Due Diligence: How Much is Too Much?

A big part of my job is due diligence. This is a fancy bit of jargon that gets thrown around a lot in finance. All it really means is doing research to back up whether things that someone has claimed about their company are true. My boss is fond of reminding us that in our job we need to “trust, but verify.” Due diligence is that verification.

Spend a little bit of time in venture capital and you quickly discover that the rigor of different firms’ due diligence processes vary greatly. Some firms spend an incredible amount of time and resources digging into every small detail of a company. Others run light processes that can be completed quickly. At Rev1, we have what I believe to be a relatively robust process compared to other investors at our stage.

This spectrum makes sense.

Firms with more specific sector-focuses are likely subject matter experts on the spaces they invest, cutting down on time necessary to get themselves up to speed.

Firms that invest across a series of stages will likely have leaner due diligence processes for their earliest investments and more in-depth processes for their later investments. The idea here being that the effort per dollar of investment remains relatively constant. More dollars. More effort.

There is no right answer on what is the perfect amount of due diligence.

But there are wrong answers.

Conducting no due diligence can’t be correct. But doing too much diligence makes your life miserable (and the entrepreneur’s life you are working with even more so).

When I was at Carlyle, one of our founders was fond of saying “you should never focus on conducting the most complete, perfect due diligence. By the time you will have completed it, the investment round will no longer be open and it won’t even matter because you will have talked yourself out of doing the deal anyways.”

I think there is a good amount of truth in this. Venture capital is a risky game. You will never be able to conduct such a thorough due diligence process that you are able to remove ALL the risk from a deal. If you were able to, they wouldn’t exactly be able to call it risk capital investing now would they?

So the correct amount of due diligence lies somewhere between 0 and 100. But where?

I have been thinking about this question a lot recently. The answer (as with most things in business) is that it depends. It depends on the characteristics of your firm and the demands of your stakeholders.

My views on the optimal amount of due diligence have recently been informed by my reading of Fooled By Randomness by Nassim Nicholas Taleb. This is an excellent book which I highly recommend. The author is a veteran options trader and a foremost expert on probability and randomness.

Two concepts from his book have especially informed my views on due diligence.

The first is the idea of satisficing.

Satisficing is a decision making strategy where someone analyzes different alternatives until they find one that reaches a minimum acceptable threshold. And then they stop. I believe this concept should also be applied to investment due diligence.

Your goal should be to reach the minimum required confidence threshold necessary for you to make an investment while expending the least amount of effort and resources necessary to get there. Any additional due diligence past that point is a waste of your, and the entrepreneur’s, time.

This minimum required confidence threshold will change from person to person and firm to firm, but I do think there is value in understanding the idea of satisficing to help avoid using unnecessary time and effort. As with many things in life, due diligence follows the law of diminishing marginal return. Each additional level of comfort you can reach in an investment requires exponentially more and more effort. This is why it is so important to reach your required confidence threshold and to go no further. Even pushing on just a little bit can require a colossal amount of energy.

Not only is too much due diligence a waste of time, money, and energy, but it could actually lead to some pretty large cognitive blind spots.

The second concept from the book that applies to due diligence are the negative side-effects of conducting too thorough of an analysis.

Too thorough of an analysis?

Yes, that is right. Taleb points out that one of the major cognitive biases exhibited by people is that their confidence in the likelihood of a given outcome increases linearly with the amount of effort they expend analyzing the chances of its outcome. It’s the effort people put in to an analysis more so than the analysis itself that tends to influence people’s expectations around an event.

People trick themselves into thinking that more analysis = more certainty, when nothing could be further from the truth. The wrong kind of analysis will be a red herring that increases your confidence in, without actually increasing the accuracy of your predictions.

Venture capital due diligence is an environment ripe for this sort of error. In early stage VC, the risks are so incredibly high for every company. Conducting an excessive amount of due diligence doesn’t change this fact. But it does make us feel better about the investment. This dislocation between the actual risks of an investment and someone’s perceived risks can lead to incorrect decision making and overconfidence in those decisions.

The true danger is not in the risks itself, but in conducting so much analysis that we convince ourselves that the risks no longer apply.

With the ideas of satisficing and the dangers of over-analysis in mind, I believe the best way to conduct due diligence is to seek the no. “Seeking the No” is a cool sounding phrase that I just made up on the spot. The concept is to figure out the few things that would immediately make you say no to an investment and try to validate whether they are true or not. Work backwards from biggest things that would immediately make you cut bait with the company. If you find out any of these hot button issues are true, you can pack up shop right then and there. No more analysis necessary.

Assuming you can attain some comfort that the company does not breach any of your “DO NOT INVEST” red flags, then you can proceed with seeing if they fit what you actually want to see in an investment. What exactly those attributes are that you should be looking for is a topic for another post, but following this strategy of seeking the no should help you focus your efforts on only the investments that truly warrant your time.

Venture capital due diligence is a tale of modern day Sisyphus. You will never be able to truly understand all the risks inherent in a business. Trying to do so wastes precious resources, while giving yourself a false sense of security. Conduct the minimum amount of due diligence necessary to reach either a no or a yes. You will thank yourself for it. And so will your entrepreneurs.

Pink Dragons, Serendipity Vehicles, and Mentos

When I was a kid one of my all time favorite things to do on friday nights was to have a movie night (who am I kidding, that is still one of my favorite things to do). My mom and I would go to Blockbuster to pick out a movie or two and then we would skip next store to Papa Murphy’s to pick up some pizza (I will contend till my dying breath Papa Murphy’s is by far the most underrated pizza on the planet. So good). One of the movies I distinctly remember watching during multiple movie nights was Serendipity The Pink Dragon. Serendipity was a pink sea dragon who lived on a magical island with all of her friends learning life lessons about friendship. I have no idea why we ever picked this particular movie out, but I do remember watching it more than once (to this day, my go to nickname for a Lapras in any Pokemon game is Serendipity).

I was reminded of Serendipity the pink dragon while listening to this interview from Sara Dietschy with Nik Sharma and David Perell. This episode is definitely worth listening to. They cover a lot of ground from influencer marketing to direct-to-consumer brands to their own stories and how they got where they are today. As part of this last part, they spoke about the role that serendipity had in each of their lives. They drew a line in the sand between serendipity and luck. Luck is something good that just happens to you. Serendipity is something good that happens to you because your hard work and patience put you in a position where it could happen to you. I love this distinction.

If you talk to anyone with a modicum of success in life, the vast majority can point to a handful of “lucky” events where they caught a break or were given a chance to take on a project they were woefully underqualified for. Rare, however, is the successful person who had this happen to them while watching Netflix and eating cheetos on a Thursday afternoon.

Luck is a factor in everyone’s story. What differs is how prepared people are to take advantage of the situation when the dice start rolling their way.

