Tag: vc

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#unfiltered #42 The Miracle that Catalyzes the Hero’s Journey

In the venture world, the word timing is thrown around in a very canonical way. Many investors and founders mythologize the concept of timing around a business. While there is some science and data that might be able to point in the general direction, success is a lagging indicator of timing. And arguably, the only way anyone can really determine if the timing is right or not is in hindsight. Investors that said they knew the exact timing of the market may just be attributing their success to survivorship bias.

To analogize it, it’s the same as knowing when to invest in the market or in a particular stock. Everyone wants to buy at the lowest, sell at the highest. Your ROI is positively correlated with the sell price, and negatively correlated with the buy price. But when is the lowest? No one really knows for certain. We can guesstimate a timeframe with reasonable confidence, but that’s the best we can do. The same is true for measuring timing in the market. Yet there is one thing that I’ve come to learn in my years in the venture world that’s as close as you can get to the “true” timing of the market. A miracle.

Let me explain.

One miracle

Every startup needs one miracle to succeed. One. No more. No less. Elad Gil said in an interview with James Currier at nfx, “Every startup needs to have a single miracle… If your startup needs zero miracles to work, it probably isn’t a defensible startup. If your startup needs multiple miracles, it probably isn’t going to work.” He further elaborates, “If you have more than one, you have compounding small odds and that means you’re very, very likely to fail.”

Before that miracle, if you’re truly creating a revolutionary business, by definition, you’re in the non-consensus. You have more non-believers than you do believers. If it were an obvious business, then everyone would do it. If everyone does it, economically-speaking, the ROI is low. In a situation, where every kid sells lemonade with the exact same recipe by the street corner, everyone is fighting for the exact same customers. Eventually, it’ll lead to a race to the bottom.

That single miracle is going to be that trial by fire. The true test of grit and founder obsession. That trial, whenever it is, predictable or not, determines if your product will stay a niche idea (and possible fizzle into obscurity) or a business that will change the world. For you and your business, that miracle could have been catalyzed by the pandemic, the GME short squeeze, ’08 recession (if you’re an older business), the inauguration, or something yet to come. The question is: How do you respond in the face of adversity?

Why is that miracle important?

Tim Ferriss once said, “Your superpower is very often right next to your wound, like your biggest wound. […] They’re often two sides of the same coin.” If you can survive and conquer that trial, the miracle – your superpower – becomes one of your strongest moats. The lessons you learned, the trust you (re)built, and the legacy you begin to construct. Those lessons – those earned secrets – while not impervious, will ideally be incredibly hard to obtain for others without walking through fire. A metamorphic journey from a vulnerable caterpillar to a beautiful monarch. What Joseph Campbell calls the “hero’s journey“.

And in the longer time horizon, that you are no longer just the protagonist of that miracle, but that you are also a producer of miracles for others. You are then capable of minting miracles systematically. Be it your customers, your team members, and your investors.

Why #unfiltered?

You might be wondering why I tagged this essay as #unfiltered. Frankly, it’s a new unrefined hypothesis that I’ve been playing around with. While it’s been inspired by others, I believe there’s more nuance I still need to uncover as well. That I’ll need to test a bit more to see if it can be a more robust thesis.

Going forward, I will continue to ask founders questions like:

  • What is the origin story of this idea?
  • If you were to fail in 18 months, what would be the most likely reason why?
  • Conversely, if you were to wildly succeed in that same time frame, what would be the biggest contributor?
  • Why are you a different person today than when you started this business? Who/what catalyzed this/these change(s)?
    • Examples of who: customers, team, partners, investors
    • Examples of what: black swan events, market trends, socio-economic habits, new technologies, an inflection point in your life when you faced impossible odds, failures, etc.

But I’ll be particularly looking for the earned secret among a miracle of adversity. Simply put, I’m looking to hear this song play in the background. The beginning of a mythical legend in the making.

Cover photo by Jon Ander on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

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Should you take VC money or just money money?

Not too long ago, I came across a question on Quora that I had to double click on: Why should founders care about VC brand? Money is money, isn’t it? While the question itself seemed to have a come from a less-informed perspective, I found it to be a useful exercise to once again go through the checklist of founder-investor fit.

