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.
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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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:
It’s too early to tell which ones will be home runs.
I’m not being selective enough, aka I have a flawed investment thesis.
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:
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).
Hit up the investors I know to help me create a more robust thesis.
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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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.
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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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.
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My friend, Rouhin, sent me this post by a rather angry fellow, which he and I both had a good chuckle out of, yesterday about how VC is a scam. In one part about startup growth, the author writes that VCs only care about businesses that double its customer base.
The author’s argument isn’t completely unfounded. And it’s something that’s given the industry as a whole a bad rap. True, growth and scalability are vital to us. That’s how funds make back their capital and then some. With the changing landscape making it harder to discern the signal from the noise, VCs are looking for moonshots. The earlier the stage, the more this ROI multiple matters. Ranging from 100x in capital allocation before the seed stage to 10x when growth capital is involved. But in a more nuanced manner, investors care not just about “doubling”, unilaterally, but the last time a business doubles. We care less if a lemonade stand doubles from 2 to 4 customers, than when a lemonade corporation doubles from 200 to 400 million customers, or rather bottles, for a more accurate metric.
After early startup growth
Of course, in a utopia, no businesses ever plateau in its logistical curve – best described as it nears its total TAM. That’s why businesses past Series B, into growth, start looking into adjacent markets to capitalize on. For example, Reid Hoffman‘s, co-founder of LinkedIn, now investor at Greylock, rule of thumb for breaking down your budget (arguably effort as well) once you reach that stage is:
70% core business
20% business expansion – adjacent markets that your team can tackle with your existing resources/product
10% venture bets – product offerings/features that will benefit your core product in the longer run
And, the goal is to convert venture bets into expansionary projects, and expansionary projects to your core business.
Simply put, as VCs, we care about growth rates after a certain threshold. That threshold varies per firm, per individual. If it’s a consumer app, it could be 1,000 users or 10,000 users. And only after that threshold, do we entertain the Rule of 40, or the minimum growth of 30% MoM. Realistically, most scalable businesses won’t be growing astronomically from D1. (Though if you are, we need to talk!) The J-curve, or hockey stick curve, is what we find most of the time.
The Metrics
In a broader scope, at the early stage, before the critical point, I’m less concerned with you doubling your user base or revenue, but the time it takes for your business to double every single time.
From a strictly acquisition perspective, take day 1 (D1) of your launch as the principal number. Run on a logarithmic base 2 regression, how much time does it take for your users (or revenue) to double? Is your growth factor nearing 1.0, meaning your growth is slowing and your adoption curve is potentially going to plateau?
Growth Factor = Δ(# of new users today)/Δ(# of new users yesterday) > 1.0
Why 1.0? It suggests that you could be nearing an inflection point when your exponential graph start flattening out. Or if you’re already at 1.0 or less, you’re not growing as “exponentially” as you would like, unless you change strategies. Similarly, investors are looking for:
ΔGrowth Factor > 0
Feel to replace the base log function with any other base, as the fundamentals still hold. For example, base 10, if you’re calculating how long it takes you to 10x. Under the same assumptions, you can track your early interest pre-traction, via a waitlist signup, similarly.
While in this new pandemic climate (which we can admittedly also evaluate from a growth standpoint), juggernauts are forced to take a step back and reevaluate their options, including their workforce, providing new opportunities and fresh eyes on the gig economy, future of work, delivery services, telehealth, and more. Stay safe, and stay cracking!
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I have a love-hate relationship with that word. On one hand, I love and seek to learn from creative souls. It’s a trait that I seriously respect in individuals, regardless of industry, profession, or background. On the other hand, it’s rather amorphous. What’s creative to me may not be creative to you. We are bounded by the parameters of our experiences and what we, as individuals, are exposed to.
So, where do innovators draw inspiration?
Over the years, I’ve seen inspiration stem from three main frameworks:
The flow from art;
Margins;
And, what people dislike.
The Flow from Art
I seem to find that the data largely (with a few outliers) points towards the following:
Art precedes science. Science precedes tech. Tech precedes business. Business precedes law.