That is where Serendipity Vehicles come in.

Serendipity Vehicles are a concept coined by David Perell in this post. He talks about purposefully building structures that increase the likelihood of both serendipitous things happening to you as well as increasing the chances that you are able to take advantage of them when they occur. Serendipity vehicles can range from simple structures like attending a dinner party to more much more complex things like writing books.

This blog is one of my serendipity vehicles. Twitter is another. Both require relatively minimal, but consistent, effort to maintain. Both have lead to significant outsized opportunities far and above what I would’ve ever expected.

Now all of this talk of lifestyle design may sound complicated, but I think the most important thing is simply the way you approach it. I think the best way to think about designing your serendipity vehicles is to make yourself into a Mentos. Mentos are a type of spherical candy that are sold all across the world. To be perfectly honest, I think they are pretty average. What is not average are the explosive effects they have when combined with any sort of carbonated beverage (but especially Diet Coke). There is a whole lot of science behind why this happens, but the short of it is that even though Mentos looks like smooth spheres, on a microscopic level their surfaces are very rough. This increased surface area acts environments where bubbles can form, launching soda up into the air. The key is the surface area.

You can make your life resemble Mentos by increasing your surface area so you have a lot of different places where serendipity bubbles can form.

Say yes to thing even if they are outside your comfort zone.

Cultivate curiosity in a broad range of subjects and areas.

Go out of your way to go to new places and meet new people.

Jump at opportunities even if the timing is not always ideal.

Create excuses to talk with interesting people.

Provide value to people instead of just asks.

At the end of the day, your goal should be to have as many areas in your life where serendipity can form as possible The challenge is to recognize serendipity and then make sure you are able to take advantage of it.

This advice is equally true for both individuals and startups.

Well designed startups are a lot like giant serendipity vehicles. A lot of work goes into designing them so that they are in a position to shoot for the stars as soon as a serendipitous customer connection or technological development breaks their way. As a founder you need to balance the need to stay focused on what you are building with providing yourself as much surface area as possible in order to take advantage of connections with investors, talent, customers, etc.

I can’t tell you what the right balance for that is. You will need to figure that out for yourself. But I can tell you what the wrong balances are. There are two.

1) Ignoring any thought of the outside world to focus solely on your business.

2) Ignoring your business to focus solely on hoping something happens in the outside world.

Everything in between is fair game.

No matter where you land on the spectrum between focusing your time and energy on building your business and increasing your surface area to optimize for serendipity, there is one lever that you can pull to maximize your chances for success.

Burning responsibly.

Responsibly managing your burn rate as a startup is one of the most important things you do as a founder. Burn too fast and you won’t get enough at bats to have something serendipitous happen for your business, no matter how much you optimize for it.

As an individual and as a business, design your life so that you can take advantage of serendipity when it comes knocking at your door.

That is how you and your company achieve success.

Board to Death

Photo by Drew Beamer on Unsplash

The world of Venture Capital is very different than it appears from the outside. I have been surprised by many things since becoming an investor, but none more so, than the difficulties surrounding boards. From the outside looking in, boards appear simple. Incentives are aligned. Everyone wants what is best for the company. Experience and expertise are leveraged to make the company the best it can be.

If only it were that simple.

Properly managing boards as an entrepreneur is a dance. Defer to them too much and you will lose the magic that made board members want to support you in the first place. Don’t heed them enough and you will make avoidable mistakes and miss out on opportunities.

The biggest mistake I see entrepreneurs make in respect towards their boards is that they think about their boards with the wrong mindset. The second you grow mistrustful of your board and start thinking of them as antagonists trying to put up hurdles in the way of your company, the chances your company is going to become successful with you at the helm plummets to almost zero.

Alright, Erik chill out. Classic Berg exaggeration.

No I am serious. A toxic board relationship is THAT deadly. It may not happen that day. Or that month. But eventually allowing the relationship between you and the board to fester will come back to bite either you or the company. Or both.

I believe the best metaphor for a well run board is to think of the board as your boss. Because that is exactly what they are. The keys to a healthy relationship with a board are the same as with a healthy relationship with your boss.

Communication

As with most relationships in life, the most important thing when managing a board is communication. Regularly update your board (even, and especially, outside of official board meetings) on your successes, failures, and any ways that they can help. I maintain that investor updates are one of the highest leverage activities any entrepreneur can do. Keep your board in the loop with what is going on with your company and they will be able to leverage their experience to help you make the best possible decisions. Note that I am not saying to do whatever your board tells you to. If they knew what was best for your business in every possible scenario, they would’ve started your company themselves. Rely on your intuition. It got you this far. But your board has many lifetime’s worth of additional experience than you do. Use it. Take it into account and leverage it to make the best possible decisions. To do otherwise is simply foolish.

Coaching

Just like all good bosses, boards have a responsibility to develop the CEO. Most startup entrepreneurs have not built a business before. Those that have, in all likelihood, have done so in a different sector or space. The board has a responsibility to coach and mentor the CEO to be the best that they can be. This means giving your CEO the tools they require to be successful. Equip them with resources and connect them with mentors who have been successful in this space before. A board’s fundamental job is to protect the interests of a company and its employees. The best way to do this is by making sure that the CEO performs at their absolute peak. If you as a board member believe your duty is to provide oversight without nourishment, advice without mentorship, you are neglecting your responsibilities to the company.

Accountability

Communication is a two way street. Yes, the impetus lies squarely at the feet of the entrepreneur, but at the end of the day, they will only feel empowered to bring everything to the attention of the board if the board knows how to give appropriate levels of feedback. Successful boards design structures where they can hold their CEOs accountable in a constructive way. I think Fred Wilson has the best approach for ensuring that feedback loops are tight and honest. Entrepreneurs, don’t get defensive when the board gives you feedback. Every single one of their incentives is aligned with the success of the company. So are yours. Remember that they trying to help you make the company the best that it can possibly be.

From the outside looking in, no one will know how healthy your company is. You can survive with a bad board relationship for a little while. But, if you are consistently neglecting your relationship with your board, eventually it will blow up in your face. The key is to leverage their experience and remember that they are on your side.

Is Venture Capital right for your Business?

So you’ve built a business. You’ve got an interesting idea and you think there could be potential for growth. In this post I am going to help you think through whether or not venture capital funding might be right for you and your business.

What is Venture Capital Financing?

Venture Capital is the riskiest of risked capital financing. It is chiefly used to support technology startups. VC firms receive money from investors such as high-net worth individuals, pension programs, and corporations and invest that money into companies in exchange for a portion of the ownership of said company. VCs are compensated with management fees on the amount of money they are managing (usually around 2%) and they also share in the gains on each investment in the form of carried interest (usually 20% of any gains). Carried interest (allegedly) got its name from ship captains who would receive 20% of the cargo for any goods that successfully completed the journey. Carried interest comes into play whenever a gain is realized for an investment. This occurs when A) the company is acquired by another company or B) when the company goes public. That’s it. There are other fringe ways for a investors to get liquidity (fancy word for their money back), but for the most part every investment is taken with an eye towards one of these two scenarios eventually occuring.