Money, frankly, is just money. A Benjamin will look the same and work the same as any other Benjamin out there. Assuming you don’t need anything else other than money, I’d recommend other sources of funding other than venture funding, i.e.:

  • (Equity) crowdfunding,
  • Rev share,
  • Angels – high net-worth individuals who write checks in the 1000s to 10s of 1000s of dollars;
    • Also worth looking into, but are representative of the VC model, are super angels and solo capitalists. Many of whom might be leading their own rolling funds (more context) now;
  • SBA Loans;
  • Friends/family – small sums of money, unless your dad is Chamath Palihapitiya;
  • ICO;
  • Government (public) and private grants – really small sums of money, but money nonetheless;
  • Accelerators/incubators – less upfront capital. But the partnerships they have with other startup services save you a lot of money (i.e. AWS, Adobe Suite, etc.);
  • Selling domain names (yes, I have a friend who initially funded his business by doing that, but other than that, I’m kidding);
  • And I’m sure I missed some others out there.

On the other hand, most founders who raise VC funding want something more than just monetary capital, including, but not limited to:

  • Mentorship/advisorship –
    • Ex-operators who can give you tactical advice,
    • Former founders who can empathize with you,
    • VCs who can check your blind side and had previous portfolio founders who have gone through what you’re going through now,
    • People who have access to resources that will aid you on the founding journey (ideally not distract you),
    • And frankly, people who’ll be there for you when you have to make the tough calls,
    • Highly recommend Harry Hurst’s tweet about the CS:H ratio (check size: helpfulness, which I elaborate on here) as a mental model to figure out which VCs depending on fund size/check size can help you the founder the most at the stage you’re at.
  • Network – downstream investors, sales pipeline, potential hires (eng, executives, growth, product, marketing, etc)
  • Brand/PR –
    • If you’re trying to fill up a round, a brand name investor can easily help you fill in the rest of the round with their network and their participation alone. They’ll also help you raise downstream capital – directly or indirectly.
    • It’ll be easier to find customers. With a brand name VC, you also get quite a bit of media attention from Forbes, TC, NY Times, and so on. Customers are more likely to trust you knowing that you’re backed by a recognizable brand, especially the folks on the other side of the chasm on the adoption curve.
    • It’ll be easier to hire world-class talent. Your business, in their mind, is less likely to go out of business tomorrow. And while you’re not looking for candidates who seek stability, it does give the candidates you do want to hire a peace of mind and confidence that you have external validation.

There’s a saying that the difference between a hallucination and a vision is that other people can see the latter. It’s really a chicken and egg problem. I’m not saying a VC’s brand will guarantee the success of your startup, but I do believe it will help, with the underlying assumption that you pick the right VC. Whereas it used to be a differentiator a decade ago, all VCs these days say they’re founder-first or founder-friendly. But unfortunately not all are. They might be if things are going well. But the true tells are what happens when things don’t go well. Here are some of my favorite questions to ask portfolio founders before you work with a VC. And how to find founder-investor fit.

Photo by Luca Bravo on Unsplash

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One of the Toughest Job Requirements to be a VC

I passed on a deal.

Every time I think it’s easier to say “pass on the good to make space for the great”, the world says you’re wrong. Last week, once again, I realized how hard it was to say “No”.

We’d been chatting for a few months now. They were raising a pre-seed. And they checked most of the boxes I look for in an epic founding team:

  • Spent time in the idea maze and deep domain expertise,
  • Had a unique insight which led to innovation in their business model,
    • Because I didn’t know their market well enough, I hesitate to say if this was an earned secret or just a lesser-known fact that an outsider would never hear about. The difference between, what Kanyi Maqubela at Kindred Ventures, a mystery and a secret.
  • Consistently followed through with their promises and commitments (to me),
  • Dreamed big – big TAM, big vision,
  • Hustled to build relationships with some of the largest enterprise customers in their sector (though, yet to close any contracts),
  • Onboarded some incredible talent,
    • As I heard on my buddy’s podcast recently, “you can only learn from experience, but it doesn’t have to be yours.

I’ve written more here about what I look for.

Over the past few months, I asked for more time in hopes to find something more. Admittedly, I could think of a million excuses. And I have. I could have said:

  • They’re too early, since I rarely do pre-seed deals these days.
  • Or it’s the lack of traction.
  • Maybe that they could be more articulate about their go-to-market and product-market fit.
  • Maybe it’s the fact that at an early stage, that they have both a CEO and president. In other words, competing personalities in leadership.
  • Surprisingly large team for pre-seed startup.
  • Or, simply, I don’t know their space well enough, albeit adjacent to mine.