Art is bounded only by one’s imagination. Science, which draws inspiration from art, is limited by our physical universe and the fundamental laws. And, tech rides on the coattails of science, restricted by the patterns recognized in our universe by scientists before them. Similarly, business can only optimize existing technology. Following suit, regulations and legal practice can only debate and prevent ramifications that have turned from hypothesis to reality.
On one end of the spectrum, fiction has driven innovation on the fundamental, scientific front. Scientists have tried to make the impossible – fiction, superstition, assumptions, and imagination – possible. On the other end, the legal and regulatory space has empirically lagged behind business innovation. From autonomous driving to the shared economy to video games, a regulatory emphasis came only after incidents occurred. I’m a huge proponent of founders becoming self-regulatory. But that is a discussion for another day.
Margins
As Jeff Bezos famously said:
“Your margin is my opportunity.”
In the lens of a businessperson, profits exist on the margins. In a fully saturated market, as we learned in economics class, perfect competition will squeeze out profits. That margin can be delta between human perfection and imperfection. It can be the difference between a naive and sophisticated individual. It can also be the blind spots between a self-awareness and ignorance.
The good news (and bad news?) is that humans aren’t rational. As much as we try to be, we’re not. We repeat the same mistakes. After all, that’s where our favorite stories come from – the fact that we’re imperfect. If we were rational, our friendly neighborhood kid from Queens wouldn’t have to struggle with identity. Or, Skinner, the head chef at Auguste Gusteau’s restaurant, wouldn’t be out to exterminate my favorite rat chef.
From a nonfictional front, if we were rational, gambling, the lottery, therapy, and more wouldn’t exist. In fact, there’s a whole industry that capitalizes on human imperfection – insurance. We choose to reach for that last cookie when we know a healthier diet with less sugar is better for us (I’m guilty as well). We set New Year’s resolutions to work out more, but regress to our couch norm after the first month. Walter Mischel famously conducted The Marshmallow Experiment. When given the option to wait 15 minutes to double their treats, many children opted for immediate gratification.
There would be way fewer founders if they were rational. I mean, come on, the numbers work against them. 90% of startups fail. So, from a VC’s perspective, we have to ask ourselves:
What’s is the underlying notion that makes this product work?
What is that innate theme in human or societal development that won’t disappear anytime soon? What factors produce such a trend? And what margin is it taking advantage of? Uber was made possible with the evolution of smartphone and faster data. As more data were archived online, Google became a reality because of the internet and browser. Two current examples of underlying notions include:
Audio, including, but not limited to, podcasts and audiobooks, is the new form of content consumption. Not only does it free up consumers’ hands and eyes up, audio content is often easier to digest. The spoken word has been around millennia, whereas print is fairly new invention. Emotions and sarcasm is often easier to relay via audio than via print. So, what else is possible?
With growing consumer sentiment against traditional social media, like Facebook, Twitter, and Instagram, there is a shift to social experiences surrounding active participation. Sarah Tavel writes a great piece on this. Examples include Discord, Medium, TikTok, and user-generated content (UGC) in video games, like mods and in-game skins. Many of the traditional social media platforms leave users with a more negative passive experience, where they feel a sense of FOMO (fear of missing out). Through active participation, users can be a part of the conversation, rather than watch from the sidelines.
What do you dislike?
Speaking of negative experiences, aversion is a strong motivating emotion humans have. Like prospect theory illustrates, loss invokes a stronger response than gains. It also happens to be one of the reasons why I probe how obsessed a founder is about a certain problem.
In a recent interview with Andrew “Kappy” Kaplan, host of the podcast, Beyond the Plate, Grant Achatz, legendary chef, talks briefly about how he drew inspiration from his daughter’s dislike of cheese, yet she still ate pizza and grilled cheese sandwiches. Similarly, when his guests at Alinea didn’t like sea urchin, he thought about the ‘why’ and if he could circumvent their aversion by playing with various variables, including iodine concentration.
So, what do you dislike (with a passion)? What about the people around you? And can you figure out a way to change or eliminate that frustration? Take some time through the idea maze.