I note the incentive structures at play here because it is important to understand one key tenet of Venture Capital:

When the company wins, everyone wins.

Now there is obviously a TON of nuance to this statement and a host of different scenarios that can play out in the chaotic adventure that is investing into startups, but it is important to understand that at the core of any investment, the entrepreneur and the investor’s incentives are, by-in-large, aligned.

Different VC firms invest in different types of companies across a variety of stages. Stages represent how mature a business is. There are three important buckets of stages to remember. Seed stage companies (Pre-seed, Seed, Seed+) are in their infancy and usually have yet to successfully deploy a product at any sort of scale. Early stage companies (Series A, Series B) have successfully launched their product and are starting to ramp up their scaling efforts. Growth stage companies (Series C and later) have an established business and are focused on expansion. After growth you get into the world of more mainstream Private Equity. My focus is on the Seed and Early stages.

Is Venture Capital Funding Right for your Business?

My favorite metaphor for venture capital is from Josh Kopelman at First Round Capital. He says that venture capitalists are like jet fuel salesman. Jet fuel is awesome when you are building a jet. It is significantly less awesome when you are building a motorcycle. There is nothing wrong with building a motorcycle. In fact, motorcycles are pretty sweet. They are just not built to successfully and sustainably use jet fuel. Similarly, Venture Capital funding is not right for every business Here are some of the characteristics that a business needs to have before a VC will consider it for an investment.

First, a business must have the potential for an exit. Remember, for a VC to get their money back to their own investors (and hopefully make some money themselves) there has to be a pathway to that company eventually having an exit to an acquirer or to the public markets. There doesn’t have to be (and usually isn’t) an obvious acquirer, but there has to at least be the potential for an acquisition one day down the road. What about the public markets? Going public through an Initial Public Offering is the holy grail for venture capitalists. Like the holy grail, it is an outcome that is very difficult to find. While this exit strategy is often discussed, it is rarely focused on (or at least should be rarely focused on), especially at the seed and early stages. Having a company IPO is a fantastic outcome for investors, but there are so many things that need to align perfectly for this to occur, that it is rarely worth focusing on too much before the company has some serious momentum behind it.

The second key characteristic is that the company must be scalable. Scalability can take a lot of different shapes, but at the end of the day, there must be significant potential for a company to grow before any venture capitalist will consider it for an investment. Growing the business is what a VC will want their money to go towards. Profits are not the goal in early venture capital. Many startups that could be profitable, choose not to so that they can pump their money into the growth of their business. An initial upfront investment of time, money, and resources can propel a company to significantly greater heights much, much quicker than it would be able to achieve on its own. A company doesn’t need to have its entire growth plan figured out to receive an investment, but it does need to have the potential for growth. A business that is overly reliant on the expertise of the founder will have a difficult time attracting venture capital investments because individual humans don’t scale. Technology scales. Business models can be designed to scale. But people don’t. This simple fact is why the bulk of venture capital investments goes to software companies. Software takes a lot of upfront effort to build, but once it is built, it is relatively easy to duplicate and distribute it.

The final key characteristic is that the company must do or make something of value to someone. This may sound obvious, but I can assure you that, in practice, it is anything but. I have seen startup after startup come along that may be doing something novel or interesting, but it isn’t creating any real value for anyone. The best framework to think about whether your company creates value or not is to consider what problem your company is solving. How many people are experiencing that problem? How acute is the pain they are feeling? Is it a “hair-on-fire” problem, or is your product a “nice-to-have” item? Thinking through these questions will help you pinpoint who your potential customers are and whether they would be willing to pay for your good or service. You can build a successful business if the problem you are solving is experienced by a large number of people or if it is a Top-5 pain in the lives of whoever is experiencing it. The best companies solve problems that are both. Companies solving problems that are neither will not be successful as venture investments.

Is Venture Capital Funding right for YOU?

Even if your business is perfect for venture capital funding, venture capital funding may not be right for you. As an investor, I assume that every investment I enter into is going to be at least a 10 year relationship. When a company takes a venture capital investment, it is a lot like a marriage, and it can be even harder (and more painful) to get out of. If you take an investment from a VC firm, you are ultimately giving up control of your company’s destiny. The where and how are all up for discussion, but at the end of the day, your new investors will eventually require some sort of exit of the business. And they have the power to make this happen. VC’s investments have controls built into them meant to help them safeguard their investment. This may sound severe, but it is important to remember that VCs are, for the most part, managing other people’s money, not their own. They are managing money that comes from college funds, firefighter pensions, and government coffers. VC’s have a responsibility to responsibly manage their investors’ money and they put protections into place to make sure that they can do this. If this lack of control sounds like a deal breaker for you, venture capital funding simply may not be for you. The system works great when all parties have a shared vision for the company. It works considerably less well when a founder has a different vision for their company than their investors. That is why it is so important to know exactly what you are getting into.

Be Honest with Yourself!

Venture Capital is a tool to help companies grow. As with any other tool, applying it in the correct circumstance will determine whether it is effective or not. Be honest with yourself about whether venture capital is right for you and your company. It is not without its downsides, and it is a train that is incredibly hard to get off of once you have hopped onboard. But for the right companies, there is no better way to build a business. Successful companies can be built without venture capital funding, but it is important to remember that these situations are the exceptions that prove the rule. The VAST majority of major technology companies utilized some form of venture capital at some point in their life cycle to accelerate themselves past competition.

There are alternatives. Companies can be built with nothing more than the blood, sweat, and tears (typically lots and lots of tears) of the founder. This is called bootstrapping and can be an excellent strategy for founders that are unwilling to give up control of their business or who do not have ambitions of making their business grow to its optimized potential. Small business that aren’t scalable can utilize small business loans to help them get going. There are even new alternatives for startups like indie.vc and Clearbanc.

However you decide to fund your business, make the decision with eyes wide open, knowing that there are pros and cons for every option.

Venture capital is an excellent option that you should absolutely consider.

Just make sure you are building a jet before you start pumping in the jet fuel.

Podcast of the Week: The Twenty Minute VC with Fred Destin

The first podcast I started listening to regularly when I really started to dive headlong into the VC world was The Twenty Minute VC with Harry Stebbings. His bite-sized episodes were a great place to get started in learning more about the ecosystem. Harry’s story was a great inspiration to me as well. His advice to get out there and start creating content was a big part of the reason I decided to get this blog started. Harry has been a huge help to me and is an excellent example of how hard work and determination can really take you places.