The more I thought about it, the more I realized I was just making excuses. I could circumvent most of these “reasons” with just a little effort on my part. And the fact that I was introduced to them by someone I really respect in the industry didn’t make it any easier. In fact, that alone was one of the strongest driving forces for me to want this deal to work out. The truth is, I just wasn’t excited about the product. And I had been spending time – arguably wasting theirs – trying to find my excitement. But I couldn’t, no matter how hard I tried.

I know it may be completely self-serving here. Call it immaturity or naivete. As a scout, I live by a self-imposed rule that every deal I refer, I want to be their greatest champion – their greatest evangelist – when I do so. In other words, if I had the capital, I would invest in each and every one I refer. On the same token, every deal I refer is just the start of an exciting long-term relationship. Post-referral, during diligence, post-investment and even if the deal doesn’t close. But for this startup, I just felt myself dragging my feet through knee-deep water just to meet with them over time.

Thinking I was in over my head, I hit up two mentors of mine in the space to give me the reality check I thought I needed. I thought and was, borderline, hoping they’d say, “You’re a sucker to bring personal emotions into an investment.” Or “Suck it up. Stop being a millennial/snowflake.” But neither did. I also told another friend last night and she replied, “It’s what makes you human. And I think people need to know about this side of VC.”

So, I’m writing this now in hopes that it will contextualize some of the decisions we make on this side of the table. I made the decision with the expectation that I’d be forgotten or passed on by them when they raise a future round. If they ask me again, it’ll be an honor and a privilege. And maybe my disposition will change in 1-2 years’ time. But it’s naive of me to expect that. Nevertheless, I still wish them the absolute best, and I hope they become the rock-star success they set out to be.

Photo by Bruce Jastrow on Unsplash

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The Smoke Signals of a Great Startup From the Lens of the Pitch Deck

best startup pitch deck

Founders often ask me, what slides on my pitch deck do I have to make sure I get right? The short answer, all of them. Then again, if you’re focusing on all of them, you’re focusing on none of them. So I’ll break it down by fundraising stages:

  1. Pre-seed/seed (might as well include angels here too)
  2. Series A/B

Since I spend almost no time in the later stages, I’ll refrain from extrapolating from any anecdotes there.

If you’re using DocSend, you already have the numbers for your deck viewership in front of you. As DocSend’s CEO Russ Heddleston said in his interview with Jason Calacanis, VCs often spend ~3.5 minutes on your deck. Though I’ve never timed myself, it seems to be in the same ballpark for myself as well. After all, it’s the deck that gets the meeting, not the deck that determines if you get funding or not.

Nevertheless, I hope the below contextualizes the time spent beyond the numbers, and what goes on in an investor’s head when we’re skimming through.

Pre-seed/seed

Team

  1. What is the biggest risk this business is taking on?
  2. Is the person who can address the biggest risk of this business on this slide?
    • And does this person have decision-making power?

Let’s say your biggest risk is that you’re creating a market where there isn’t one. Do you have that marketing/positioning specialist – either yourself or on your team – to tackle this problem? As much as I love techies, three CS PhDs are going to give me doubts.

Similarly, the biggest risk for a hypothetical enterprise SaaS business is often a sales risk. Then I need proof either via your network/experience or LOIs (letters of intent) that you have corporations who will buy your product.

Or if it’s a tech risk, I’ll be hesitant if I see two MBAs pursuing this. Even if their first hire is an ML engineer, who owns 2% of the business. Because it doesn’t sound like the one person who can solve the biggest risk for the business has been given the trust to make the decisions that will move the needle.

This might be a bit controversial, but having talked with several VCs, I know I’m not alone here. I don’t care about quantity – number of years in the industry or at X company. Maybe a little more if you were a founding team member who helped scale a startup to $100M ARR. I do care for quality – your earned secret, which bleeds into the next slide.

Solution/product

The million-dollar question here is: What do you know that makes money that everyone else is overlooking, underestimating, or just totally missed? If you’re a frequent reader of this blog, you’ll be no stranger to this question. I’ve talked about it here and here, just to name a few.

