Tag: weekend fund

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What You Can and Cannot Control as a GP

radio, communication, fm

Not too long ago, I was catching up with the amazing Owen Willis, someone I’ve been lucky to see in action during our time at On Deck together, who now runs Opal Ventures. And there was one thing he mentioned that I cannot stop thinking about.

As a fund manager, there are things you can control. And things you cannot.

So often, many a fund manager focus on things they cannot. The market. In many ways, marks. And not enough on things, they can. Chief of which, communication. What. How. When.

Are your LPs hearing about news on you or your portfolio — good and bad — from you or from another source?

What are you seeing in the market? What is your insight into it? Why? After all, LPs pay you for your opinion.

And how frequently do you maintain an open line of communication with your LPs? Do you share everything? Or only the good? Do you miss regular updates because of how busy you get?

To nosedive a level deeper, as a GP, what are your most powerful tools of communication with LPs? Not to lead the witness, but you’ve probably figured it out. LP updates. Many GPs I meet tend to only have one type. At best one and a half.

There’s the update GPs send your existing LPs. But they also understand the value of prospective LPs, so they end up sending the exact same to prospects. Maybe with some numbers redacted (if it includes sensitive information on the portfolio). Most of the time, that’s it. But really, it’s helpful to think about existing and prospects as two different audiences. The former will naturally be disposed to support. The latter is still deciding if they want to support. They have yet to be converted.

As such, instead of one, there should be two types of LP updates. To make it simpler, one is for “customer success.” The other is for “sales and BD.”

The “customer success” update

There’s a lot of content on this front already, so I’ll spare you the extra verbiage here. But if you want a place to start, I’d recommend the below first:

But to provide a brief summary (plus, a snazzle dazzle of the Cup of Zhou perspective), typical LP updates I see have:

  1. The Abstract / TL;DR / What to know if you only had 2 minutes
  2. Performance (TVPI, DPI, IRR, new investments, % deployed, % left, % capital called, and (if so) did you preemptively mark down portcos and why)
  3. Net New Investments — 2-3 lines about each company + what’s promising + why’d you invest + website link + key highlights (you’ll need sign off from your founders for this last one)
  4. Asks — for your portfolio and for your fund
  5. Team updates — if your team changed (i.e. new hires)
  6. General portfolio updates — the good, the bad, the ugly
  7. Capital call schedules / Legal stuff if any
  8. Insights into the market (if any)

In general, you want to tell your LPs if there are any updates before they find out about them themselves. Better to hear from you than from other channels.

Lastly, I like personal flare and highlights as well. But hell, that’s up to each GP’s preference.

The “sales” update

So, there will be some overlap of information with the earlier type of update. With some redactions, particularly the specific numbers on the portfolio side. That said, rather than what goes in it, what might be more helpful is how to think about it.

Sales, like in any other industry, requires you to know your customer.

Some general framing questions:

  1. Are they the solution to your problem or are you the solution to their problem?
    • For instance, are they actively looking to deploy? Why? What motivates them? If not, you might be pushing a rock uphill. If yes, are you actually what they’re looking for, or can you better triage them to a friend who is investing in what they’re looking for. Relationships are long.
  2. Do they see VC as an access class or an asset class?
    • Generally, not always, individuals and family offices see VC as an access class. So they care more about co-investment opportunities, deal flow for them to directly invest, and/or opportunities to learn from you. In other words, these LPs want to see what you’re investing in, who else is validating your investments, and what are you seeing and learning. If you’re a Fund I, you’re probably spending more time with these LPs.
    • Institutions, like foundations, endowments, pensions, and fund of funds, see VC as an asset class. As such, returns and performance matter a lot more. So the best ways to convince them is to let the numbers do the talking AND how close you stick with your initial strategy and if you deviate, why. Promise fulfillment, or in LP lingo, consistency of strategy, matters just as much as returns, if not more, once return profiles measure up to 3-5X across several years. Or when and how quickly DPI hits 1X. If you’re a Fund II+, you’re probably spending more time prospecting these.
  3. Are you looking to institutionalize your fund? To go from a fund to a firm?
    • If so, how do you set yourself up to grow in team? How are you knocking out key risks one by one?
    • And in a loose way, not for an LP update, what happens once you get hit by a bus?
  4. What kind of cadence makes sense for you and is enough to keep you top of mind for these LPs?
    • Including events you’re hosting or when you’re visiting certain geographies are always a nice added bonus.

And lastly, getting feedback is always important. As you might suspect. So that your communication between both your existing and prospective LPs only improves over time.

Photo by ANDY ZHANG on Unsplash

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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Why Should the Investor NPS Score Exist?

I’ve written about product-market fit on numerous occasions including in the context of metrics, pricing, PMF mindsets, just to name a few. And one of the leading ways to measure PMF is still NPS – the net promoter score. The question: On a scale of one to ten, how likely would you recommend this product to a friend?

As investors, while a lagging indicator, it’s a metric we expect founders to have their finger always on the pulse for their customers. Yet how often do investors measure their own NPS? How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?

Let’s look for a second from the investor side of the table…

Mike Maples Jr. of Floodgate pioneered the saying, “Your fund size is your strategy.” Your fund size determines your check size and what’s the minimum you need to return. For example, if you have a $10M pre-seed fund, you might be writing 20 $250K checks and have a 1:1 reserve ratio (aka 50% of your funds are for follow-on investments, like exercising your pro rata or round extensions). Equally so, to have a great multiple on invested capital (MOIC) of 5x, you need to return $50M. So if you have a 10% ownership target, you’re investing in companies valued around $2.5M. If two of your companies exit at $200M acquisition, you return $20M each, effectively quadrupling your fund. You only need a couple more exits to make that 5x for your LPs. And that’s discounting dilution.

On the flip side, if you have a $100M fund with a $2-3M check size and a 20% ownership target, you’re investing in $10-15M companies. Let’s say your shares dilute down to 10% by the time of a company’s exit. If they exit at unicorn status, aka $1B, you’ve only returned your fund. Nothing more, nothing less. Meaning you’ll have to chase either bigger exits, or more unicorns. But that’s hard to do. Even one of the best in the industry, Sequoia, has around a 5% unicorn rate. Or in other words, of every 20 companies Sequoia invests in, one is a unicorn. And that means they have really good deal flow. Y Combinator and SV Angel, who have a different fund strategy from Sequoia, sitting upstream, have around 1%.

Erik Torenberg of Village Global further elaborated in a tweet:

And, Jason M. Lemkin of SaaStr tweeted:

Why does a VC’s fund strategy matter to you as the founder?

A fund with a heavily diversified portfolio, like an angel’s or accelerator’s or participating investors (as opposed to leads), means they have less time and resources to allocate to each portfolio startup. The greater the portfolio size, the less help on average each startup team will get. That’s not to say you shouldn’t seek funding from funds with large AUMs (assets under management). One example is if you have an extremely passionate champion of your space/product at these large funds, I’d go with it.

I wrote late last year about founder-investor fit. And in it, I talk about Harry Hurst‘s check-size-to-helpfulness ratio (CS:H). In this ratio, you’re trying to maximize for helpfulness. Ideally, if the fund writes you a $1M check, they’re adding in $10M+ in additive value. And based on a fund’s strategy (i.e. lead investors vs not, $250K or $5M checks, scout programs or solo capitalist + advisory networks, etc.), it’ll determine how helpful they can be to you at the stage you need them.

If you were to plan out your next 18-24 months, take your top three priorities. And specifically, find investors that can help you address those. For example, if you’re looking for intros to potential companies in your sales pipeline and all a VC has to do is send a warm intro to their network/portfolio for you, bigger funds might be more useful. On the other hand, if you’re struggling to find a revenue model for your business, and you need more help than one-offs and quarterly board meetings, I’d look to work with an investor with a smaller portfolio or a solo capitalist. If you’re creating a brand new market, find someone with deep operating experience and domain expertise (even if it’s in an adjacent market), rather than a generalist fund.

While there’s no one-size-fits-all and there are exceptions, here are two ways I think about helpfulness, in other words, value adds:

  1. The uncommon – Differentiators
  2. The common – What everybody else is doing

The uncommon

Of course, this might be the more obvious of the pair. But you’d be surprised at how many founders overlook this when they’re actually fundraising. You want to work with investors that have key differentiators that you need at that stage of your company. By nature of being uncommon, there are million out there. But here are a few examples I’ve seen over the years:

  • Ability to build communities having built large followings
  • Content creation + following (i.e. blog, podcast, Clubhouse, etc.)
  • Getting in’s to top executives at Fortune 500 companies
  • Closing government contracts
  • Access/domain expertise on international markets
  • In-house production teams
  • They know how to hustle (i.e. Didn’t have a traditional path to VC, yet have some of the biggest and best LPs out there in their fund)
  • Ability to get you on the front page of NY Times, WSJ, or TechCrunch
  • Strong network of top executives looking for new opportunities (i.e. EIRs, XIRs)
  • Influencer network
  • Category leaders/definers (i.e. Li Jin on the passion economy, Ryan Hoover on communities)
  • Having all accelerator portfolio founder live under the same roof for the duration of the program (i.e. Wefunder’s XX Fund pre-pandemic)
  • Surprisingly, not as common as I thought, VCs that pick up your call “after hours”

The common

Packy McCormick, who writes this amazing blog called Not Boring, wrote in one of his pieces, “Here’s the hard thing about easy things: if everyone can do something, there’s no advantage to doing it, but you still have to do it anyway just to keep up.” Although Packy said it in context to founders, I believe the same is true for VCs. Which is probably why we’ve seen this proliferation of VCs claiming to be “founder-friendly” or “founder-first” in the past half decade. While it used to be a differentiator, it no longer is. Other things include:

  • Money, maybe follow-on investments
  • Access to the VC’s network (i.e. potential customers, advisors, etc.)
  • Access to the partner(s) experience
  • Intros to downstream investors

That said, if an investor is trying to cover all their bases, that is a strategy not to lose rather than a strategy to win, to quote the conversation I had with angel investor Alex Sok recently. As long as it doesn’t come at the expense of their key differentiator. At the same time, it’s important to understand that most VCs will not allocate the same time and energy to every founder in their portfolio. If they are, well, it might be worth reconsidering working with them. It’s great if you’re not a rock-star unicorn. Means you still get the attention and help that you might want. But if you are off to the races and looking to scale and build fast, you won’t get any more help and attention that you’re ‘prescribed’. If you’re winning, you probably want your investor to double down on you.

Even if you’re not, the best investors will still be around to be as helpful as they can, just in more limited spans of time.

Finding investor NPS

You can find CS:H, or investor NPS, out in a couple of ways:

  • The investors are already adding value to you and your company before investing. Uncommon, but it really gives you a good idea on their value.
  • You find out by asking portfolio founders during your diligence.
  • Your founder friends are highly recommending said investor to you.

Then there’s probably the best form of validation. I’ve shared this before, but I still think it’s one of the best indicators of investor NPS. Blake Robbins once quoted Brett deMarrais of Ludlow Ventures, “There is no greater compliment, as a VC, than when a founder you passed on — still sends you deal-flow and introductions.”

In closing

“How likely would you, the founder, recommend this fund/firm/partner(s) to your founder friend(s)?” is a great question to consider when fundraising. But I want to take it a step further. NPS is usually measured on a one to ten scale. But the numbering mechanic is rather nebulous. For instance, an 8/10 on my scale may not equal an 8/10 on your scale. So your net promoter score is more so a guesstimate of the true score. While any surveying question is more or less a guesstimate, I believe this question is more actionable than the above:

If you were to start a new company tomorrow, would you still want this investor on your cap table?

With three options:

  • No
  • Yes
  • It’s a no-brainer.

And if you get two or more “no-brainers”, particularly from (ex-)portfolio startups that fizzled off into obscurity, I’d be pretty excited to work with that investor.

Photo by Laurice Manaligod on Unsplash

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