I have listened to A LOT of 20VC, but this episode is up there with my favorite ever. Fred Destin is Harry’s partner at Stride.VC. and I can honestly say that this is the first time I have ever finished a podcast and then immediately started it over from the beginning. After listening, you may want to do the same! I can honestly say that Harry has found himself one hell of a partner and I for one could not be more excited to follow their new fund closely!

Be the Hero

One of the most interesting podcasts I have listened to recently was Reid Hoffman’s 10 Commandments of Startup Success on the Tim Ferris show. Reid shares some of the highlights and lessons learned from his own podcast, Masters of Scale.

Reid Hoffman’s 10 Commandments of Startup Success

• Commandment 1: Expect rejection. [09:14]

• Commandment 2: Hire like your life depends on it. It does. [19:26]

• Commandment 3: In order to scale, you have to do things that don’t scale. [25:37]

• Commandment 4: Raise more money than you think you need — potentially a lotmore. [36:18]

• Commandment 5: Release your products early enough that they can still embarrass you. Imperfect is perfect. [44:45]

• Commandment 6: Decide. Decide. Decide. [1:00:16]

• Commandment 7: Be prepared to both make and break plans. [1:03:13]

• Commandment 8: Don’t tell your employees how to innovate. [1:07:21]

• Commandment 9: To create a winning company culture, make sure every employee owns it. [01:12:32]

• Commandment 10: Have grit and stick with your hero’s journey. [1:23:22]

Of all these insights, the one that has stuck with me most is the last one. Reid talks about how at some point in the life of almost every startup, there comes a decisive crossroads. In these situations Reid gives a speech where he likens entrepreneurship to the hero’s journey. Fraught with adventure, steep odds, and the promise of treasure if the dragons can be slain. He then asks the entrepreneur if they are going to be the hero in this story.

Reid’s speech is a great example of the importance of narrative for startups.

Narratives are the glue that holds a company together. It tells the what and the why of the business. It is what your customers think of when they see your logo and it is why your employees will take pay cuts to leave the job security of some cushy corporate position. When the going gets tough, the importance of narrative is revealed. During times of crisis, employees will rally around a company that has a compelling story behind it. When a company doesn’t, don’t be surprised if they jump ship as soon as it starts letting on water.

One of the key roles for any startup CEO is as storyteller-in-chief. It is their responsibility to craft their company’s story, to nourish it, and to communicate it effectively to their teams. A CEO that neglects this responsibility will be an ineffective leader and fundraiser. The importance of narrative to companies is one of the (multiple) reasons I prefer to invest in CEOs that have a deeply personal connection to the problem their company is trying to solve. This personal connection allows them to build a much more authentic and genuine story around why they are building this business.

A strong central narrative will make all the difference in the world when the chips are down and things are looking dire.

A strong narrative will give people a reason to look themselves in the mirror and say:

I am the hero in this story.

How often should you update your investors?

Regular investor updates are one of the highest leverage activities entrepreneurs can do to make their company successful. They provide tangible value to companies and a positive signal to investors. And they don’t have to be hard.

If you follow me on twitter, you will have noticed that investor updates have been a topic on my mind a lot recently. There is some debate in the industry about how vital they are and what form they should take. Hopefully this post can codify my thoughts and be a resource to any entrepreneurs.

Help me, Help you

Should investor updates even be done? The answer is an overwhelming YES. Not to be confused with an emphatic YES or a confident YES. An overwhelming YES. Updating your investors is important for a few reasons.

First, investors cannot help you if they don’t know what you need. Investor updates are an opportunity to ask for help/guidance/connections. It may seem intimidating to open your company’s komono to some of the less than glamorous aspects of the business, but by the time investors find out about issues on their own, it will often be too late for them to help. This of course all operates under the assumption that your investors are able and willing to help you. If they are, great! Update them. If they aren’t, why are they your investors in the first place (a topic for another post perhaps)?

I am going to let you in on a little secret. Investors want to be helpful! There are better ways to make money in finance than being a VC. For the most part, VCs have an itch to help build the next great thing and providing help to portfolio companies allows them to scratch this itch. I know that is the case for me. Anyday I can make a fruitful introduction or help clean up a model for a portfolio company is a good day in my book. I think any other good investor would agree.

Brent Beshore describes entrepreneurship as a “daily knife fight”. It is not easy. Founders are faced with new issues and obstacles every day. Mobilizing your investors can help solve a lot of those problems. Why turn down a resource that is not only willing, but excited to help you succeed?

Timing is Everything

As with many things in life, the key to investor updates is consistency. Developing a regular cadence with your updates will take a lot of the punch out of anything that is less than perfect. An email received after not hearing from a founder for 6 months saying that a company missed one of their revenue milestones and need help hiring a VP of engineering seems like a catastrophe. An explanation of why a milestone target was missed and a request for help hiring a VP of engineering received as part of a regular investor update is a Tuesday.

There is some debate in the industry on how often companies should be updating their investors. Some investors believe quarterly updates are sufficient. This may work for later stage companies, but for early stage companies, I believe that monthly investor updates are always the way to go. Monthly updates allow you to keep your updates brief and to the point. In-depth strategic discussions can be left for quarterly board meetings.

How Much is too Much

Entrepreneurs have enough on their hands, so investor updates absolutely must be designed to keep the burden to a minimum. With a monthly cadence, your update can be brief. I suggest that entrepreneurs don’t spend more than 15-30 minutes putting together their update. Items noted should be whatever is top of mind. You don’t need to write a novel, just give your investors a sense of the momentum of the company and make any asks you need help with. Here is a template:

Hello Investors,

XYZ month was a productive one for ABCify! This month we accomplished A, B, and C. We are excited about Initiative X and are thrilled about new hire Y. We continue to execute on plan Z.

Thank you for your continued support,

Founder

Company

Wins:

• Win 1

• Win 2

• Win 3

Challenges:

• Challenge 1, brief explanation

• Challenge 2, brief explanation

• Challenge 3, brief explanation

KPIs:

• Metric 1

• Metric 2

Asks:

• Ask 1

• Ask 2

That’s it. Seriously. If you fill in the blank with the above template your investors will LOVE you. This is a good thing. Happy investors make for happy fundraises. More than that, consistent updates are a very positive signal for investors. It shows that the entrepreneur is on top of things and is being thoughtful about their company.

And it shows that the founder is smart.

Because spending 15 minutes keeping your investors happy and leveraging their expertise to help you overcome obstacles is one of the most high-leverage activities you can do as an entrepreneur.

2019 Predictions for Venture Capital and Tech

I hope you all had a pleasant holiday season and a happy new year! My wife and I went back to The Commonwealth to spend some wonderful R&R with friends and family. It was quite the “break” with a lot of family time, my first ever successful cooking of traditional Norwegian Juleribbe, my first ever debutante ball, and a New Year’s Eve filled with board games and Super Smash Bros until the wee hours of the morning.