In closing
Ideas come in all shapes and sizes. Some may be more obvious than others. Some may snowball into a best-selling one. Although I’ve shared the three most common frameworks that I’ve personally generated and seen others find inspiration, it is, of course, not the only ways to exercise your creative muscle. In fact, the first step into being more “creative” is being cognizant about everything around you.
Two years ago, one of my former professors recommended I start ‘idea-journaling’ every day. Since I’ve started, I began noticing more and more stimuli from my surroundings, conversations and frustrations.
It may be a start, but it’s by no means an end. Stay curious.
While on my way to see a friend the other day, instead of cancelling, our Uber Pool driver decided to wait for the third rider. After a few exchanges of texts and calls, to the vocally evident dismay of the rider before me, we ended up waiting eight minutes. Therefore, delaying the rest of our arrival times by that same margin. In the ensuing silence that followed, I spent a little time thinking about the fascinating dichotomy between being nice and running a great business.
At the risk of receiving two low-star ratings, our driver opted to be nice and wait for the potential one five-star rating. To his credit, the third rider was incredibly grateful for his patience. In an alternate universe, he would have chosen to cancel the last rider’s request after waiting about two minutes.
The Examples
Social stereotypes might suggest that being nice and running a great business are two polar opposites. The portrayals of Mark Zuckerberg, in The Social Network, and Steve Jobs, in every biographical movie of him, only further perpetuate this motif. But, the truth is they’re not mutually exclusive. Many of the best businesses out there, like TOMS and Salesforce, are purpose-driven and spread positive impact. In the past few years, it should and has been, for many, a priority for building a brand.
Driving positive social impact is beginning to gain traction among a class of notoriously financially-driven individuals: venture investors. Although impact investing is one way, prominent VCs, like Felicis Ventures and Brad Feld, have also committed to founder’s mental health.
The marriage of being nice and running a great business comes in two parts:
Transparent and honest communication with your customers,
And, follow-through on promises and feedback implementation.
After all, it’s a collaborative effort.
One of my favorite examples is Digital Extremes – the developer for one of the most popular games on Steam, Warframe. Like many other businesses, they donate regularly to charities – from leukemia awareness to children’s health to most recently, the Australian wildfire. But, unlike many others, they engage their users every week through their stellar community management team. In fact, their community director, Rebecca Ford, was recognized in the 30 Under 30 Forbes list this year. Through a weekly permutation of developer streams, forum posts/polls, and social media content, they listen and engage with feedback. And through weekly hotfixes and content updates, which already speaks volumes in the game industry, they incorporate that feedback.
Don’t just take my word for it. Their subreddit serves as an example of one of the most positive and honest communities I’ve ever seen.
In Closing
Of course, no business is perfect. And the business may not always agree with the consumer’s thoughts. But, through transparent communication, radically candor (thank you to the brilliant Kim Scott), and following through, you can be nice and run a great business.
Instead of staying silent, if our Uber driver had asked us if we were in a hurry and agreed on a time limit to how long we’d wait (maybe even offered us a snack during the wait, but that might be stretching it), he might have gotten three five-star reviews.
I was chatting with a founder yesterday about why she was getting so many “maybe’s”, a few “no’s”, but no “yes’s”, where a “yes” needs to come along with a term sheet, or else it’s as good as a “maybe.” Her product was hitting most of the check boxes for a startup ripe for the seed round, but she just wasn’t getting any traction from investors. There were a few KPIs she was missing here and there, but most startups don’t fit in the cookie cutter rubric anyway. So why?
