Tag: vc

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Why Aren’t Investment Theses Hyper-Specific?

pedestrian, vc investment thesis

As a result of my commitment to provide feedback for every founder who wants a second (or third) pair of eyes on their pitch deck, I’ve been jumping on 30-minute to 1-hour calls with folks. Although I’ve had this internal commitment ever since I started in venture, I didn’t vocalize it until earlier this year. And you know, realistically, this is not gonna scale well… at all. But hey, I’ll worry about that bridge when I cross it.

Something I noticed fairly recently, which admittedly may partly be confirmation bias ever since I became cognizant of it, is that there have been a significant number of founders currently fundraising who complain to me about:

  1. Many VCs don’t have their investment thesis online/public.
  2. Of those that are, VCs have “too broad” of a thesis.

So, it got me thinking and asking some colleagues. And I will be the first to admit this is all anecdotal, limited by the scope of my network. But it makes sense. That said, if you think I missed, overlooked, over- or underestimated anything, let me know.

The Exclusionary Biases

By virtue of specificity, you are, by definition, excluding some population out there. For example, in focusing only on potential investments in the Bay, you are excluding everyone else outside or can’t reach the Bay in one way or another. Here’s another. Let’s say you look for founders that are graduates from X, Y, or Z university. You are, in effect, excluding graduates from other schools, but also, those who haven’t graduated or did not have the opportunity to graduate at all.

The seed market example

Here’s one last one. This is more of an implicit specificity around the market. The (pre-) seed market is designed for largely two populations of founders:

  1. Serial entrepreneurs, who’ve had at least one exit;
  2. And, single-digit (or low double) employees of wildly successful ventures.

Why? You, as a founder, are at a stage where you have yet to prove product-market fit. Sometimes, not even traction to back it up. And when you’re unable to play the numbers game (like during the stages at the A and up), VCs are betting on the you and your team. So, to start off, we (and I say that because I’ve been guilty of overemphasizing this before) look into your background.

  • What did your professional career look like before this?
  • Do you have the entrepreneurial bone in your body?
  • How long have you spent in the idea maze?

The delta between a good investor and a great investor

Let’s say an investor were to be approached by two founders with the exact same product, almost identical team, same amount of traction, same years of experience, and let’s, for argument’s sake, have spent the same number of years contemplating the problem, but the only difference is where they came from. One is a first-time founder from [insert corporate America]. The other is the 5th employee of X amazing startup. Many VCs I’ve talked with would and have defaulted on the latter. And the answer is reinforced if the latter is a founder with an exit.

The question wasn’t made to be fair. And, it’s not fair. To the VCs’ credit, their job is to de-risk each of their investments. Or else, it’d be gambling. One way to do so is to check the founder’s professional track record. But the delta here that differentiates the good from the great investor is that great investors pause after given this information and right before they make a conclusion. That pause that gives them time to ask and weigh in on:

What is this founder(s)’ narrative beyond the LinkedIn resume?

Shifting the scope

It’s not about the quantitative, but about the qualitative. It’s not about the batting average, but about the number and distance of the home runs. So instead of the earlier question:

  • How long have you spent in the idea maze?

And instead…

  • What have you learned in your time in the idea maze?

Similarly, from what I’ve gathered from my friends in deep/frontier tech, instead of:

  • How many publications have you published?

And instead…

  • Where are you listed in the authorship of that research? The first? The second? The 20th?
    • For context of those outside of the industry, where one is listed defines how much that person has contributed towards the research.
    • As a slight nuance, there are some publications, where the “most important” individual is listed last. Usually a professor who mentored the researchers, but not always.
  • And, how many times has your research been cited?

Some more context onto specificity

Some other touch points on why (public) investment theses are broad:

  • FOMO. Investors are scared of the ‘whats if’s’. The market opportunity in aggregate is always smaller than the opportunity in the non-aggregate.
  • Hyper-specific theses self-selects founders out who think they’re not a ‘perfect fit’. Very similar to job posts and their respective ‘requirements’.
  • Some keep their thesis broad in the beginning before refining it over time. This is more of a trend with generalist funds.
  • Theses are broad by firm, but more specific by partner. The latter of which isn’t always public, but can generally be tracked by tracking their previous investments, Twitter (or other social media) posts, and what makes them say no. Or simply, by asking them.

The pros of specificity

Up to this point, it may seem like specificity isn’t necessarily a good thing for an investor. At least to put out publicly.

But in many cases, it is. It helps with funneling out noise, which makes it easier to find the signals. It may mean less deal flow, which means less ‘busy’ work. But you get to focus more time on the ones you really care about. And hopefully lead to better capital and resource allocation. The important part is to check your biases when honing the thesis. Also, happens to be the reason why LPs (limited partners – investors who invest in VCs) love multi-GP funds (ideally of different backgrounds). Since there are others who will check your blind side.

Specificity also works in targeting specific populations that may historically be underrepresented or underestimated. Like a fund dedicated to female founders or BIPOC founders or drop-outs or immigrant founders. Broad theses, in this case, often inversely impact the diversity of investments for a fund. When you’re not focusing on anyone, you’re focusing on no one. Then, the default goes back to your track record of investments. And your track record is often self-perpetuating. If you’ve previously backed Stanford grads, you’re most likely going to continue to attract Stanford grads. If you’ve previously backed white male founders, that’ll most likely continue to be the case. In effect, you’re alienating those who don’t fit the founder archetype you’ve previously invested in.

In closing

We are, naturally, seekers of homogeneity. We naturally form cliques in our social and professional circles. And the more we seek it – consciously and subconsciously, the more it perpetuates in our lives. Focus on heterogeneity. I’m always working to consider biases – implicit and explicit – in my life and seeing how I’m self-selecting myself out of many social circles.

Whether you, my friend, are an investor or not. Our inputs define our outputs. Much like the food we put in our body. So, if there’s anything I hope you can take away from this post, I want you to:

  1. Take a step back,
  2. And examine what personal time, effort, social, and capital biases are we using to set the parameters of our investment theses.

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#unfiltered #18 Naivety vs Curiosity – Asking Questions, How to Preface ‘Dumb’ Questions, Tactics from People Smarter than Me, The Questions during Founder-Investor Pitch

asking questions, naivete vs curiosity, how to ask questions

Friday last week, I jumped on a phone call with a founder who reached out to me after checking out my blog. In my deep fascination on how she found and learns from her mentors, she shed some light as to why she feels safe to ask stupid questions. The TL;DR of her answer – implicit trust, blended with mutual respect and admiration. That her mentors know that when she does ask a question, it’s out of curiosity and not willing ignorance – or naivety.

But on a wider scope, our conversation got me thinking and reflecting. How can we build psychological safety around questions that may seem dumb at first glace? And sometimes, even unwittingly, may seem foolish to the person answering. The characteristics of which, include:

  • A question whose answer is easily Google-able;
  • A question that the person answering may have heard too many times (and subsequently, may feel fatigue from answering again);
  • And, a question whose answer may seem like common sense. But common sense, arguably, is subjective. Take, for example, selling losses and holding gains in the stock market may be common sense to practiced public market investors, but may feel counter-intuitive to the average amateur trader.

We’re Human

But, if you’re like me, every so often, I ask a ‘dumb’ question. Or I feel the urge to ask it ’cause either I think the person I’m asking would provide a perspective I can’t find elsewhere or, simply, purely by accident. The latter of which happens, though I try not to, when I’m droning through a conversation. When my mind regresses to “How are you doing?” or the like.

To fix the latter, the simple solution is to be more cognizant and aware during conversations. For the former, I play with contextualization and exaggeration. Now, I should note that this isn’t a foolproof strategy and neither is it guaranteed to not make you look like a fool. You may still seem like one. But hopefully, if you’re still dying to know (and for some reason, you haven’t done your homework), you’re more likely to get an answer.

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Competitive Awareness as a Founder

sailing, competitor analysis, competitor awareness

For a while, I’ve been publicizing one of my favorite questions for founders.

“What unique insight (that makes money) do you have that either everyone else is overlooking or underestimating?”

I first mentioned it in my thesis. And, which might provide more context, was quickly followed by my related posts on:

For the most part, founders are pretty cognizant of this X-factor. B-schools train their MBAs to seek their “unfair advantange”. And a vast majority of pitch decks I’ve seen include that stereotypical competitor checklist/features chart. Where the pitching startup has collected all the checkmarks and their competitors have some lackluster permutation of the remaining features.

There’s nothing wrong with that slide in theory. Albeit for the most part, I gloss over that one, just due to its redundancy and the biases I usually find on it. But I’ve seen many a deck where, for the sake of filling up that checklist, founders fill the column with ‘unique’ features that don’t correlate to user experience or revenue. For example, features that only 5% of their users have ever used, with an incredibly low frequency of usage. Or on the more extreme end, their company mascot.

To track what features or product offerings are truly valuable to your business, I recommend using this matrix.

And, I go into more depth (no pun intended) here.

Competitive Awareness > Competitive Analysis

I’m going to shed some nuance to my question in the words of Chetan Puttagunta of Benchmark. He once said on an episode of Harry Stebbings’ The Twenty Minute VC:

“The optimal strategy is to assume that everybody that is competing with you has found some unique insight as to why the market is addressable in their unique approach. And to assume that your competitors are all really smart – that they all know what they’re doing… Why did they pick it this way? And really picking it apart and trying to understand that product strategy is really important.”

So, I have something I need to confess. Another ‘secret’ of mine. There’s a follow-up question. After my initial ‘unique insight’ one, if I suspect the founder(s) have fallen in their own bubble. Not saying that they definitively have if I ask it, but to help me clear my own doubts.

“What are your competitors doing right?”

Or differently phrased, if you were put yourself in their shoes, what is something you now understand, that you, as a founder of [insert their own startup], did not understand?

In asking the combination of these two questions, I usually am able to get a better sense of a founder’s self-awareness, domain expertise, and open-mindedness.

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How Fictional Worldbuilding Applies to Building Startup Narratives

startup narratives, trees, forest, fantasy, science fiction, worldbuilding

Last week I spent some time with my friend, who joined me in my recent social experiment, brainstorming and iterating on feedback. Specifically, how I could host better transitions between presentations. She left me with one final resonating note. “Maybe you would’ve liked a creative writing class.”

I’ve never taken any creative writing courses. I thought those courses were designed for aspiring writers. And given my career track, I never gave it a second thought. Well, until now. I recently finished a brilliant fictional masterpiece, Mistborn: The Final Empire written by #1 New York Times bestselling author, Brandon Sanderson. So, that’s where I began my creative journey.

In my homework, I came across his YouTube channel. One of his lectures for his 2020 BYU writing students particularly stood out. In it, he shares his very own Sanderson’s Laws.

The three laws that govern his scope of worldbuilding are as follows:

  1. Your ability to solve problems with magic in a satisfying way is directly proportional to how well the reader understands said magic.
  2. Flaws/limitations are more interesting than powers.
  3. Before adding something new to your magic (setting), see if you can instead expand what you have.

Outside of his own books, Sanderson goes in much more depth, citing examples from Lord of the Rings, Star Wars, and more. So, if you have the time, I highly recommend taking one and one-fifth of an hour to hear his free class. Or if you’re more of a reader, he shares his thesis on his First Law, Second Law, and Third Law on his website.

But for the purpose of this post, the short form of the 3 laws suffices.

The First Law

Your ability to solve problems with magic in a satisfying way is directly proportional to how well the reader understands said magic.

The same is true in the world of entrepreneurship. Your ability to successfully fundraise is directly proportional to how well the investor understands your venture. Or more aptly put, how well you can explain the problem you are trying to solve. This is especially true for the 2 ends of the spectrum: deep tech/frontier tech startups and low-tech, or robust anti-fragile products/business models. Often times, the defensibility of your product comes down to how well people can understand what pain points you’re trying to solve. You may have the best product on the market, but if no one understands why it exists, it’s effectively non-existent.

Though not every investor will agree with me on this, I believe that too many founders jump straight into their product/solution at the beginning of their pitch deck. While it is important for a founder to concisely explain their product, I’m way more fascinated with the problem in the market and ‘why now?’.

You’re telling a story in your pitch. And before you jump into the plot (the product itself), I’d love to learn more about the setting and the characters involved (the underlying assumptions and trends, as well as the team behind the product). As my own NTY investment thesis goes (why Now, why This, why You, although not in that particular order), I’m particularly fascinated about the ‘why now’ and ‘why you’ before the ‘why this’. And if I can’t understand that, then it’s a NTY – or in millennial texting terms, no thank you.

My favorite proxy is if you can explain your product well to either a 7-year old, or someone who knows close to nothing about your industry. Brownie points if they’re excited about it too after your pitch. How contagious is your obsession?

The Second Law

Flaws/limitations are more interesting than powers.

Investors invest in superheroes. The underdogs. The gems still in the rough. And especially now, at the advent of another recession and the COVID crisis, the question is:

  1. How much can you do with what little you have?
  2. And, can you make the aggressive decisions to do so?

I realize that this is no easy ask of entrepreneurs. But when you’re strapped for cash, talent, solid pipelines, are you a hustler or are you not? Can you sell your business regardless? To investors? New team members? Clients/paying users?

On the flip side, sometimes you know what you need to do, but just don’t have the conviction to do so, especially for aggressive decisions. You may not want to lay off your passionate team members. Or, let go of that really great deal of a lease you got last year. You may not want to cut the budget in half. But you need to. If you need to extend what little you have to another 12-18 months, you’ve got to read why you should cut now and not later. Whether we like it or not, we’re heading into some rough patches. So brace yourselves.

But as an investor once said to me:

“Companies are built in the downturns; returns are realized in the upturns.”

The Third Law

Before adding something new to your magic (setting), see if you can instead expand what you have.

And finally consider:

  • Can you reach profitability with what you have without taking additional injections of capital?
  • Can you extend your runway by cutting your budget now?
  • But if you need capital to continue, do you need venture capital funding? I’m of the belief, that 90% of businesses out there aren’t fit for the aggressive venture capital model.

How scrappy are you? How creatively can you find solutions to your most pressing problems? And maybe in that pressure, you may find something that the market has never seen before.

In closing

Like a captivating fantastical story, your startup, your team, your investors, and especially you yourself, need that compelling narrative. The hardest moments in building a business is when there’s no hope in sight – when you’re on the third leg of the race. In times of trial, you need to convince yourself, before you can convince others. To all founders out there, godspeed!

And as Sanderson’s Zeroth Law goes:

Always err on the side of what’s awesome.

If you’re interested in the world of creative writing or drawing parallels where I could not, check out Brandon Sanderson’s completely (and surprisingly) free series of lectures on his YouTube channel.

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Two Ways Investors Measure Founder Coachability

As much as investors love founders with passion (or obsession) and grit, they also want to invest in founders who have the capacity to grow as individuals as much as their startup grows. And that boils down to how curious and open-minded they are. In other words, how coachable are they? In the past 2 weeks, I’ve had the fortuity to talk to 2 brilliant angel investors – each with their own respective formula for measuring founder coachability.

Formula #1: Assessing Peer Coachability

Last year, I shared a post about the importance of all three levels of mentorship – peer, tactical, and veteran. With the most underappreciated one being peer mentorship. For the sake of this post, let’s call the first angel, Marie. Similarly, Marie finds that peer coachability acts as a useful proxy for founder coachability. And she approaches peer coachability in a very unique way:

What do you and you co-founder(s) fundamentally disagree on?

Following that question, usually 1 of 3 scenarios ensue:

  1. The co-founders can state what they disagree on. And by follow-up question, share how they resolved that disagreement, then how that applies to their framework for resolving future disagreements.
  2. They figure it out on the spot. Better sooner than later.
  3. They say, “Nothing.” And quite possibly, the worst answer they could provide. ‘Cause that means they just don’t understand each other well enough. It’s highly unlikely that given how complex human beings are, that there can be two ambitious individuals who have the exact same outlook on life. Even twins have variations in their perspectives.

Knowing what co-founders disagree on assesses not only how well founders know each other, but also, how they’ve learned from each point of friction. Whether intentionally or not, they become each other’s coaches and push each other forward.

Formula #2: Assessing VC-Founder Coachability

Jerry, on the other hand, tests the waters by offering a controversial opinion about building a business or an insight into the industry, but one he has conviction and experience in. Then, he waits to see how the founder responds. The founder(s) can either:

  1. Disagree, and subsequently walk through where the dissent starts and offer a sequence of data and analyses as to why he/she believes in such a way.
  2. Agree, but still offer how he/she reached the same conclusion.

In either case, Jerry is looking for how mentally acute a founder is and how much room for discussion there is between them. On the other hand, the strike-outs regress to 2 categories:

  1. Disagree, and spend time trying to convince Jerry why he is wrong, rather than working to persuade Jerry to possibly see a bigger picture he might not have considered before. And sometimes, this bigger scope includes a marriage of Jerry and the founder(s) insights.
  2. Agree or disagree, but unfortunately, is unable to substantially back up their claim. Becoming a yes-man/woman in the former, or an argumentative troll in the latter.

The Mentorship Parallel

Unsurprisingly, just like how VCs use these methods to assess founder coachability, I’ve seen mentors use similar methods to assess potential mentees. Many aspiring mentees seek mentorship for its namesake – that metaphoric badge of honor. Not too far from the apple tree when people start a business or come to Silicon Valley to be called a CEO or for their company to be ‘venture-backed’. A category of folks we designate as “wantrapreneurs”.

And unfortunately, many aspiring mentees find bragging rights to be the mentee of [insert accomplished individual’s name]. Yet they don’t actually mean to learn anything meaningful, much less accept constructive criticism. Realistically, no mentor wants to go through that mess. “If you want for my advice, you better take it seriously,” as my first mentor once told me.

In closing

A great VC’s goal is to be the best dollar on your cap table, but they can’t be that Washington if you don’t let them be one. And though it doesn’t call for your investors or board members to micromanage, it does mean you are expected to be candid in both receiving and using (or not using) feedback.

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A Telltale Sign for a “VC No”

telltale sign, conviction, leap of faith, how to find a lead investor

Three moons ago, I jumped on a call with a founder who was in the throes of fundraising and had half of his round “committed”. And yes, he used air quotes. So, as any natural inquisitive, I got curious as to what he meant by “committed”. Turns out, he could only get those term sheets if he either found a lead or could raise the other half successfully first. Unfortunately, he’s not the only one out there. These kinds of conversations with investors have been the case, even before COVID. But it’s become more prevalent as many investors are more cautious with their cash. And frankly, a way of de-risking yourself is to not take the risk until someone else does.

I will say there are many funds out there where as part of the fund’s thesis, they just don’t lead rounds. But your first partner… you want them to have conviction.

Just like, no diet is going to stop me from having my mint chocolate chip with Girl Scout Thin Mints, served on a sugar cone. I’m salivating just thinking about it, as the heat wave is about to hit the Bay. An investor who has conviction will not let smaller discrepancies, including, but not limited to:

  • Crowded cap table,
  • No CTO,
  • College/high school dropout,
  • Lower than expected MRR or ARR,
  • No ex-[insert big tech company] team members,
  • Or, no senior/experienced team members,

… stop them from opening their checkbook. And just like I’ll find ways to hedge my diet outlier, through exercise or eating more veggies, an investor will find ways to hedge their bets, through their network (hiring, advisors, co-investors, downstream investors), resources, and experience.

So, what is that telltale sign of a lack of conviction?

I will preface by first saying, that the more you put yourself in front of investors, the more you’ll be able to develop an intuition of who’s likely to be onboard and who’s likely not to. For example, taking longer than 24 hours to respond to your thank you/next steps email after that pitch meeting. Or, on the other end, calling someone “you have to meet” mid-meeting and putting you on the line.

It seems obvious in retrospect, but once upon a time, when I was fundraising, I just didn’t let myself believe it was true. That investors just won’t have conviction when they ask:

Who else is interested?

A close cousin includes “Who else have you talked to?” (And what did they say?). If their decision is contingent – either consciously or subconsciously – with benchmarking their decision on who else is going to participate (or lead), you’re not talking to a lead (investor). And that initial hesitation, if allowed manifest further, won’t do you much good in the longer run, especially when things get bumpy for the company. Robert De Niro once said, in the 1998 Ronin film,

“Whenever there is any doubt, there is no doubt.”

You want investors who have conviction in your business – in you. Who’ll believe in you through thick and thin. After all, it’s a long-term marriage. Admittedly, it takes time and diligence to understand what kind of investor they are.

In closing

Like all matters, there are always other confounding and hidden variables. And though no “sign” is your silver bullet for understanding an investor’s conviction. Hopefully, this is another tool you can use from your multi-faceted toolkit.

From spending time with some of the smartest folks on both sides of the table and from personal observations, even if it’s anecdotal, the sample size should be significant enough to put weight behind the hypothesis. And, if I ever find myself wanting to ask that question, I aim to be candid, and tell founders that I’m not interested.

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Mega vs Micro Funds – Where is the money going in the private markets?

markets, mega vs microfunds
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One of my buddies and his team recently successfully raised their Fund I, luckily before this recent downturn. Moreover, their fund is geared towards investments into frontier tech. And the Curious George in me couldn’t help but ask about his findings and learnings. In the scope of mega versus micro-funds, our conversation also spiraled into:

  • the current state of private markets,
  • VC-LP dynamics,
  • and, operators-turned VCs.

Here’s a snapshot of our conversation, which could act as a cognitive passport for newly-minted and aspiring VCs. For the purpose of this blog, I’ll call him Noah.

The Snapshot

David: How do you think the private markets will change in this pandemic?

Noah: In a way starting a fund is a lot like starting a company. It’s definitely a humbling process to be on the ‘other side’ of the table and feel what it’s like to be an ‘entrepreneur’ and fundraise.

Yeah the impact on the private market side is something i’m trying to figure out yet. I think it’s still a little early to denote the true extent of the impact. But nonetheless, in the short term, funding activity is bound to go down, people are speculating the duration of this event and waiting for prices to come down. We’re lucky to have closed some money before this happened but it’ll be extremely tricky for the next wave of new fund managers to raise their funds.

It’ll be an especially rough time for founders especially if it goes on for long enough, most VCs will probably try to cut losses by dedicating their attention to portfolios that have the highest chance of survival. This crisis is also different in the sense that it’s a virus which prevents people from regrouping quickly if it carries on.

David: And it’s partly due to a recent function of LPs under-allocating towards the VC asset class as a whole, with longer fund cycles (10 years [6-7 years now] + 2-year extensions). Before all this, the market had been performing rather well in the past few years (a solid 17-18% return YoY on the public markets, or these self-imposed liquidity events, versus venture where only the top quartile of VCs make better than market return). I believe the 2018 number for the top quartile annual IRR was 24.98%, which is, what, 3x in 5 years, but even then, its not enough to convince many LPs.

Although you have the rise in a new sort of private investor in both the secondary markets, as well as VC-LP functions, where firms LPs either invest directly, or VCs are now investing in other micro-funds, like Sapphire. With VCs writing more discovery checks, and so many recent exits in tech, syndicates, via SPVs (special purpose vehicles), has helped them develop relationships with founders early on and relatively no strings attached.

Noah: I think one metric that really stands out that everyone is thinking about is in terms of liquidity. Not only are companies staying private for longer, more and more new alternative asset classes are rising. Interestingly enough, a lot of the endowments or larger institutions we’ve talked to are over allocated in venture. For example, Duke has nearly 1/3 of their money allocated to VCs. One obvious way that VCs are tackling this is in the secondaries market, selling off equity earlier and earlier, so lower potential return profile but LPs generally love early indications of a good DPI.

And yep, microfunds is definitely a big trend as well. It’s simply not sustainable for half a bill/billion dollar early stage funds to exist. Some of the returns of these mega funds have been made public and they’re not looking too great, even if it’s still early for them. On the flip side, smaller funds are a lot easier to return and generally where the best performing vehicles can be found. Moreover, the traditional endowments and institutions have locked in to the Sequoias and Andreessens already, so new FoFs (fund of funds) and relatively newer endowments are always looking for who are the next best alternatives. It just so happened that we’re also seeing a wave of ex-operators coming into the world of VCs and starting new funds. They might not have the acumen to build a long-standing mega fund yet, but their technical expertise makes them a good candidate for more verticalized funds.

David: I totally agree with your sentiment that operators should go do specialized funds, that could be vertically aligned, or could be functionally aligned (i.e. marketing, growth, dev, design, etc.). I’ve had this long standing belief, and let me know what you think. If you’re a great VC, run a mega fund. But if you’re a good-to-okay VC, run a micro fund or an alternative funding vehicle.

As someone who’s good-to-okay, it’s more important to (1) hedge your bets, aka diversify your portfolio, and (2) collect data. Most newly-minted VCs don’t have the experience, like you said, on the other side of the table. Just because you’ve been a good student doesn’t mean you’ll be a good teacher. As someone starting off or just don’t have a stable track record for doing well (aka one shot wonders or the lagging 75% if not more, of the industry), you gotta collect data, to do better cohort/portfolio/deal flow analysis.

Whereas if you’re a great VC, you need the capital to commit to the best investments of your portfolio. So megafunds, plus growth funds, make sense. Although, admittedly great VCs are far and few between.

Noah: My two cents is that the trend of larger and larger fund sizes is ultimately the result of VCs becoming too competitive. It’s no longer enough that VCs have a platform team to help support portfolio companies because more and more other VCs are amassing large support teams too. Therefore as you mentioned, the true way for them to stand out is to have a multi-billion dollar fund that spans across multiple stages. So unlike an early stage fund that can only guarantee committing maybe up to, let’s say, $10MM in capital during their seed and series A, these new beasts can support you in the growth rounds as well, all the way to IPO, and more and more VCs are doing so.

The problem is that this is a recent trend that happened within the past decade, and it’s still quite early to judge the capabilities of some of these new mega funds and whether they’re qualified to manage such a large fund. Nonetheless, you do still see that some of the best funds out there are very disciplined in keeping a consistent fund size (e.g. USV, Benchmark, First round, etc.) simply because it’s so much harder to return a billion dollar fund versus a $250MM vehicle. Microfunds is another interesting trend. On one hand a lot of these newly-minted VCs simply don’t have the capability to raise a >$100MM+ fund in the first place. But there are also cases where the GPs are more than capable but still choose to keep it at a <$100MM vehicle. I’m guessing a lot has to do with the competitive environment we’re in nowadays. When you don’t have as high ownership targets because of your smaller fund, you’re more flexible with minority stakes and can thus co-invest and get into better deals.

What does this mean for founders?

In these trying times, the public discourse around venture financing has been that there’s still quite a bit of capital that has yet to be deployed and that investors are still looking to invest. Yet it is neither entirely true nor entirely false. There are still financings going on today. Admittedly, most of these started their conversations 2-3 months ago.

The goal is cash preservation over growth for many verticals and companies, and it’s no less true for private companies. In that theme, most investors’ first foremost focus is the wellbeing of their portfolio. And because of that priority, many investors are slowing their investing schedule for now. This is especially true for megafunds, where, as ‘Noah’ mentioned, requires much more to return the fund, much less make a profit.

On the flip side, I’ve seen smaller funds and angel syndicates still actively deploying in this climate. I’ve also heard concerns where this pandemic and downturn is going to affect their fundraising schedule for Fund II and Fund III, so they’re pressured with making bets now from their LPs.

Anecdotally, it shouldn’t be harder to raise funding now than before. Some of the greatest companies came out of the past few downturns (2000 and ’08). A caveat would be if you overvalued in a previous round and are still looking to maintain the valuation trajectory (up round over down round).

So keep hacking! Measure well! And stay safe!

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Self-Assessment (VC Scout) circa April 2020

vc scout reflection
Photo by Marc-Olivier Jodoin on Unsplash

This year in my resolution, I aim to be more vulnerable by “opening up about the potholes ahead, not just the ones in the rearview mirror”, to quote Jeff Wald. So I’m going to take a step closer to doing so.

Yesterday, my buddy asked me a question that didn’t sit well with me. Not because he was rude, nor because he meant to offend me. In fact, for all intensive purposes, it was entirely innocuous. But it was a question that got me to really question my beliefs and do an impromptu performance review of myself. He asked:

“Out of all the startups you’ve met with and had the chance to source, how many do you regret passing on? Which one or two stands out to you the most?”

I paused for a second. But when words arose to my mouth, my reply was simple. “I don’t think I have any regrets.” As soon as I said that, I immediately felt this gnawing feeling that something was wrong. I’ve always chosen to live life without regrets. And though this may seem to run parallel to my mantra, I knew deep down it wasn’t meant to be.

Luckily, I have had more time to introspect than otherwise during this pandemic. There are 3 possibilities as to why I have no regrets:

  1. It’s too early to tell which ones will be home runs.
  2. I’m not being selective enough, aka I have a flawed investment thesis.
  3. I don’t have the kind of quality deal flow I would like.

While optimistically, I hope it’s the first possibility. After all, it’s only been 3 years since I embarked on this journey. And there probably is a small proportion of startups that will go on to prove me wrong. Realistically, it’s a permutation of the latter two.

Currently, I pick about 40-50% of my inbound (referrals/intros, cold pitch emails/messages, various networking apps) and 100% of my outbound (assuming they get back to me) to have a conversation with. Of those, I usually find 1 out of every 10-15 that I continue the conversation with from an investment standpoint. And out that pool of founders, I usually end up referring 50% of them. Meanwhile, I still try to be helpful in some capacity to everyone else, but only spend about 20% of my time to do so. From a high level, I couldn’t see anything wrong with this funnel. At least, not until my buddy asked me that question.

Sourcing is one of those things that’s easy to pick up, but difficult to master. And now, I feel, not just conceptualize, how steep this learning curve is. There’s a saying in the industry that “luck only gets better with success.” But I have yet to pay the admission fee for my luck to start compounding. So there’s 3 things I have to do:

  1. Reevaluate my current deal flow by analyzing inbound sources and the empirical quality from each (# of startup I’ve introed/total # of startups received from X source).
  2. Hit up the investors I know to help me create a more robust thesis.
  3. Double down on helping my existing deal flow reach their aggressive milestones, until hopefully, the first can hit the ground running.

On the brighter side, it’s great that I’m iterating on this now before I become a checkwriter.

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#unfiltered #5 The Insider “Silicon Valley” TV Show – The Show, plus Thoughts on Eccentric Cold Emails and Crazy Startup Pitches

Tech satire.

I gotta say I love it! Memes. GIFS. YouTube vids. TikTok clips. The whole nine yards.

As a testament to how much I love satirical memes and GIFs, six years ago, when I was testing out “best” cold email methods, as a semi-random A/B test, I emailed half of the folks I reached out to, leading or ending with either a meme or GIF. The list ranged from authors to musicians to researchers to Fortune 500 executives to founders to professional stone skippers. And the results weren’t half bad. Out of 150 odd emails, about a 70% response rate. Half of which resulted in a follow-up exchange by email, call, or in-person. The other half were gracious enough to say time was not on their side.

So when I learned, from the most recent episode of Angel podcast, about David Cowan’s version, I just had to check it out. And I wish I had only discovered it sooner. Made by Director Martin Sweeney, and co-visionaries, Michael Fertik of Reputation.com and David Cowan of Bessemer Venture Partners, bubbleproof is tech hilarity… made by the folks who have tech day jobs. Though I still haven’t watched the 6 seasons and 53 episodes of the Silicon Valley TV series yet. Sorry, friends who keep recommending it.

I just finished episode 5, where they share a snapshot of comedic ideas and pitches – from lipid fuel technology to an Airbnb marketplace for prisoners. And not gonna lie, I had a good chuckle. But when the episode wrapped up and I finally had a chance to think in retrospect, those ideas could have been real pitches in some world out there. When I first started in venture, I met with my share of cancer cures predicated off of a happiness matrix and feces fuel and African gold brokers. In case you’re wondering, yes, I did get pitched those. The last one admittedly should have come through my spam folder.

In these next few weeks, while you’re WFH (work from home), if you’re curious about tech from the ironic perspective of those who live and breathe it every day, check the series out. Only 10 episodes. 7-15 minutes per. (And while you do that, maybe I’ll finally get around to watching Silicon Valley. But no promises.)

As a footnote, Bessemer also has a track record for being forthcoming and intellectually honest. I would highly recommend checking out their anti portfolio, that lists and explains not their biggest wins or losses, but their biggest ‘shoulda-coulda-woulda’s’.

#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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#unfiltered #3 Plan Bs – Should we have them?

I woke up today with a thought that’s been gnawing at me for years now. Why do we have backup plans – Plan Bs, Plan Cs, etc? Does it inhibit our drive? Or readily prepare us for the worst? At what point are we sacrificing our commitment for safety?

When I started this blog, my writing mentor recommended that I have 10 pieces written and ready before I launch my blog. And I did exactly that. All cards out, I still have 8 of my pieces saved in my backlogs, which as you have already deducted, I’ve used 2 of my pieces already. Why? My mentor told me that, in my commitment to publish content weekly, I will indubitably have dry spells – dry weeks. And I did… twice. So, I regressed to my lowest common denominator and pulled something out of my archives. But during those two weeks, it helped me stay in my comfort zone. That instead of fighting writer’s block (if such a thing exists), I chose to run from it.

Part of the reason I started this #unfiltered series is to help me be content with content. I am guilty of 8/10 times second-guessing my way out of doing something. If I contemplate over something long enough, I’ll realize fears that I never thought possible, and opt for the safer option – not doing it at all.

From when we were young, we’re taught to always prepare backup options. When applying to colleges, we’re told to apply to our 2-3 reach schools, and 10-15 other schools we’re confident about getting into. When applying to jobs, one of my hometown neighbors, 2 years my senior, advised me to apply to 200 jobs, expect 10-20 interviews, another 3-5 for final rounds, and 1-2 offers to choose from. Effectively, asking me to apply to 198 backup alternatives.

I get it. As the saying goes, beggars can’t be choosers. Both high school and my early years of college have drilled that saying into me – by my peers and by my teachers.

A part of me hates it, but a part of me realizes the truth in there. I saw that circumstances played an even larger role for my friends and peers who:

  • are going through tough times in this pandemic and economic downturn,
  • (whose) parents came from a lower income bracket,
  • are POC (people of color),
  • are female,
  • are/were open about their different sexual orientations,
  • didn’t graduate from a 4-year college,
  • lost limbs or appendages due to accidents or conflict,
  • are/were in debt,
  • and much more.

Half a decade back when I set out to meet one new person that drew my insatiable curiosity a week, I realized I’m a goddamn privileged person living in the 21st century. I’m a perfectly healthy, heterosexual Asian male who graduated from a 4-year university. If all hell breaks loose and my net worth goes to absolute zero, I have my parents’ home to go back to and a room and bed to call my own. And as a full disclaimer, the fact I’m contemplating this question in the first place means I’m privileged enough to do so.

And because I’ve had the liberty to do so, I realized that my greatest personal achievements came from when I didn’t give myself the option of a Plan B. For the people I reached out to and am in touch with above my weight class, I either have given it my all or was prepared to do so. For swimming, I treated each competition as my last, meaning I either gave it my all or nothing. And during more nights than I can count, I beat myself up over my inability to reach a milestone.

Yet, now in the land of venture, we learn to hedge our bets and come up with contingency plans. We learn once again to diversify our portfolio, and not put all eggs in one basket. Does that lead to why many investors fundamentally don’t have the conviction to lead deals?

On the founding side, you have it almost flipped. When you are trying to make ends meet, there will be times you have to take that one option and go all in. And you can’t let go until you do everything you can to make it a reality. When you sit in a position of privilege, you can have several contingency plans to hedge your bets. Ben Horowitz, author, founder, and investor, illustrated the dichotomy in his piece (and one of my favorites) about peacetime and wartime CEOs. There’s a part of me that strives to find that sense of urgency, like a wartime CEO. And go all in. Maybe this pandemic is the test where I can find where my values really lie.

To be frank, I haven’t come up with a conclusion to the dilemma. For now, I can only hypothesis-test and keep good track of the data that comes my way. But, so far, I can say that one’s tolerance for risk is positively correlated with one’s free cash flow.

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

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups!

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