Or in other words, having spent time in the idea maze, what is your earned secret? Here are two more ways of looking at it is:

  1. Is there an inflection point you found, as Mike Maples Jr. of Floodgate calls it, in the socio-economic/technological trends that makes the future you speak of more probable?
  2. Is it a process/mental model that you’ve built over X years in the industry that grafts extremely well to an adjacent or a broader industry?

I believe that’s what’ll greatly increase the chances of your startup winning. Or at least hold your incumbents at bay until you reach product-market fit. If you’re able to find the first insight, then you’ll be able to find the second. And by pattern recognition, you’ll be able to find the third, fourth, and fifth in extreme velocity. It’s what we, on the VC side, call insight development. And your product/solution is the culmination of everything you and your team has learned faster and better than your competitors.

Of course, your product still has to address your customers’ greatest pain points. You don’t have to be the best at everything, but you have to be the best (or the only) one who can solve your customers’ greatest frustration. So VCs, in studying how you plot out the user journey, look for: do you actually solve what you claim this massive problem in the market is?

Series A/B

Traction

  • What are your unit economics? I’m looking for something along the lines of LTV:CAC ~3-5x.
  • Who’s paying?
    • For enterprise, which big logo is your customer? And who are your 5-7 referenceable customers?
    • For consumer:
      • If it’s freemium, what percent of premium users do you have? I’m looking for at least a 3-5% here.
      • If your platform is free, how are people paying with their time? DAU/MAU>25-30%? Is your virality coefficient k>1? 30- and 90-day retention cohorts > 20%, ideally 40%.
  • What does your conversion funnel look like? What part of the funnel are you really winning? Subsequently, what might you need more work on?

The competition

95 out of every 100 decks, I see two kinds of competitor slides:

  • 2×2 matrix/Cartesian graph, where the respective startup is on the upper right hand corner
  • The checklist, where the respective startup has all the boxes checked and their competitors have some percentage of the boxes checked

Neither are inherently wrong in nature, but they give rise to two different sets of questions.

The former, the graph, often leads to the trap of including vanity competitors. For the sake of populating the graph, founders include the logos of companies who hypothetically could be their competitors, but when it comes down to reality, they never or rarely compete on a deal with their target user/customer. April Dunford, author of Obviously Awesome, calls these “theoretical competitors.”

A simple heuristic is if you jumped on a call with a customer right now and ask: “What would you use currently if our solution did not exist?”, would the names of the competitors you listed actually pop up during the call? Or with a potential customer, what did they use before you arrived? For enterprise software, Dunford says that startups usually lose 25% of their customers when the answer to the above question is “nothing”. When your greatest incumbent is a habitual cycle deeply engrained in your user’s behavior, you need to either reposition your solution, or find ways to educate the market and greatly reduce the friction it takes to go from 0 to 60.

The latter, the checklist, usually sponsors a second kind of trap – vanity features. Founders often list a whole table’s worth of “awesome features” that their competitors don’t have, but many of which may not resolve a customer’s frustration. And on the one that does, their competitors have already taken significant market share. The key question here: Do all features listed resolve a fundamental problem your customers/users have? Which are necessary, which are nice-to-have’s? Are you winning on the features that solve fundamental problems?

The question I ask, as it pertains to competition, in the first or second meeting is: What are your competitors doing right? If you were to put yourself in your competitor’s shoes, what did they ace and what can you learn from the success of their experiment?

Financial projections

  1. What are you basing the numbers off of?
  2. What are your underlying assumptions?

How fast do you claim you can double the business growth? Is it reasonable? If we’re calculating bottom-up, can you actually sell the number of units/subscriptions you claim to? What partnerships/distribution channels are you already in advanced talks with? Anything further than 2 years out, for the most part, VCs dismiss. The future is highly unpredictable. And the further out it is, the less likely you’re able to predict that.

I also say financial projections for Series A/B decks is because only with traction can you reasonably predict what the 12-month forward revenue is going to look like. Maybe 18 months, depending on your pending contracts as well. In the pre-seed/seed, when you’re still testing out the product with small set of beta users, it’s hard to predict. And pre-seed/seed decks that have projections without much traction are often heavily scrutinized than their counterparts that don’t have that slide.

In closing

Of course, that doesn’t mean you should neglect any slide on your deck. Rather, the above is just a lens for you to see which slides an investor might allocate special attention to. If you can answer the above questions well in your pitch deck, then you’re one step closer to a winning strategy not only in fundraising, but in building a company that will change the world.