My family is big on traditions, especially around the holidays. We eat the same foods for Christmas and every New Year’s Day growing up we would go to Buffalo Wild Wings (kinda random I know) and make our New Year’s resolutions while watching the bowl games and eating chicken wings. Last year I started a tradition here of making some predictions about the year to come and I thought it would be fun to evaluate how they did before making a few new predictions for 2019.

2018 Predictions

The Rise of New Tech Hubs

Last year, I predicted we would see new tech hubs really solidify themselves as leaders in the space. Of all my predictions I think this one has turned out to be the most true. New hubs for technology have been flourishing for years, but 2018 was really the year that people began to sit up and take notice. The tech scenes in places like Columbus, Nashville, Ann Arbor, and Denver have a new found legitimacy that is demanding coastal investors take notice. This has also come at a time when the largest tech giants are under increasing amounts of scrutiny and the socio-economic situation in the Bay Area has grown more tenuous than ever. I had so much confidence in this trend, that I bet my career on it, and I have had the pleasure of getting to experience the best of what a growing tech ecosystem has to offer first-hand. It has been an absolute thrill to be a part of and I am confident this trend will continue to accelerate into 2019!

The Legitimacy of Zebras

For 2018 I believed that the VC world would wake up a little bit and take notice of more sustainable business models than the boom or bust unicorn hunting that the sector has become known for. Unfortunately it seems to me that, at least in SV, the opposite is true. As record amounts of capital were pumped into the space by ever-growing mega funds, the swing-for-the-fences mentality only seemed to heighten. I understand that VC is a power-law sector where the majority of returns are made only by the top firms/companies, but I worry that in the pursuit of growth at all costs the sector has let valuations get away from them and overlooked wide swaths of new businesses that can be built on more sustainable, cash-flow focused models.

Structures that add value

In 2017, we were starting to see what I thought was the beginning of a trend of innovation within venture capital fund structures. I thought this trend would continue into 2018 and we would see some true innovation in value-add fund structures. This turned out to not really be the case. The same crop of firms that were doing new and interesting things, like indie.vc and Kindred, continue to test their models, while structures for the rest of the industry have remained largely intact. Credit where credit is due, Indie.vc did roll out a new v3 model which is very interesting and seems to have had some initial success, but that announcement happened on January 1, 2019 so I don’t think I can really count that in my favor in good conscience! I think the lesson here for me is that any innovation in fund structure will have a LONG lead time towards wider adoption. Fund feedback loops are simply too long and the outcomes too opaque for other firms to take the career-risk involved with adopting an innovative model.

2019 Predictions

Mega Funds take a Mega Hit

The dominant story in VC over the past year has been the rise of mega-fundraises for both companies and firms. SoftBank’s $100 billion Vision Fund was the spark that started off this explosion, but other big players in the space were quick to follow suit by raising ever larger funds of their own. This trend was also fueled by the combination of a very strong bull market (except for Q4) and an environment of still relatively low-interest rates where major LPs were starved for returns and turned towards alternative assets. I think the writing is on the wall that both of those exogenous factors will be disrupted in 2019 with rising interest rates and growing global economic uncertainty. Within tech, I think we will see a good portion of companies that have raised “mega-rounds” really struggle. There are some companies, like Uber, that have a strong, but costly, business model that can bear to raise hundreds of millions of dollars. However, I do not believe the majority of companies raising these mega rounds fall into that category. They will face the same struggles that all overcapitalized startups face, a lack of fiscal discipline and an inability to meet unrealistic expectations. I predict that the combination of both this financial environment change and the underperformance of many of these companies will lead to a significant pull back in terms of firm fundraises as well as smaller company funding rounds from the all-time peaks of 2018.

Crypto starts showing signs of life

The second biggest story of 2018 was that Crypto got absolutely clobbered. Like I am talking demolished. Basically crypto took the hit that got Jadeveon Clowney drafted first overall (and which still causes him to be incredibly overrated despite being a mediocre pro-football player). The price of Bitcoin (a pretty good barometer of the space in general) started at $13,850 on January 1, 2018. On January 1, 2019 it had fallen to $3,747. A rough year to say the least… I think the majority of us in tech saw a correction coming in 2018 after the irrational exuberance of 2017, but few that I know of predicted it would be quite so dire. Overall, I think this will be a very good thing for the ecosystem. The story of 2017 and 2018 was easy come, easy go. I predict that the story of 2019 be that the cream rises to the top. It was too easy to raise money in 2017/2018 and greedy/lazy/bad actors flowed into the space until the bubble popped. Now that some of the sheen has worn off, I think the smart, passionate true believers will be able to hunker down and get to work without the distraction of the mania. I predict that 2019 will still have its ups and downs, but that we will see the overall health of the ecosystem steadily start to re-accelerate. As an indicator of this, I believe that Bitcoin will end 2019 above $8,000 (complete thumb in the air prediction here).

Tech liquidity gets weird

Liquidity has always been an issue in tech, but the trend of mega funds/rounds has only exacerbated this as companies have chosen to stay private for longer. There is an absolutely stacked lineup of potential IPOs this year including the likes of Uber, Lyft, Palantir, and Slack, just to name a few. This liquidity will be great for investors and founders and will pump capital back into the ecosystem as early employees start angel investing into nascent startups. Unfortunately, I predict that due to global economic headwinds and rising negative sentiment towards tech companies the majority of these newly public companies will underperform in the public markets for the year. The silver lining to all of this is that I believe efforts will continue to find new and interesting paths to liquidity for investors and entrepreneurs including smart secondaries and things like the Long Term Stock Exchange.

Startup I am most excited about: Lambda School

I thought it would also be fun to highlight the startup (excluding any that I have any sort of business relationship with) that I am most excited to watch in 2019. That company is definitely Lambda School! Lambda School was founded by Austen Allred and is a 30-week coding bootcamp that is absolutely free to start. Lambda makes its money with Revenue Sharing Agreements as students graduate and get new jobs. I have written about structures like this before and I absolutely love the incentive alignment that they provide! The more you get paid as a graduate, the more that Lambda makes in revenue for teaching you. I have been on the lookout for new innovative companies like Lambda in the edtech space and I think they fulfill a very interesting niche by equipping people for the future of work in a low upfront cost, incentive aligned manner.

Lessons learned from Living Legends of Venture Capital

Just over a week ago, I had the opportunity to attend the 44th annual Venture Capital Institute conference. For three days in Atlanta, we talked nothing but venture. It was an excellent opportunity to network and meet some amazing speakers from the industry. The highlight was getting to meet and learn from Dr. Mort Grosser and Pitch Johnson. Both men are absolute legends in the industry who have been involved in venture capital since the very earliest days of Silicon Valley. Mort was a partner with Kleiner Perkins for decades. Pitch Johnson founded one of the countries first venture capital firms with Bill Draper before forming Asset Management Company which is still in operation today. I had the incredible opportunity to listen to both of these men present their views on the past, present, and future of venture capital. Hearing the collective wisdom from these two men truly was career changing for me. I tried to think about how I could best share their insights with you, and I think the best way is to just let them speak for themselves. Here are some of my favorite quotes from their talks.

The motto of Silicon Valley is “Why not?” As an investor, you have to think about the potential if everything goes right. At the end of the day, you need to rely on your gut feeling.

The secret ingredient for Silicon Valley is it’s status as the world’s longest sustained meritocracy.

If you really want to be productive in meetings bring a shoe box. Write all the negative words and phrases you can think of such as can’t, wouldn’t, couldn’t, shouldn’t, it’s been done before, etc. Whenever someone says those words, make them put $5 in the shoe box.

Good ideas start flowing when people are tired, hungry, and little bit drunk. In this state they say what they think without a filter. The best ideas come at the end of the night when the paperboy can call bullshit on the CEO. You need an environment where everyone feels empowered to speak up. That is when the magic happens.

Everything in life is a craft. You succeed by practicing it over and over again. The goal in life is to do something so well that it becomes art.

90% of success in Venture Capital is forcing your left brain to work together with your right brain.

Creativity isn’t something you can force. Creativity is about tearing down the barriers to allow your inner creativity to come out.

Here are the assets you need to create the next Silicon Valley: access to excellent institutions of higher education, access to capital, high quality entrepreneurs, horizontal society/meritocracy, acceptance of new ideas/allowance for failure.

My thought on the current venture capital bull market is that we have seen this before. Booms are caused by “lemmings”. Lemmings are people that just follow what others have done to be succesful without any analysis of their own. Don’t ever compare yourself to others. Evaluate each deal seperately. Every deal is a new deal. Every person is a new person.

Venture Capital is a priviledge and you should never forget it.

In its truest form, Venture Capital is fundamentally about building companies. This is done by investing capital, providing advice and help, and coaching entrepreneurs. Coaching is about providing emotional support and encouragement.

Venture capital is half art and half science.

Always maintain your sense of integrity. If something doesn’t feel right, be very cautious. Develop your standards and then live up to them.

Here are the keys to venture capital. Much of the art of venture capital involves making decisions about people. Don’t fail to make a numbers based analysis. Cultivate judgement about the meaning behind those numbers. Listen to your gut. Base all of your actions on a high degree of personal integrity.

The biggest problem in venture capital is people trying to make money without doing anything. Both investors and entrepreneurs today are trying to get rich first and build something important second.

The way to strike a balance between too few and too many deals is to think about how often you can call/visit a company. If you aren’t calling/visiting every company you are working with every couple of weeks, you have too many deals. Each person should not have more than 4 or 5 deals that they are working on. Half of your time should be spend on working with existing companies, half of your time should be spend looking for new deals.

At the end of the day, the people that make the value in a startup are not the entrepreneurs, it is the employees, as a director, you owe something to the employees. You owe them integrity.

Here is a rule that will bring you success in both marriage and business. No lies. Including lies of omission.

As a director you have a responsibility to know as much as absolutely possible about the industry you are in. Put in the time!

When you walk into a board room, you owe knowledge and integrity to the company and its employees. You are limited in the number of companies that you can possibly work with at any given time by this paradigm. Max number of boards that anyone should sit on is 4-5 at a time.

The most important things about being a director are being knowledgeable about the space the company is in, always acting with integrity, and being willing to just show up (even when it is difficult or late in the night).

To be successful in venture capital, you have to be intentional about believing that one person can be right and the rest of the world can be wrong.

Venture capitalists hurt companies by not being honest, not knowing enough, being in too big of a hurry, only caring about the problem instead of focusing on the solution, and being too greedy.

Combining cultures after an acquisition is extremely difficult. The only way to successfully merge companies is person by person. It is like surgery and it will require all of your time and energy to make it work.

DON’T take a board seat unless you are willing to become OBSESSED with the space the company is in!

Podcast of the Week: The Jordan B Peterson Podcast: Episode 59 - Bjørn Lomborg

Last week I traveled to Atlanta to attend the 44th annual Venture Capital Institute conference. It was a fantastic time filled with some life-changing lessons. My desire to bundle those lessons up into a digestible blog post has delayed my usual timeline a bit, so expect a post on that early next week. In the meantime, I thought I would share one of the most interesting podcasts I have heard in a long time. Fair warning: this podcast has little to do with tech and even walks dangerously close to the line of politics. That being said, I think it is hugely important that people listen to this episode to hear about the very compelling research that Dr. Bjørn Lomborg and his team at the Copenhagen Consensus Center have compiled. Lomborg and a team of Nobel Laureate economists analyzed the UN’s current development goals and force ranked them by capital efficiency. Basically, they looked at for every $1 dollar invested into each development goal, what will the economic impact be. There are a few results that I am sure will surprise you! I love this pragmatic methodology and the way it allows policy makers to more effectively allocate resources. Similar to startups, it turns out that capital efficiency is very important for global development too (had to tie it back somehow!). Enjoy!

Overview of findings.

Podcast of the Week: Invest Like the Best, EP. 112 - Building Pick and Shovels, with Hunter Walk

I know, I know. I just did an episode from Invest Like the Best. I really wanted to do something from another show this week to maintain some semblance of variety, but this episode was simply too good to pass up. In it, Patrick interviews Hunter Walk about his early stage investment firm, Homebrew, his past experiences working at Google, as Head of Product at Youtube, and on the videogame, Second Life. This episode is chalked full of fascinating stories and actionable insights. I especially loved hearing about how Hunter helped solve copyright issues at Youtube and Hunter’s questions he asks every entrepreneur. Don’t miss this great episode!

Squirrel hunting is a lot like building a startup

A little bit of a stretch, I know, but stay with me here.

Thanksgiving is a BIG deal for my wife’s family. For the past 27 years, they have hosted 30+ people for Thanksgiving dinner (lunch) in their 200+ year old house. We fill the living room with tables and chairs and everyone squats down wherever they can. The menu is pretty outrageous in order to accomodate so many people. This is a far cry from the Thanksgivings I was used to growing up where it would just be the 5 of us in my family up at our cabin in the mountains reading, relaxing, and watching football.

Something else that is different with my wife’s family is Black Friday. I never used to do anything special for Black Friday, but my wife’s family has a very specific set of traditions. Every Black Friday, Caitlyn and her mom will go on and all day shopping spree while the guys of the family go hunting. Now I did not grow up around guns or hunting so the experience of tagging along is all very new to me. This year as we were going squirrel hunting, I was struck by some of the similarities between hunting and starting a successful technology startup. Here are a few things that are comparable.

Squirrel Dog (Market Validation Research)

As with any start up, hunting is a team sport. One of the keys to successfully squirrel hunting is have an aptly named Squirrel Dog. A Squirrel Dog is a dog that is trained to, you guessed it, go find the squirrels. They will go off on their own as you hike around and find the squirrels before “treeing” them by running around the base of any tree with a squirrel barking which both signals they have found something, and keeps the squirrel from running away. I found this behavior very similar to the market validation research that successful companies undertake before even building out a prototype or wireframe. The number one reason why startups fail is due to a lack of market demand for their product or service. By going out of you way you can ascertain exactly where the market opportunity (squirrel) is and devise an appropriate plan of attack.

Gun Choice (Product Market Fit)

Once your dog has treed a squirrel, you need to make sure you are equipped with the right gun for the task. Now I know next to nothing about firearms, but I do know enough to understand that you don’t go squirrel hunting with a .50 caliber rifle. Similarly, it doesn’t matter how perfectly poised for disruption a market is if you don’t have a product that truly addresses the problem people are facing. Now finding product market fit can often be a lot more difficult then picking the right gun for the job, but in either situation picking the wrong tool for the opportunity will leave you unsuccessful.

Taking The Shot (Execution)

Getting the squirrel in your sights with the proper gun is really just the start. If you aren’t able to execute the shot to perfection, it nothing else will matter. In venture, there is a debate on whether a market or a team is really what drives success. There are strong arguments for both, but as a seed-stage investor, I cannot help but believe that the right team is crucial. Even with the more ripe market and the perfectly formulated product, the startup could still be unsuccessful if the team is unable to execute.

Retriever (Business Model)

Assuming you are skilled enough to hit your target, there remains the question of how to extract your prize from the underbrush. You could hike through and get the remains yourself, but this would be a very manual process. Instead, most hunters will use a dog to retrieve for them. For startups, a scalable business model is absolutely essential for any type of meteoric growth. Many processes can be accomplished manually, but without some sort of business model to provide leverage, the company will be hamstrung as they struggle to meet the needs of their customers. Finding product market fit is the first priority for any entrepreneur, but developing a scalable business model is a close second.

Hunting Seasons (Market timing)

Even with the perfect market, an excellent product, a great team, and a scalable business model, you might fail simply because the market is not ready for your solution. Market timing is one of the hardest things for any startup to plan for because it is out of their control and requires founders to adjust opportunistically. You can find example after example of great ideas that failed because the supporting technology was just not there yet. Uber could never have existed before the proliferation of smartphones and GPS technology gave them the ability to put a dispatcher in anyone’s pocket. Other times changes in regulatory requirements can kill a business just as it is taking off. Just ask Juul. Timing is similarly important in hunting. To maintain a sustainable number of animals, hunting is only allowed in very specific seasons. You could face serious repercussions if you are found hunting the wrong animal at the wrong time.

Told you I could (mostly) make it work.

Podcast of the Week: Invest Like the Best, EP. 32 - The Art of Tracking, with Boyd Varty

This episode is from over a year ago, but it is has definitely been one of the most impactful and transformative podcasts I have ever listened to. Invest Like the Best with Patrick O’Shaughnessy is my current favorite podcast and every episode is a must-listen as soon as it is published every week. This particular podcast with Boyd Varty about living the life of a tracker and bringing a restoration mindset to everything you do has made a particular impact on my life. It is the podcast I have shared the most with others and I just finished my third listen through on my drive back to Virginia for Thanksgiving. Be sure to give it a listen and if you are interested in hearing more from Boyd, check out Part II and Part III.

---

I mentioned that this podcast has had a big impact on me. It has served as an impetuous to adopt a more process/journey focused mindset instead of obsessing about goals and outcomes. Another great resource that has helped shape this mindset is the book Chop Wood, Carry Water. It is a only about 100 pages long, but I am not exaggerating when I say reading it has changed my life for the better. It is another Patrick O’Shaughnessy recommendation and if you would like to read it, you can pick up a copy here.

One-Thousand Thanks

I have always loved Thanksgiving. Great times with family. Lots and lots of great food. And most of all, some time set aside to step back and reflect upon everything you are grateful for in life. My father is Norwegian and one of the common phrases you’ll hear in Norway is “tusen takk”. Tusen takk literally translates to one-thousand thanks and is how a Norwegian might say “thank you very much”. I have always enjoyed the image of someone thanking you emphatically by saying “thank you” one-thousand times over and over again. As I write this post out at my father-in-law’s office (no internet at my wife’s childhood home in rural Virginia. I know, I think it is crazy too, but they really don’t seem to mind), I can’t help but think about the thousand things I have to be grateful for this Thanksgiving season. Here are a few of the things I have been thinking about most.

My Family

I am incredibly lucky to have the family I do. I have the best wife in the world and the past year of our marriage has without a doubt been the greatest year of my life. My family has always been incredibly supportive and they are still always there for me even though we no longer live close to one another. My brothers are my best friends. My dad is my role model. My mom is the rock that holds our family together. I am also so incredibly grateful for my in-laws who have welcomed me into their family with open arms.

My Faith

This isn’t something I talk about a lot on this blog because of its personal nature, but I would be making too big of an omission if I left it out of this post. My faith is the foundation of who I am and it is my guiding light through thick and thin.

Our New Home

My wife and I are so grateful for the new home we have found in Columbus. We have really enjoyed our short time in the city and cannot overstate how much we have felt welcomed with open arms. I had never spent any meaningful time in the Midwest prior to our move, and I have been struck time and time again by the kindness of people living here (and the deliciousness of their food…). It is truly a privilege to be part of such a young, growing city. In Columbus, there is a palpable optimism that is wonderful to be a part of. People here truly believe that tomorrow will be better than yesterday (which is not something that can be said about many parts of our country, especially our previous home, Washington, DC.)

My New Job

The reason I moved my family half-way across the country to a state we had never been before was to take a job as an Analyst at Rev1 Ventures. I took this leap because I wanted to be a part of building the next great tech ecosystem and because I wanted to help support entrepreneurs that were creating truly impactful companies. I couldn’t be happier with the progress I have made so far. There is still a lot of work to be done and I am not anywhere close to accomplishing what I have set out to at Rev1, but I am so grateful for the opportunity I have to work at an organization like Rev1. I am grateful to work alongside some incredible colleagues who all believe in the power for entrepreneurship to fuel the American Dream as much as I do. I am grateful that I have the opportunity to support entrepreneurs that are genuinely trying to change the world. I am grateful that my Sunday evenings are a time of eager anticipation.