It was and is the secret sauce. Others might call it the X-factor. It’s what uniquely sets you, as a founder, and your team and product apart from the rest of the competition. Like I mentioned in my thesis, what did you catch that makes money, which everyone else underestimating or missing entirely? It could be an insight; it could be a business model; it could be a specific money-generating collective customer insight. And how will this secret sauce continue to help you gain traction, at the minimum, for next few years. Moreover, at an early stage, pre-product-market fit (pre-PMF), it really only has to be one thing. It doesn’t have to be a list of the five ‘unfair advantages,’ like they teach in B-school. It’s not the chart with you having all the check boxes checked and everyone else having less checks than you do. It’s more often than not, not the up and to the right graph that you have in your slide deck. Because let’s be honest, every startup’s graph is up and to the right. Left side – antiquated. Right side – revolutionary. Bottom side – slow. Top side – fast. Or some cousin of that. Not that any of these advantages, charts and graphs are wrong, but what they represent most likely isn’t as unique as a founder might think. VCs see thousands of pitches in their inbox, pitches at events, and pitches in person. What you think is unique may be the 50th time a VC sees the exact same value proposition. As one of my 6th grade teachers once put it into perspective for me, “Think of a hundred really, really creative ideas. Throw them all away because all of them are unoriginal. Now think of your next hundred, and you are finally entering where no one has tread before.”
Just one thing. One thing I, as a scout, or another as partner, can bring to a partner meeting and say: This one thing is why we should invest. The more intuitive, yet exclusive to you, the better. Investors only have so much bandwidth to entertain ideas. There is a huge sum of okay ideas. Many good ideas. A few crazy ideas. And an even smaller handful of crazy good ideas. And the secret sauce is to prove to anyone exactly why you are one of the crazy good ones.
Now the secret sauce gets more nuanced here. You and your startup not only need that secret sauce, but you need to make sure the investor that you’re talking to is the “best dollar on your cap table,” as Roy Bahat of Bloomberg Beta (yes, the link redirects to a Github link, and they might be the only investors out there that does that) puts it. Why is it the perfect fit for the investor you’re chatting with (or going to chat with)? And why is that investor, and no one else, uniquely suited to help your business flourish at this stage? For example, I can cook up the meanest mushroom dish ever, slather it with my widely-accepted secret sauce (which has white pepper in it), and give it to my brother. No matter how good it actually is, he will without a doubt throw it in the trash or flush it down the toilet. Because he’s just not into mushrooms. The same can be said with investors. If they can’t or don’t know how to appreciate, savor and help you build on that delicious mushroom recipe, you’d just be wasting time barking on the wrong tree.
All in all, the secret sauce is just when your unique recipe for success meets someone with the means and experience to love it.
I’ve always had a life goal of meeting, learning, and helping the craziest, most creative, and most inspiring people in the world (and maybe one day, outside of it). So, half a decade ago, I made that dream-like goal my mission. Every week I reached out to one new person I was insanely excited about, which sounded great in theory, but scared the hell out of my introverted self. I would find the person of the week (POTW, as I would abbreviate it in my journal) from anything that would spark my interest: articles, podcasts, books, friends (and our online and offline conversations), memes, or YouTube videos. I then forced myself to find every way possible, and over time, figure out the best way possible, to meet these brilliant folks. It was a trial-and-error game of email, call, warm intro, Instagram or LinkedIn DMs, hand-written letters, and even attempting to show up at their office and ask for a meeting unannounced. Most were in vain, but those that I did succeed in, always had me jumping with joy, which was quickly followed by nervous adrenaline, as if I had overloaded on caffeine.
But that’s what made every single week fun. Every week I had something to look forward to – a mission that I would jump out of the bed every morning to accomplish.
That’s exactly why I didn’t give myself time to blink when I got the chance to jump into venture capital. Venture capitalists have a great track record of finding and investing in brilliant and passionate dreamers. And when I had yet to find my own systematic calculus for finding fascinating humans of the world, the mysterious land of venture capital would help me gain insight and a means to create my own. At the same time, I just couldn’t ignore my former professor’s description of the VC industry:
“A career where you get to see the future from one person’s perspective. And if you piece enough of them together, you’ll be able to help build the future you want you and your children to live in.”
Though I’m still only a meager three years in, and many miles short of having children, I’ve learned VC is a much more complex beast than I initially thought, but it doesn’t change my mission: to meet, learn, and help the craziest, most creative, and most inspiring people in this world. As someone who’s on the more junior side of life, there has been no better industry for me to learn, in breadth and in depth:
