations drop. Rounds are smaller. Buyers are less eager to buy. Founders have less access to liquidity and exit opportunities. As such, the markets will demand more proof from founders of market traction.
Investor sentiment is guarded, echoing Howard Marks. I haven’t seen the newest numbers but at best, I imagine we’ll see more capital go towards existing investments, maintaining overall investment volume. At worst, a decline of capital deployment, outside of ephemerally “hot” industries, like generative AI.
Investors’ key worry is investment losses. Investors up and downstream become more risk averse.
Interest rates are rising to curb inflation, leading to a debt investor’s market rather than an equity investor’s. Founders are likely to turn to expensive debt instruments (and many already have). Higher interest rates also mean greater return expectations from investors.
Jared does note in another piece that “while YC startups may cost 2-3 times as much as their non-YC peers to investors, they’re worth 6-7 times as much in terms of expected investor returns.” It’s great to be an LP in YC, but tough to be choosing YC startups. Of course, at the very end there’s a gentle reminder that VCs (and angels) are defined by the magnitude of their successes rather than the number of their failures (and successes). Just because a portco gets to an exit doesn’t mean it’ll be a fund returner. With shifting markets, this will be as true for YC under Garry’s leadership as for any other fund.
Of course, I don’t mean to pick on YC. They do a tremendous job of picking founders. And it’s true that they have set the golden standard for startup accelerators. It’s just that the above data was easily accessible.
Portfolio consistency
Interestingly enough, Oliver Jung, Airbnb’s former VP International, wrote half a month later that Adinvest’s Fund II made him $200 on every dollar he invested in the fund, largely because of a 1000x Adinvest II made into Adyen.
That’s a phenomenal outcome! To make investors back $200 on every dollar invested is definitely one for the books. The question becomes (and I have no inside scoop on this): How did the rest of the portfolio do? Was Adinvest’s Fund II purely based on luck or is there a consistent model that can be replicated in future funds?
For that question, it begs another. If we took out Adinvest’s investment in Adyen, what is the DPI (distributions to paid-in capital) of the rest of the fund? That will dictate Adinvest’s ability to raise a subsequent fund, at least from the larger, more sophisticated LPs. A great and consistent portfolio may look something a little like this.
Given that the average fund’s returns (with a large enough portfolio i.e. 100 portcos) normalizes to a 3x gross return — venture’s Mendoza line, 3-5x would put you in the ball park of good. High single digits would put you in the great category. And double digits would put you in epic.
And if Adyen really was the sole outlier success, did the GPs have the conviction to double down in subsequent rounds? If so, how did they earn their pro rata?
Sometimes all you need is one investment to push you from a nobody to a somebody, but if you’re intent on building a multi-decade-long career in the space, your founders should see you in the same or better light than those equipped with asymmetric information (i.e. those who read about you in the media).
While many Fund I’s and II’s may not have a reserve ratio, were the GPs and LPs able to continue to invest via SPVs? By doubling down, it’s the difference between a strategy to win and a strategy not to lose. How much of Adinvest’s AUM does their investment in Adyen account for? And being a fund manager means balancing oneself on the tightrope between the two strategies. In doubling down, that investment becomes a larger percent of the capital you manage (AUM). If you lose, you lose much more. If you win, you win a lot more.
Of course, this is true for any fund. I ended up overly picking on the case study of Adinvest to illustrate the point, but I have nothing against the great success Oliver, the other LPs and the team at Adinvest did have. On a broader spectrum, the purpose of having many shots on goal is theoretically so that you will have a few outliers. So your fund can grow based on a consistent strategy.
There are many times when all you have is that one outlier (often still in paper returns, not distributions yet). It happens. I’ve seen it happen. But if that one doesn’t work out, how forthcoming are you with your “disappearing TVPI?” I imagine a lot of investors who are planning to raise in 2023 will come face to face with these questions, having made big bets on hot startups in the last two years. Will you shrug it off? Or will you candidly share the lessons in which you learned?
The above is just something I’ve thought about a lot more as I see more emerging GP fundraising decks, as they boast about their angel portfolio (if they did have one).
In closing
There’s a proverb that goes: A broken clock is still right twice a day. You can be the worst investor out there, but with enough swings at bat, you’ll still be able to hit some outliers.
In the world of investing, you’re guaranteed to be wrong more often than you’re right. But I’ve seen many that do a lot of stuff ‘wrong’ and still have a winning fund. The big question… and the question, sophisticated and institutional LPs are asking is: Is it repeatable?
So, even if you did hit some home runs, is your success repeatable?
One last footnote. In talking with a number of investors who’ve been in the business for more than a decade, I’m starting to realize that selling (i.e. knowing when to sell and how much to sell) is just as important. An art and a science. I’ve written about it before (here and here), but I imagine I’ll revisit the topic again in long form soon. Especially as I see more discourse on the topic and funds close and liquidate in the near future. From great ones like Union Square Ventures to those who need to return some DPI to raise their next fund.
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
Humans are terrible at understanding percentages. I’m one of them. An investor I had the opportunity to work with on multiple occasions once told me. People can’t tell better; people can only tell different. It’s something I wrestle with all the time when I hear founder pitches. Everyone claims they’re better than the incumbent solution. Whatever is on the market now. Then founders tell me they improve team efficiency by 30% or that their platform helps you close 20% more leads per month. And I know, I know… that they have numbers to back it up. Or at least the better founders do. But most investors and customers can’t tell. Everything looks great on paper, but what do they mean?
When the world’s wrapped in percentages, and 73.6% of all statistics are made up, you have to be magnitudes better than the competition, not just 10%, 20%, 30% better. In fact, as Sarah Tavel puts it, you have to be 10x better (and cheaper). And to be that much better, you have to be different.
And keep it simple. As Steve Jobs famously said that if the Mac needed an instruction manual, they would have failed in design. Your value-add should be simple. Concise. “We all have busy lives, we have jobs, we have interests, and some of us have children. Everyone’s lives are just getting busier, not less busy, in this busy society. You just don’t have time to learn this stuff, and everything’s getting more complicated… We both don’t have a lot of time to learn how to use a washing machine or a phone.”
If you need someone to learn and sit down – listen, read, or watch you do something, you’ve lost yourself in complexity.
“Big-check” sales is a game of telephone. For enterprise sales or if you’re working with healthcare providers, the sales cycle is long. Six to nine months, maybe a year. The person you end up convincing has to shop the deal with the management team, the finance team, and other constituents.
For most VCs writing checks north of a million, they need to bring it to the partnership meeting. Persuade the other partners on the product and the vision you sold them.
And so if your product isn’t different and simple, it’ll get lost in translation. Think of it this way. Every new person in the food chain who needs to be convinced will retain 90% of what the person before them told them. A 10% packet loss. The tighter you keep your value prop, the more effective it’ll be. The longer you need to spend explaining it with buzzwords and percentages, the more likely the final decision maker will have no idea why you’re better.
Humans are terrible at tracking nonlinearities. While we think we can, we never fully comprehend the power law. Equally so, sometimes I find it hard to wrap my hear around the fact that 20% of my work lead to 80% of the results. While oddly enough, 80% of my inputs will only account for 20% of my results. The latter often feels inefficient. Like wasted energy. Why bother with most work if it isn’t going to lead to a high return on investment.
Yet at the same time, it’s so far to tell what will go viral and what won’t. Time, energy, capital investments that we expect to perform end up not. While every once in a while, a small project will come out of left field and make all the work leading up to it worth it.
When I came out with my blogpost on the 99 pieces of unsolicited advice for founders last month, I had an assumption this would be a topic that my readers and the wider world would be interested in. At best, performing twice as well than my last “viral” blogpost.
Cup of Zhou readership as of April 2022
Needless to say, it blew my socks off and then some. My initial 99 “secrets”, as my friends would call it, accounted for 90% of the rightmost bar in the above graph. And the week after, I published my 99 “secrets” for investors. While it achieved some modest readership in the venture community and heartwarmingly enough was well-received by investors I respected, readership was within expectations of my previous blogposts.
My second piece wasn’t necessarily better or worse in the quality of its content, but it wasn’t different. While I wanted to leverage the momentum of the first, it just didn’t catch the wave like I expected it to.
Of course, as you might imagine, I’m not alone. Nikita Bier‘s tbh grew from zero to five million downloads in nine weeks. And sold to Facebook for $100 million. tbh literally seemed like an overnight success. Little do most of the public know that, Nikita and his team at Midnight Labs failed 14 times to create apps people wanted over seven years.
When Bessemer first invested in Shopify, they thought the best possible outcome for the company would be an exit value of $400 million. While not necessarily the best performing public stock, its market cap, as of the time I’m writing this blogpost, is still $42 billion. A 100 times bigger than the biggest possible outcome Bessemer could imagine.
Humans are terrible at committing to progress. The average person today is more likely to take one marshmallow now than two marshmallows later.
Between TikTok and a book, many will choose the former. Between a donut and a 30-minute HIT workout, the former is more likely to win again. Repeated offences of immediate gratification lead you down a path of short-term utility optimization. Simply put, between the option of improving 1% a day and regressing 1% a day, while not explicit, most will find more comfort in the latter alternative.
James Clear has this beautiful visualization of what it means to improve 1% every day for a year. If you focus on small improvements every day for a year, you’re going to be 37 times better than you were the day you started.
While the results of improving 1% aren’t apparent in close-up, they’re superhuman in long-shot.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
“Two of our biggest clients pulled the rug on us. They just cut their budgets, and can’t pay us anymore.”
“My co-founder had to leave. His wife just lost her job, and he needs to find a stable job to support the family.”
“I don’t think we’ll make it, David. How do we break it to our team?”
It was June 2020. The above were three of a dozen or so calls I had with founders so far who couldn’t make it through the pandemic. But most of the founders who called me weren’t looking for any solutions. In fact, half of them had already decided on their ultimatum before calling me. I could hear the pain in their voices over the phone. Yes, we called on the phone. Neither them nor I had the luxury of beautifying or blurring our backgrounds on Zoom or to try to look presentable. The only thing we had between us was the raw reality of the world.
Those conversations inspired me to compile a list of hard-won insights and advice from some of the best at their craft. A Rolodex of tactical and contrarian insights that a founder can pull from any time, so that you are well-equipped for times in the startup journey in which you’ll need them. I don’t know when you will, or even if you will, but I know someone will. Even if that someone is just myself.
Below are bits and pieces of insights that I’ve selectively collected over several months that might prove useful for founders. As time went on, I found myself to be more and more selective with the advice I add on to this list, as a function of my own growth as well as the industry’s growth.
I also often find myself wasting many a calorie in starting from a simple idea and extrapolating into something more nuanced. And while many ideas deserve the nuance I give them, if not more, some of the most important lessons in life are simple in nature. The 99 soundbites below cover everything, in no particular order other than categorical resonance, including:
Some might be more contrarian than others. You might not use every single piece of advice now or for your current business or ever. After all, they’re 100% unsolicited. At the end of the day, all advice is autobiographical. Nevertheless, I imagine they’ll be useful tools in your toolkit to help you grow over the course of your career, as they have with mine.
Oh, why 99 tips, and not 100? Things that end in 9 feel like a bargain, whereas things that end in 0 feel like a luxury. We can thank left-digit bias for that. Dammit, if you count this tip, that’s 100!
To preface, none of this is legal investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
On fundraising…
1/ Some useful benchmarks and goals for stages of funding:
<$1M: pre-seed
Find what PMF looks like and how to measure it
$1-5M: seed
$2-4M – you found PMF already and you’re gearing up to scale
$5M – you’re ready for the A
$5-20: Series A *timestamped mid-2021, your mileage may vary in different fundraising climates
2/ If you’re a hotly growing startup, time to term sheet is on the magnitude of a couple of weeks. If not, you’re looking at months*. Prepare your fundraising schedule accordingly. *timestamped mid-2021, your mileage may vary in different fundraising climates
3/ On startup accelerators… If you’re a first-time founder, go for the knowledge and peer and tactical mentorship. If you’re a second- or third-time founder, go for the network and distribution.
4/ Legal fees are often borne by founders in the first priced round. And are usually $2-5K at the seed stage. $10-20K at the A. Investor council fee is $25-50K. So by the A, may come out to a $75-100K cost for founders.
5/ If you’re raising from VCs with large funds (i.e. $100M+), don’t have an exit slide. It may seem counterintuitive, but by having one, you’ve capped your exit value. Most early stage investors want to see 50-100x returns, to return the fund. And if their expected upside isn’t big enough, it won’t warrant the amount of risk they’re going to take to make back the fund. With angels or VCs with sub-$20M funds, it doesn’t matter as much.
6/ “Stop taking fundraising advice from VCs*. Would you take dating advice from a super model? In both cases, they’re working with an embarrassment of riches and are poor predictors of their own future behaviors. Advice from VCs is based on what they think they want versus what they want.” – Taylor Margot, founder of Keys *Footnote: Unless they’ve been through the fundraising process – either for their fund or previous startup.
7/ These days, it’s incredibly popular for founders to set up data rooms for their investors. What are data rooms? A central hub of a startup’s critical materials for investors when they do due diligence. Keep it on a Google Drive, Dropbox, Docsend, or Notion. Usually for startups that have some traction and early numbers, but what goes in a pre-seed one, pre-revenue, or even pre-product?
Pitch deck + appendix slides
Current round investment docs
Use of funds
Current and proforma cap table
Pilot usage data, if any
References + links to everyone’s LinkedIn:
Key members of management
1-2 customers, if any
1-2 investors, if any
Financials: annual + YTD P&L + projections
Slightly controversial on projections. Some investors want to see how founders think about the long term, plus runway after capital injection. Some investors don’t care since it’s all guesswork. Rule of thumb at pre-seed is don’t go any further than 2-3 years.
List of all FAQ investor questions throughout the fundraising process
Press, if any
Legal stuff: Patents, trademarks, IP assignments, articles of incorporation
8/ If you’re a pre-seed, pre-revenue, or even pre-product, you don’t need all of the above points in tip #7. Just stick to pitch deck/appendix, investment docs, use of funds, and current/proforma cap table.
9/ Investors invest in lines not dots. Start “fundraising”, aka building relationships, early with investors even before you need to fundraise. Meet 1-2 investors every week. Touch base with who would be the “best dollars on your cap table” every quarter. With their permission, get them on your monthly investor update. So that you can raise capital without having to send that pitch deck.
10/ Don’t take more money than you actually need when fundraising. While it’s sexy to take the $6M round on $30M valuation pre-product and will guarantee you a fresh spot on TechCrunch and Forbes, your future self will thank you for not taking those terms to maintain control and governance and preserve your mental sanity. Too many cooks in the kitchen too early on can be distracting. And taking on higher valuations comes with increased expectations.
11/ If you’re getting inbound financing, aka investor is reaching out to you, decide between two paths: (a) ignore, or (b) engage. If you choose the first path (a), when you ignore one, get comfortable ignoring them all – with very few exceptions i.e. your dream investors, which should be a very short list. Capital is a commodity. Your biggest strength is your focus on actually building your business. For undifferentiated VCs, understand speed is their competitive advantage. Fundraising at that point, for you the founder, is a distraction. If you choose (b) engage, set up the process. As you get inbound, go outbound. Build a market of options to choose from. Inspired by Phin Barnes.
12/ If you haven’t chatted with an investor in a while (>3 months), remind them why they (should) love you. Here’s a framework I like: “Hi, it’s been a minute. The last time we chatted about Y. And you suggested Z. Here’s what I’ve done about Z since the last time we chatted.“
13/ If you have a business everyone agrees on, you don’t have a venture-backable business. Alphas are low in perfect competition and businesses that are common sense. You’re going to generate a low 2-5x return on their capital, depending on how obvious your idea is.
Strive for disagreement. Be contrarian. Don’t be afraid to disagree in your pitch. Trying to be a people pleaser won’t get you far. If your investor disagrees with your insight, either you didn’t explain it well or you just don’t need them on your cap table. If the former, go through the 7 year old test. Are you able to explain your idea to a 7-year old? If that 3rd grader does understand, and you have sound logic to get to the insight, and your investor still disagrees, you need to find someone who agrees with strategic direction forward.
It’s not worth your time trying to convince a now-and-future naysayer on a future they don’t believe in. Myself included. There will be some ideas that just don’t make sense to me. While part of it might be ’cause of poor explanation/communication, the other part is I’m just not your guy. And that’s okay.
14/ If a VC asks your earlier investors to give up their pro-rata, and forces you to pick between your earlier investors and that VC, it’s a telltale sign of an unhealthy relationship. If they’re willing to screw your earlier investors over, they’ll have no problem screwing you over if things go south. To analogize, it’s the same as if the person you’re dating asks you to pick between your parents who raised you and them. If they have to force a choice out of you, you’re heading into a toxic relationship where they think they should be the center of the universe.
15/ You can really turn some heads if your pitch deck doesn’t have the same copy/paste answers as every other founder out there. Seems obvious, but this notion becomes especially tested on two particular slides: the go-to-market (GTM) and the competitorslides.
16/ If you want to be memorable, teach your investor something they didn’t know before. To be memorable means you’re likely to get that second meeting.
17/ Focus on answering just one question in your pitch meeting with an investor. That question is dependent on the plausibility of your idea. If your idea is plausible, meaning most people would agree that this should exist in the market, answer “why this.” If your idea is possible, meaning your idea makes sense but there’s not a clear reason for why the market would want it, answer “why now.” If your idea is preposterous, answer “why you.” Why you is not about your X years of experience. It’s about what unique, contrarian insight you developed that is backed by sound logic. That even if the insight is crazy at first glance, it makes sense if you dive deeper. Inspired by Mike Maples Jr.
18/ Beware of investor veto rights in term sheets. Especially around future financing. The verbage won’t say “veto rights,” but rather “no creation of a new series of stock without our approval” or “no amendments to the certificate of incorporation without our approval.”
19/ 99% of syndicate LPs like to be passive capital, since they’re investing 50 other syndicates at the same time. Don’t expect much help or value add from them. But if they’re also a downstream capital allocator, you can leverage that relationship when you go to them for bigger checks in future rounds.
20/ Don’t count on soft commitments. “We will invest in you if X happens.” Soft commitments are easy to make, and don’t require much conviction. X usually hinges on a lead investor or $Y already invested in the startup. Investors who give soft commits are not looking for signal in your business but signal via action from other investors. Effectively, meaning they don’t believe in you, but they will believe in smart people who believe in you.
21/ Just because they’re an A-lister doesn’t mean they’ll bring their A-game. Really get to know your investor beforehand.
22/ If you’re an outsider of the VC world, first step is to accept you are one and that you will have to work much harder to be recognized. “You will be work for investors. The data doesn’t support investing in you. The game is not fair at all. It will be a struggle.” Inspired by Mat Sherman.
23/ Mixing your advisors and investors in the same slide is a red flag for potential investors, unless your advisors also invested. Why? It gives off the impression that you’re hiding things. If the basis of an investment is a 10-year marriage, doubt is the number one killer of potential investor interest.
24/ Too many advisors is also a red flag. “Official” and “unofficial“. Too many distractions. Advisors almost always invest. If they don’t, that’s signaling to say you need their help, but they don’t believe in you enough to invest.
25/ There are also some investors don’t care about your advisors at all, at least on the pitch deck. The pitch deck should be your opportunity to showcase the team who is bleeding and sweating for you. Most advisors just don’t go that far for you. The addendum would be that technical advisors are worth having on there, if you have a deeply technical product.
26/ “Find an investor’s Calendly URL by trying their Twitter handle, and just book a meeting. With so many investor meetings, it’s easy to forget you never scheduled it. Just happened to me and it was both frightening and hilarious.” – Lenny Rachitsky
27/ If you want money, ask for advice. If you want advice, ask for money.
28/ Don’t waste your energy trying to convince investors who strongly disagree to jump onboard. Your time is better spent finding investors who can already see the viability of your vision.
29/ Higher valuations mean greater expectations. You might want to raise for a longer runway, and I’ve seen pitches as great as 36 months of runway, but most investors are still evaluating you on a 12-month runway upon financing round. Can you reach your next milestones (i.e. 10x your KPIs) in a year from now? Higher valuations mean your investor thinks you are more likely and can more quickly capture your TAM at scale than your peers.
30/ As founder, you only need to be good at 3 things: raise money, make money, and hire people to make money. Every investor, when going back to the fundamentals, will evaluate you on these 3 things.
31/ A good distribution of your company’s early angel investors include:
32/ “All investor questions are bad. They are a tell tale sign of objections politely withheld until you are done talking.” Defuse critical questions by incorporating their respective answers into the pitch. For instance, if the question that’ll come up is “How do you think about your competition?”, include a slide that says “We know this is a competitive space, and here’s why we’re doing what we’re doing.” Inspired by Siqi Chen.
33/ “‘Strategics’ (aka non-VCs) may care less about ROI, and more about staying close for competitive intel and downstream optionality.” – Brian Rumao
On managing team/culture…
34/ Align your vacation with when the core team takes their vacation. (i.e. if you’re a product-led team, take your vacations when your engineers and product teams go on vacation)
35/ Please pay yourself as a founder. Some useful founder salary benchmarks:
Seed stage – lowest paid employee
Series A or when you find product-market fit (PMF) – lowest paid engineer
When you hit scale – mid-level engineer
When you’ve reached market dominance – market rate pay for CEOs
If growth slows or stops or hard times hit – cut back to previous compensation, until you grow again
36/ Measure twice, cut once. If you’re going to lay people off, do it once. Lay more people than you think you need to, so you don’t have to do it again. Keep expectations real and don’t leave unnecessary anxiety on the table for those that still work for you.
One of my favorite examples is that, at the start of the pandemic, Alinea, one of the most recognizable names in the culinary business, furloughed every full-time employee, giving them $1000 and paid for 49% of their benefits and health care, eliminated the salaries of owners completely, and reduced the business team and management’s salary by 35%. Not only that, they emailed all their furloughed employees to level expectations and to understand the why. In normal situations, the law states that furloughed employees shouldn’t have access to their work emails, but Nick said “I will break the law on that because this is the pandemic.” For more context, highly recommend checking out Nick’s Medium post and his Eaterinterview, time-stamped at the start of the pandemic.
37/ Take mental health breaks. I’ve met more venture-backed founders who regretted not taking mental health breaks than those who regretted taking them.
38/ Build honesty into your culture, not transparency. And do not conflate the two. Take, for example, you are going through M&A talks with one of the FAAMGs. If you optimize for transparency, this gets a lot of hype among your team members. But let’s say the deal falls through. Your team will be devastated and potentially lose confidence in the business, which can have second-order consequences, like them finding new opportunities or trying to sell their shares on the secondary market. I’ve quoted mmhmm‘s Phil Libinbefore, when he said, “I think the most important job of a CEO is to isolate the rest of the company from fluctuations of the hype cycle because the hype cycle will destroy a company.” Very similarly, full transparency sounds great in theory but will often distract your team from focusing on their priorities.
39/ When in doubt, default to Bezos’ two-pizza rule. Every project/team should be fed by at most two pizzas. In the words of David Sacks, even “the absolute biggest strategic priority could [only] get 10 engineers for 10 weeks.” Don’t overcomplicate and over-bureaucratize things.
40/ Perfect is the enemy of good. Have a “ship-it” mentality. Give yourself an 10-20% margin of error. Equally so, give your team members that same margin so that they’re not scared of making mistakes. It’s less important that mistakes happen, and they will, but more important how you deal with it.
41/ James Currier has a great list of ways to compensate your team and/or community.
Value of using the product (e.g. utility, status, cheaper prices, fun, etc)
Cash (e.g. USD, EUR)
Equity shares (traditional)
Discounted fees
Premier placement and traffic/attention
Status symbols
Early access
Some voting and/or decision making, ability to edit/change
Premier software features
Membership to a valuable clique of other nodes
Real world perks like dinner/tickets to the ball game
Belief in the mission (right-brain, intrinsic)
Commitment to a set of human relationships (right-brain, intrinsic)
Tokens (fungible)
Non-Fungible Tokens
42/ Have Happy Hour Mondays, not on Thursdays and Fridays. Give your team members something to look forward to on Mondays.
43/ “Outliers create bad mental models for founders.” – Founder Collective
44/ Once you break past product-market fit and hit scale, you have to start thinking about your second act. It’s about resource allocation. The most common playbook for resource allocation is to spend 70% of your resources on your core business, 20% on business expansion, and 10% on venture bets.
45/ The top three loads that a founder needs to double down or back on when hitting scale. “You have to stop being an individual contributor (IC). Stop being a VP. And you gotta hire great [VPs]. The sign of a great VP… is that you look forward to your 1:1 each week. And that plus some informal conversations are enough. Otherwise you’re micromanaging.” – Jason Lemkin.
46/ If you could write a function to mathematically approximate the probability of success of any given person on your team, what would be the coefficients? What are the parameters of that function? Inspired by Dharmesh Shah.
47/ The team you build is the company you build. And not, the plan you build is the company you build. – Vinod Khosla.
48/ “The output of an organization is equal to the vector sum of its individuals. A vector sum has both a magnitude and a direction. You can hire individuals with great magnitude, but unless they were all pointed in the same direction, you’re not going to get the best output of the organization.” – Pat Grady summarizing a lesson he learned from Elon Musk.
49/ “The founder’s job is to make the receptionist rich.” – Doug Leone
50/ “The amount of progress that we make is directly proportional to the number of hard conversations that we’re willing to have.” – Mark Zuckerberg quoting Sheryl Sandberg.
52/ Hire for expertise, not experience. The best candidates talk about what they can do, rather than what they did.
53/ A great early-stage VP Sales focuses on how fast they can close qualified leads, not pipeline. Also, great at hiring SDRs. It’s a headcount business.
54/ A great early-stage VP Marketing focuses on demand gen and not product or corporate marketing.
55/ Kevin Scott, now CTO of Microsoft, would ask in candidate interviews: “What do you want your next job to be after this company?” Most of your team members realistically won’t stick with the same company forever. This is even more true as you scale to 20, then 50, then 100 team members and so on. But the best way to empower them to do good work is to be champions of their career. Help them level up. Help them achieve their dreams, and in turn, they will help you achieve yours.
56/ When you’re looking to hire people who scale, most founders understand that a candidate’s experience is only a proxy for success in the role. Instead, ask: “How many times have you had to change yourself in order to be successful?” Someone who is used to growing and changing according to their aspirations and the JD are more likely to be successful at a startup than their counterparts. Inspired by Pedro Franceschi, founder of Brex.
57/ The best leading indicator of a top performing manager is their ability to attract talent – both externally and internally. “The ability to attract talent, not just externally, but also internally where you’ve created a reputation where product leaders are excited to work not just with you, but under you.” Inspired by Hareem Mannan.
58/ When you’re hiring your first salespeople, hire in pairs. “If you hire just one salesperson and they can’t sell your product, you’re in trouble. Why? You don’t know if the problem is the person or the product. Hire two, and you have a point of comparison.” Inspired by Ryan Breslow.
59/ The longer you have no team members from underestimated and underrepresented backgrounds and demographics, the harder it is to recruit your first.
On governance…
60/ You don’t really need a board until you raise the A. On average, 3 members – 2 common shareholders, 1 preferred. The latter is someone who can represent the investors’ interests. When you get to 5 board seats (around the B or C), on average, 3 common, 1 preferred, and 1 independent.
61/ As you set up your corporate board of directors, set up your personal board of directors as well. People who care about you, just you and your personal growth and mental state. Folks that will be on your speed dial. You’ll thank yourself later.
62/ You can’t fire your investor, but investors can fire you, the founders. That’s why it’s just as important, if not more important, for founders to diligence their investors as investors do to founders. Why for founders? To see if there’s founder-investor fit. The best way is to talk to the VC’s or angel’s portfolio founders – both current and past. Most importantly, to talk to the founders in their past portfolio whose businesses didn’t work out. Many investors will be on your side, until they’re not. Find out early who has a track record for being in for the long haul.
63/ Echoing the previous point, all your enemies should be outside your four walls, and ideally very few resources, if at all, should be spent fighting battles inside your walls.
64/ Standard advisor equity is 0.25-1%. They typically have a 3-month cliff on vesting. Founder Institute has an amazing founder/advisor template that would be useful for bringing on early advisors. You can also calculate advisor equity as a function of:
(their hourly rate*) x (expected hours/wk of commitment) / (40 hours) x (length of advisorship**) / (last company valuation) *based on what you believe their salary would be **typically 1-2 years
65/ Have your asks for your monthly investor updates at the top of each email. Make it easy for them to help you. Investors get hundreds every month – from inside and outside their portfolio. I get ~40-50 every month, and I’m not even a big wig. Make it easy for investors to help you.
66/ Monthly/quarterly investor updates should include, and probably in the below order:
Your ask
Brief summary of what you do
Key metrics, cash flow, revenue
Key hires
New product features/offerings (if applicable)
67/ In his book The Messy Middle, Scott Belsky quotes Hunter Walk of Homebrew saying, “Never follow your investor’s advice and you might fail. Always follow your investor’s advice and you’ll definitely fail.”
68/ While you’re probably not going to bring on an independent board member until at or after your A-round, since they’re typically hard to find, once you do, offer them equity equivalent to a director or VP level, vested over two to three years (rather than four). Independent board members are a great source for diversity, and having shorter schedules, possibly with accelerated vesting schedules on “single trigger”, will keep the board fresh. Inspired by Seth Levine.
69/ “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation. In other words to take a concrete example, Google is a great company. Google is not a great company because Sequoia invested in them. Sequoia is a great venture firm because they invested in Google.” – Ashmeet Sidana. This seems like obvious advice, but you have no idea how many founders I’ve met started off incredible, then relied on their VC’s brand to carry them the rest of the way. Don’t rely solely on your investors for your own success.
70/ “Invest in relationships. Hollywood idolizes board meetings as the place where crucial decisions are made. The truth is the best ideas, collaboration, and feedback happen outside the boardroom in informal 1:1 meetings.” – Reid Hoffman
71/ When your company gets to the pre-IPO stage or late growth stages, if you, as the founding CEO, are fully vested and have less than 10% ownership in your own company, it’s completely fine to re-up and ask your board for another 5% over 5 years. No cliffs, vesting starts from the first month. Inspired by Jason Calacanis.
72/ A great independent board member usually takes about 6-9 months of recruiting and coffee chats. You should start recruiting for one as early as right after A-round closes. In terms of compensation, a great board member should get the same amount of equity as a director of engineering at your current stage of the company, with immediate monthly vesting and no cliff. Inspired by Delian Asparouhov.
73/ If your cap table doesn’t have shareholders with equity that is differentiated (i.e. everyone owns the same size of a slice of the pie), then their value to the company won’t be differentiated. No one will feel responsible for doing more for the business. And everyone does as much as the lowest common denominator. It becomes a “I only have to do as much as [lowest performer] is doing. Or else it won’t be fair.”
74/ “If you ‘protect’ your investor updates with logins or pins, you will also protect them from actually being read.” – Paul Graham
On building communities…
75/ Every great community has value and values. Value, what are members getting out of being a part of the community. Values, a strict code of conduct – explicit and/or implicit, that every member follows to uphold the quality of the community.
76/ Build for good actors, rather than hedge against the bad actors. I love Wikipedia’s Jimmy Wales‘ steak knives analogy. Imagine you’re designing a restaurant that serves steak. Subsequently, you’re going to be giving everyone steak knives. There’s always the possibility that people with knives will stab each other, but you won’t lock everyone in cages to hedge against that possibility at your restaurant. It’s actually rather rare for something like that to happen, and we have various institutions to deal with that problem. It’s not perfect, but most people would agree that they wouldn’t want to live in a cage. As Jimmy shares, “I just think, too often, if you design for the worst people, then you’re failing design for good people.”
77/ If you’re a consumer product, Twitter memes may be the new key to a great GTM (go-to-market) strategy. (e.g. Party Round, gm). As a bonus, a great way to get the attention of VCs. There’s a pretty strong correlation between Twitter memes and getting venture funding. Community, check. Brand, check. Retention and engagement, check.
On pricing…
78/ For B2B SaaS, do annual auto-price increases. Aim for 10% every year. Why?
Customers will try to negotiate for earlier renewal, longer contract periods.
When you waive the price increases, customers feel like they’re winning.
You can upsell them more easily to more features.
79/ If you’re a SaaS product, you shouldn’t charge per seat. Focus on charging based on your outcome-based value metric (# customers, # views per video), rather than your process-based value metric (e.g. per user, per time spent). If you charge per seat, aka a process-based value metric, everything works out if your customer is growing. But incentives are misaligned when your customer isn’t. After all, more users using your product makes you more sticky, so give unlimited seats and upsell based on product upgrades.
80/ Charge consumers and SMBs monthly. And enterprises annually. The former will hesitate on larger bills and on their own long-term commitment. The latter doesn’t want to go back to procurement every month to get an invoice approved. Equally so, the latter likes to negotiate for longer contracts in exchange for discounts. Inspired by Jason Lemkin.
On product/strategy…
81/ Having a launch event, like Twitchcon, Dreamforce, Twilio’s Signal, or even Descript’s seasonal launch events, aligns both your customers and team on the same calendar. Inspired by David Sacks’ Cadence. For customers, this generates hype and expectation for the product. For your team, this also sets:
Product discipline, through priorities, where company leaders have to think months in advance for, and
Expectations and motivates team members to help showcase a new product.
82/ Startups often die by indigestion, not starvation. Exercise extreme focus in your early days, rather than offering different product lines and features.
83/ “Epic startups have magic.” Users intuitively understand what your product does and are begging you to give it to them. If you don’t have magic yet, focus on defining – quantitatively and qualitatively – what your product’s magic is. Ideally, 80% of people who experience the magic take the next step (i.e. signup, free trial, download, etc.). Inspired by John Danner.
84/ To find product-market fit (PMF), ask your customers: “How would you feel if you could no longer use our product?” Users would have three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of the users say “very disappointed”, then you’ve got your PMF. Inspired by Rahul Vohra.
85/ For any venture-backed startup founder, complacency is cancer. As Ben Horowitz would put it, you’re fighting in wartime. You don’t have the luxury to act as if you’re in peacetime. As Reid Hoffman once said, “an entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
86/ Good founders are great product builders. Great founders are great company builders.
87/ To reach true scale as an enterprise, very few companies do so with only one product. Start thinking about your second product early, but will most likely not be executed on until $10-20M ARR. Inspired by Harry Stebbings.
88/ Build an MVT, not MVP. “An MVP is a basic early version of a product that looks and feels like a simplified version of the eventual vision. An MVT, on the other hand, does not attempt to look like the eventual product. It’s rather a specific test of an assumption that must be true for the business to succeed.” – Gagan Biyani
89/ Focus on habit formation. “Habit formation requires recurring organic exposure on other networks. Said another way: after people install your app, they need to see your content elsewhere to remind them that your app exists.” And “If you can’t use your app from the toilet or while distracted—like driving—your users will have few opportunities to form a habit.” Inspired by Nikita Bier.
90/ “Great products take off by targeting a specific life inflection point, when the urgency to solve a problem is most acute.” – Nikita Bier. Inflection points include going to college, getting one’s first job, buying their first car or home, getting married, and so on.
91/ You’re going to pivot. So instead of being married to the solution or product, marry yourself to the problem. As Mike Maples Jr. once said about Floodgates portfolio, “90% of our exit profits have come from pivots.”
92/ Retention falls when expectation don’t meet reality. So, either fix the marketing/positioning of the product or change the product. The former is easier to change than the latter.
93/ To better visualize growth of the business, build a state machine – a graph that captures every living person on Earth and how they interact with your product. The entire world’s population should fall into one of five states: people who never used your product, first time users, inactive users, low value users, and high value users. And every process in your business is governed by the flow from one state to another.
For example, when first time users become inactive users, those are bounce rates, and your goal is to reduce churn before you focus on sales and marketing (when people who never used your product become first time users). When low value users become high value users, those are upgrades, which improve your net retention. Phil Libin took an hour to break down the state machine, which is probably one of the best videos for founders building for product-market fit and how to plan for growth that I’ve ever seen. It’s silly of me to think I can boil it down to a few words.
94/ When a customer cancels their subscription, it’s either your fault or no one’s fault. If they cancel, it is either because of the economy now or you oversold and underdelivered. So, make the cancellation (or downgrading) process easy and as positive as the onboarding. If so, maybe they’ll come back. Maybe they’ll refer a friend. Inspired by Jason Lemkin.
On market insight and competitive analysis…
95/ To find your market, ask potential customers: “How would you feel if you could no longer use [major player]’s product?” Again, with the same three choices: “Very disappointed”, “Somewhat disappointed”, and “Not disappointed”. If 40% or more of your potential customers say “not disappointed”, you might have a space worth doubling down on.
96/ Have a contrarian point of view. Traits of a top-tier contrarian view:
People can disagree with it, like the thesis of a persuasive essay. It’s debatable.
Something you truly believe and can advocate for. Before future investors, customers, and team members do, you have to have personal conviction in it. And you have to believe people will be better off because of it.
It’s unique to you. Something you’ve earned through going through the idea maze. A culmination of your experiences, skills, personality, instincts, intuition, and scar tissue.
Not controversial for the sake of it. Don’t just try to stir the pot for the sake of doing so.
It teaches your audience something – a new perspective. Akin to an “A-ha!” moment for them.
Backed by evidence. Not necessarily a universal truth, but your POV should be defensible.
It’s iterative. Be willing to change your mind when the facts change.
97/ Falling in love with the problem is more powerful than falling in love with the solution.
98/ If you’re in enterprise or SaaS, you can check in on a competitor’s growth plan by searching LinkedIn to see how many sales reps they have + are hiring, multiply by $500K, and that’s how much in bookings they plan to add this year. Multiply by $250K if the target market is SMB. Inspired by Jason Lemkin.
99/ Failures by your perceived competitors may adversely impact your company. Inspired by Opendoor’s 10-K (page 15).
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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal or investment advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.
I’ve had this long-standing belief – which if you’re a regular reader of this blog, you’re no stranger to – that founders need to have a personal vendetta when building a business. They must have something to prove or someone they’d want to prove to. Building a business is finding where selfishness meets selflessness. In fact, I’d argue that’s true in every ideal professional career.
The path of entrepreneurship is one where resilience is the floor, not the ceiling. While I understand, it is not the only career path that carries this trait, it is the one I am most familiar with. And having asked 31 people, 18 of which are or have been entrepreneurs, I’ve learned that everyone, despite their job title or background, can be scared in the face of obstacles. Everyone feels fear, myself included. The question is what do we do next, after the feeling of fear enters our heart and mind.
I recently read Mark Suster‘s 2018 blog post about startups on “Remind me why I love you again?”. As an extremely active VC, he specifically detailed why, unfortunately, by meeting 2, 3, and so on with a founder, he may forget the context of reconnecting and why the founder/startup is so amazing. And, simply, he calls it “love decay”.
Mark Suster’s graph on ‘Love Decay’
The longer it has been since a VC/founder’s last meeting, the harder it is to recall the context of the current meeting. Though I may not be as over-saturated with deal flow as Mark is, it is an unfortunate circumstance I come across in meeting 5-10 founders and replying to 100+ emails a week.