Photo by Ricardo Gomez Angel on Unsplash

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Rolling Funds and the Emerging Fund Manager

library, rolling funds, startup investment

In the past few months, Rolling Funds by AngelList have been the talk of the town. Instead of having to raise a new fund every 2-3 years, fund managers can now continuously accept capital on a quarterly basis, where LPs (limited partners, like family offices or endowments or fund of funds (FoF)) typically invest with 1-2 year minimum commitments. Under the 506c designation, you can also publicly talk about your fundraise as a fund manager. Whereas the traditional Fund I typically took 11 months to fundraise for a single GP (general partner of a VC fund), 11.9 if multiple GPs, now with Rolling Funds, a fund manager can raise and invest out of a fund within a month – and as quick as starting with a tweet. AngelList will also:

  • Help you set up a website,
  • Verify accredited investors,
  • Help set up the fund (reducing legal fees),
  • And with rolling funds, you can invest as soon as the capital is committed per quarter, instead of waiting before a certain percentage of the whole fund is committed as per the usual 506b traditional funds.

Moreover, Rolling Funds, under the same 506c general solicitation rules, are built to scale. Both for the emerging fund manager playing the positive sum game of investing upstream as a participating investor, and for the experienced fund manager who’s leading Series A rounds. In the former example with the emerging fund manager, say a solo GP investing out of a $10M initial fund size, 20 checks of $250K, and 1:1 reserves. Or the latter, $50-100M/partner, writing $2-3M checks. Maybe up to $7-10M for a “hot deal“, which by its nature, are rare and few in between. In the words of Avlok Kohli, CEO of AngelList Venture, Rolling Funds are what funds would have looked like if they “were created in an age of software”.

I’m not gonna lie, Rolling Funds really are amazing. Given the bull case, what is the bear case? And how will that impact both emerging and experienced fund managers?

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Predictions Are Popular

Predictions are in season. It started back during the holidays. A number of my friends, colleagues and folks online have been making predictions of what is going to happen this year. And I’m sure some are sure to hit. Many to miss. Since I’ve been reasonably active on Quora and given my role in the startup community, many people have asked me: “What are some of the best startup ideas to start in 2021? In 2022?”

Over the past year, the pandemic became a forcing function for late majorities and laggards of the adoption curve to pick up newer social and technological trends. Subsequently, accelerating many timelines. Timelines that would have otherwise been realized two, three, maybe even five years out.

  • Social is back.
    • Consumer social has been back. The pandemic has saved on average 2-3 hours of travel time per day for the average worker, job-permitting. At the same time, quarantining has reduced, if not eliminated, many in-person interactions with friends. More time means people seek to find more places to place their attention.
    • Enterprise social is here. The pandemic has forced many businesses to go remote. Similarly, there’s been a migration away from metropolitan/urban areas to save on rent, as well as an opportunity to not be shackled by geography in the past few months. Now, as well as “post-pandemic”, businesses, as well as individuals, are looking for new ways to improve efficacy, communication, and culture at work. In efforts to both retain and attract talent.
  • Impact-driven and socially-responsible businesses are hot.
  • Diversity in the board room is gaining traction. And it’s created ripple effects in the financial world. LPs are demanding venture funds to invest in diverse founders. At the same time, when diverse founders consider which investors to bring on, they look at if the checkwriters at the firm are diverse. Some investors have acted proactively; some reactively. Nevertheless, the cogs are moving.
  • E-commerce, entertainment, streaming, gaming, remote tools, edtech are all up.
  • SPACs and 2020’s string of IPOs have created many “overnight” millionaires.
  • Investing in the stock market, in alternative assets, in syndicates, and more mean more capital is being recycled back into the economy at various stages.
  • There is more capital available at the early stages. New angels. More startups. Just like pre-seed/seed is the Series A from a decade ago, more institutional investors will move upstream. Who knows, there may be a pre-pre-pre-seed round one day.
  • Innovation around the home office space is building momentum.
  • Unsurprisingly, Zoom fatigue is real, which will only led a hand in hybrid work-life models post-pandemic. Equally so, innovation around virtual meetings is only a matter of time.
  • Oculus brought down the price of a VR headset to be as much as a video game console, which means more people can and will adopt VR. Leading to larger markets and more diverse consumers for VR/AR. More startups.
  • Mental health has taken center stage, where it had previously been overlooked or disregarded.

When will the pandemic end? I don’t know.

When will we get vaccines? While experts have given us an expected date, I also don’t know.

When will “normal” return? I’m willing to bet it’s on the magnitude of years rather than months. Then again, will “normal” ever return? I might be completely wrong, but I’m willing to bet the “normal” we knew will never return. But instead, we’ll have a normal 2.0.

In truth, I can only answer what I see in my very narrow periphery. And by definition, there are a hundred-fold more that are in my blind side. And the thing is, what I’ve thought of I guarantee many other founders have already seen, tried, or are trying. What I’m looking for this year, and every year, is what I haven’t thought of yet. But when I hear and see it, it’ll click. Everything I know will make sense.

Investors are lagging indicators of innovation.

Founders are the leading indicators. Listen to them.

Photo by Nathan Anderson on Unsplash

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The Four Traits of World-Class Startup Founders

Proportionally speaking, I rarely make referrals and intros. Numerically speaking, I set up more intros than the average person. Frankly, if I made every intro that people have asked of me, I’d be out of social capital. It’s not to say I’m never willing to spend or risk my social capital. And I do so more frequently than most people might find comfortable. In fact, the baseline requirement for my job is to be able to put my neck on the line for the startups I’m recommending. The other side of the coin is that I’ve made more than a few poor calls in my career so far. That is to say, I’m not perfect.

I only set up intros if I can see a win-win scenario. A win for the person who wants to get introduced. And a win for the person they will be introduced to. The clearer I can see it, the easier the intro is to make. The less I can, the more I look for proxies of what could be one.

This largely has been my framework for introducing founders to investors, as well as potential hires, partners, and clients. Over the years, I realized that I’ve also been using the same for people who would like an intro to someone above their weight class.

Below I’ll share the 4 traits – not mutually exclusive – of what I look for in world-class founders.

  1. Insatiable curiosity
  2. Bias to action
  3. Empathy
  4. Promise fulfillment
Continue reading “The Four Traits of World-Class Startup Founders”
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My Top Questions to Ask Portfolio Founders When Doing Investor Diligence

I’ve recommended in a number of essays on this blog the importance of founder-investor fit. That founders should always do their diligence on potential investors, like here and here. And for a more robust understanding, asking founders in their current and previous portfolio, specifically the ones that didn’t work out. Some of my favorite questions for (ex-)portfolio founders:

  • How has [insert name] been helpful for you in your founder journey?
  • What was [insert name]‘s involvement like when shit hit the fan? Do you remember specific examples?
  • If you were to build another company (if applicable), would you work with [insert name] again?
    • If they are building another company in a relevant field, and if they say “yes”: Why haven’t you?
    • What are scenarios in which you would, and ones you wouldn’t?

Then think to yourself, were those pieces of advice actionable? Did the context help or detract from your initial disposition? Your goal isn’t to point fingers, but to paint a more holistic picture of who you might be working with closely for the long haul.

The best investors can inspire founders to think on wavelengths they might not have considered before. Some may hurt when you first hear them, but if your investors truly care, they mean well. The only reason the truth hurts is because it is the truth. And it’s your job as the founder to do your best to fix it.

The red herring

When a founder responds to the above questions with, “X investor just spent less time with us”, it’s not enough to say that an investor isn’t great.

Each VC always has his/her first and foremost duty and responsibility to the partnership. By simple economics, most of their investments won’t work out. Investors generally understand that they have to:

  1. Spend more time with the winners ’cause they’ll return the fund (and then some, hopefully),
  2. And cap their time commitment with the ones who won’t return the fund.

While that isn’t an excuse for VCs to only focus on maximizing returns (i.e. selling your IP, forcing an acquisition, unjustly firing the founder), it is something that founders should keep in mind. When you raise venture funding, just be aware of the fact that investors need to prioritize their time, especially when the going gets tough. And while it is usually implicit in the investment, a great investor/board member will often have that conversation explicitly with you at the beginning.

This notion, on the other hand, contrasts with angel investors, who are often investing out of their own net worth. So the dynamics, as well as commitment level, for angels is different. Angels often have between tens to hundreds of active investments at a time, meaning their time allocation per startup is much more limited than a VC. For context, a VC is usually actively involved in 3-7 investments at a time, meaning they’re going to be more involved per startup.

In closing

At the end of the day, the world of entrepreneurship, and business more broadly, is a relationship-building industry. And it’s extremely hard for an investor to build great relationships and a reputation if they have a track record of burning bridges. With founders. Even other investors – downstream and upstream.

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Two Types of Investments

Last week, I wrote an essay about the importance of brand-building for a VC. In it, I reference Fred Destin’s tweet. This post is more or less of a part 2 to the notion of “picking” versus “getting picked”.

As an early-stage investor, and even more so as a scout, where it is my job to qualify leads at the top of the funnel, there are 2 types of investments:

  1. Founders you pick
  2. And founders who pick (you)

The former is in order to build your brand. The latter is a result of the brand you built.

So for some additional context, in the last two days, I just had to ask a few investors who dance around this phenomenon and have a track record for winning outsized returns.

What I learned

In my email conversations with them, here’s what I learned:

On picking:

  • “Picking startups” is thesis-driven. “Getting picked” is value-driven. It’s not mutually exclusive. In fact, in many cases, it’s symbiotic.
  • “Picking” startups, especially at the earlier stages (i.e. pre-seed, seed), often comes down to if you can get conviction faster than anyone else.
  • The earlier the stage an investor invests in, the more likely he/she will focus on “picking” the founders. For instance, angels, pre-seed, and seed investors.
  • If an investor typically leads rounds, they are more likely to be “picking” as well.
  • Markets also matter. If the startups exist in a new market or are attempting to create that market, investors also spend more time “picking”.

On getting picked:

  • In situations where investors “get picked” and founders have leverage, valuations end up skyrocketing with larger rounds and less dilution. In effect, may misalign incentives between founder and investor.
  • For many, it’s a dichotomy they might reflect on when doing fund and deal flow analysis, but not as a pre-meditated approach.
  • For non-lead investors (i.e. angels, rolling funds, etc.), many of whom don’t have a huge brand yet, there is incredible value in empathy and operating experience, which often give you an edge over traditional VCs. Especially since you can’t compete with their check sizes.
  • To “get picked”, build relationships before founders need to raise. Be high-value, actionable, and timely. Hustle like the founders do.
  • Be differentiated. If you have the same thesis/brand/network as every other VC out there, you will just be another number, but never THE number – the signal for a founder among the noise. You don’t have to be unique on every variable (thesis, brand, network, operating experience, etc.), but you have to be stellar and unique in at least one.
  • Help founders with their “firsts” – first hire, first fire, first fundraise, etc. So that you will be the first fund they think of when they raise/need help.

Finding meaning in investments

If I could paraphrase the words of Keith Rabois of Founders Fund in his recent conversation with Jason Calacanis, picking and getting picked analogizes to:

  1. Investment you took a bet on when everyone else turned in the other direction
    • Where “your decision to invest in the company made a meaningful difference in their potential”.
  2. Investment where the company was going to get funded regardless of your investment, but your advice, resources and/or network sped up the escape velocity of that startup in a meaningful way

Keith was early into Airbnb, Palantir, and Wish, when others were doubtful on the product thesis. And it contrasted with his rationale to invest in Max Levchin‘s Affirm. He elaborates on the pod that Max might have gotten larger checks on better terms than he did with Keith. But Max chose Keith for the value Keith could bring to the table.

In closing

As Miami Heat’s Hall of Famer Pat Riley once said, “When you leave it to chance, then all of a sudden you don’t have any more luck.” Investing is all about being intentional. Whether an investor “picks” or “gets picked”, they set themselves for opportunity. In the words of Seneca, “luck is where opportunity meets preparation.” Preparation being the keyword. And for a VC, that includes:

  • A robust network (deal flow + potential hires + potential startup customers/partners + downstream investors),
  • Brand (network + content + knowledge/experience + track record),
  • Resources,
  • And a thesis.

Photo by Mario Mendez on Unsplash

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The Investor I Am Working To Be

I wrote an essay exactly a week ago about welcoming tough founder narratives. In it, the prerequisite to play in VC is to be open-minded – to “stay positive” and to “test negative”. I’m reminded of something Tim Ferriss shared in his recent interview with Jim Collins, “It is not that beauty is hard to find, it’s that it is easy to overlook.”

In a world where it is my job to evaluate people who stretch the margins – to stretch “common sense”, it’s easy to be cynical. On the same token, it’s also easy to be incredibly optimistic. As Blake Robbins of Ludlow Ventures puts it, “the best venture capitalists [are] able to perfectly toe the line of optimist vs. pessimist.”

Since then, partly due to the semi-recent influx of investment talks I’ve seen and been a part of – the holiday mad dash, if you will, I’ve had some time to myself to re-center my purpose in the venture world.

The role of an investor

As someone on the investing side of the table, it is our job to check founders’ blind sides. To consider things they may not be aware to even consider. Drawing parallels between seemingly orthogonal parts of the business that we know because we’ve seen hundreds, if not thousands of businesses. For example, if you’re creating a plug-and-play solution – a product whose main selling point is its ease of use, the more you have to spend on your customer success team, the less effective your product is.

Of course, we merely provide insight and context to a situation, but it is the founders who have the final say.

The brand of an investor

Craig Thomas, an LP, wrote on his Substack last month: “Brand is arguably the only thing that resembles a moat in traditional venture capital.” To summarize Nikhil Basu Trivedi words briefly, brand here is constructed by how strong the synergy between the various forms of acquisition channels (i.e. content, performance marketing/ads, virality/word-of-mouth) and the players in the ecosystem (i.e. founders, investors, LPs, operators, talent, etc.) are. In simpler terms, brand is about who knows and how well they know what you stand for.

Increasingly, in the world of venture, while “picking” the right investments via conviction and a thesis still matters, it’s becoming a world of VCs “getting picked“, as Fred Destin of Stride.VC tweets. This is especially true for the deals that investors expected outsized returns on – effectively, uncapped upside.

Craig provides a great graphic for why brand matters. The blue-dotted line, which he calls the Mendoza Line for VC firms, represents y = x + b. And the best VC firms have b’s where b > 1.

Craig Thomas’ chart plotting the relationship between brand and AUM (assets under management)

He points out that the fallacy here is when firms prematurely scale. Increasing their AUM (assets under management) before establishing and growing their brand. And it’s something I’m not keen on falling for.

Seen in another light, Correlation Ventures did a study that found almost 65% of venture-backed deals fail to return on investment. And only 4% make outsized “magical returns”. Proving that b > 1 is truly easier said than done.

returns on venture backed startups is very low in most cases based on data from Correlation Ventures

There’s a saying in venture: Luck only gets better with success. It’s largely described in the context that it only takes one epic investment to get you on the radar. And I believe building a successful brand is a leading indicator of success. Of course, having a strong brand and having outsized returns are not mutually exclusive either. In a 2015 Medium post, Blake quotes Brett deMarrais of Ludlow Ventures, which I think acutely sums up what it means to be a great investor. “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”

As you might have guessed, I’m on the brand-building phase. Craig wrote: “Brand is reputation and access.” A great brand leads to better deal flow, which leads strong signals for downstream investors. Which leads to a stronger brand. Analogized, it’s what Reid Hoffman has said all these years: “a good product with great distribution will almost always beat a great product with poor distribution.” As an investor, a VC is their own product.

In closing

To quote Ruben Harris’ first boss in Ruben’s recent interview with Garry Tan, “To become a billionaire, help a billion people.” Through a mutual friend, I first met Ruben, Artur, and Timur back in ’18 around the inception of Career Karma and when they were hosting office hours at their apartment for folks who wanted to break into tech. At the inflection point in my career, I went to one of these to meet the individuals I had only been communicating over emails with. And within 5 minutes, Ruben said: “Here’s who you’ve got to talk to…”. And gave me 2 names I hadn’t even considered reaching out to beforehand. Both ended up being great influences on my growth.

True to their mission, even prior to the founding of Career Karma, they’ve been playing the connective tissue between talent, education and occupation. From their podcast to their company, the triple threat have created an impressive brand and community of givers and hustlers. And I highly recommend checking out their podcast to hear some of their community’s stories. Here’s one of my favorites. Congratulations on your A led by Initialized, Ruben, Artur, and Timur!

Similarly, that’s the investor I’m working to be. While I still have miles more to go in building a brand, I believe I’m taking steps in the right direction.

Photo by Daan Stevens on Unsplash

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