You

This blog started out as a tool in my VC-job-search utility belt. It was a way to demonstrate that I was using my free time to be thoughtful about the space. It has become so much more than that to me and I am truly grateful for everyone that takes time out of their day to read through my musings (sometimes ramblings) on the world of venture capital and tech startups. I have been really happy with the cadence I have worked up to and really believe that my writing and analysis improves with every post. Thanks for reading!

These are just a few of the things I am most grateful for. If I really listed out everything that I am thankful for, I would still be working on this post come next Thanksgiving. I know this post is a little bit outside the norm, but I hope that you enjoyed it.

Have a Happy Thanksgiving with you and yours!

What I have learned about negotiation

Han could use some lessons on modern negotiation.

Full disclosure: not much. But I have picked up a few things here and there that I thought were worth sharing.

Put the gun in the other person's hand

I heard this principle on a podcast. I think it is a Mungerism but it could also be a Buffetism. The concept is to let the other person drive your negotiation. Put them in a position of power and just ask them to do what they think is fair. Two reasons for this. One, this can often lead to better outcomes as the person you are negotiating with tries to live up to the trust you have put in them. Two, if they take advantage of the situation to screw you, you now have a crystal clear window into their character and can reevaluate your relationship moving forward. you now have someone you trust to work fairly with you in the future or you have someone who you know is only in it for them selves. Either way you're better off.

Negotiate from the ground up

I take this from a wonderfully simple post from Max Niederhofer on what he has learned about negotiation. I loved this post so much I hung it up on my wall! The strategy is commonly sited in negotiation how-to's, but bear's repeating. The key takeaways are to treat people on the other side of the table like the humans they are and that the more you prepare, the more likely you will get a good outcome. Start by knowing exactly how much you want to buy/sell something for. Then start 35% higher/lower in the applicable direction. Move 20% closer. Then 10% closer. Then 5%. Finally throw in something non-monetary that you have identified earlier that could be seen as a "win" for the other party. The decreasing intervals of this framework will signal you are getting closer to your break point. The kicker at the end will make the other party feel as if they have walked away winners. I very much align with Max’s view that negotiation is not winner take all. The key is to act emphatically and come to a scenario everyone around the table can feel comfortable with.

Make them blink

The most audacious and least widely applicable of the three strategies in this post. I take this from the podcast I highlighted earlier this week with Nick Kokonos. Nick describes his most recent book negotiation. He got together a bunch of publishers on the call (they had all agreed to this before hand so weren't completely blind sided.). He then starts off at a LUDICROUS number and slowly starts counting down. Eventually someone blinked at a point 2-3x what they were willing to offer one on one. This high pressure situations ramps up the fomo (fear of missing out for my non-millennial friends) faster than a Friday night in high school. Eventually someone will blink and offer you a good price because they are worried that someone knows something they don't since the price is so much higher than they were willing to offer initially. This strategy only works when you  a) are bargaining from an existing position of strength b) are able to get several similar buyers together in an auction setting and c) the negotiation is more transnational in nature and less about building a lasting relationship. 

One important caveat. This should all be taken with a healthy dose of salt grains. I am early in my career and haven't exactly been negotiating international joint developments protocols in my free time. The most high stakes negotiation I face on a regular basis is figuring out where to go to dinner with my wife (we are one of those couples where the negotiation centers more around wanting the other person to decide than actually feeling strongly about somewhere in particular.)

That being said, each of these strategies really resonated with me and when I am negotiating the name for Mars colony 3, these will be the paradigms I lean on.

Podcast of the Week: The Tim Ferriss Show #341: Nick Kokonas

I love podcasts. They are my absolute favorite way to consume content. The great thing about podcasts is that they are the only form of content that gives you your time BACK instead of taking it away from you. Since you can listen to podcasts speed up and while you are doing something else, you are able to squeeze more hours into your day. I typically listen to 2-3 hrs of podcasts a day during my commute and while doing chores around the house. These podcasts are a great source of learning and give me the super power of having 27 hours in every day.

My favorite part of listening to podcasts, is sharing them with others! I thought it would be fun to start sharing my favorite podcast from the week with my readers. I’ll give brief overview of the podcast, topic/guest, and I will embed the podcast so you can enjoy it too! I am planning on doing a Podcast of the Week post once a week (surprise, surprise). Let me know in the comments what your favorite podcasts are and if you have any suggested shows for future weeks!

---

This first podcast is without doubt one of my favorite podcasts of all time. In episode #341 of the Tim Ferriss show, Tim interviews Nick Kokonas about hist story from commodity trader on the floor of the Chicago exchange to co-owner of one of the most successful high-end restaurant groups in the country, The Alinea Group. The thing I love about Nick’s story is that at every turn he questioned the status quo and tried to come up with how things SHOULD be done instead of just how they had always been done in the past. It is a refreshing mindset and a thoroughly enjoyable episode. Do not miss this one and do not be scared away by it’s hefty length, it is absolutely worth it!

Would you rather get rich or change the world?

As part of my entrepreneurship concentration in college I took a few classes on entrepreneurship and venture capital with a professor that had been both a successful entrepreneur and venture capitalist. I thoroughly enjoyed his brusque and brutally honest style (he was known to carry around a yellow football penalty flag that he called his “Bullshit Flag” and was he did not hesitate to throw it whenever people got a little too fresh with the truth). One of the common questions he would ask us to ponder is would you rather invest in an entrepreneur interested in getting rich or changing the world. Invariably whenever he asked this he would then have us raise our hands depending on our answer.

I was always in the minority (or sometimes the only one) that said they would rather invest in an entrepreneur that was trying to change the world.

His argument is that the world of venture capital is tough and that only the fittest companies survive. If an entrepreneur isn’t dead set on getting rich, they won’t prioritize growth the way that you, as an investor, need them too. A focus on changing the world to stop short of the best financial outcome when it is just over the horizon. My response was always that there are a ton of ways to accrue wealth in this life and that only entrepreneurs that are truly passionate about solving a problem in the world will succeed. I believed that the wealth would come from the offshoot of that success, just not as its primary driver.

Of all the things I learned in this class, it was this conversation that always stuck with me the most (though I doubt I will ever forget his bullshit flag either!).

Would you rather get rich or change the world?

This is a question that I have been pondering and discussing a lot recently as I have had the opportunity to work with founders that clearly come from both camps. There are a lot of strong arguments people make for supporting the team trying to get rich. They will act in alignment with our goals as investors. They won’t settle for a less than excellent outcome. They won’t get pulled in different directions by their altruistic goals.

And at the end of the day, I have to admit I agree with a lot of the get rich argument. It makes sense from the perspective as an investor with a fiduciary responsibility to their LPs. And anyone who knows me will tell you that I am as much of a free-market capitalism loving libertarian as the next guy.

But I can’t help believing that the best investments are made in founding teams that truly believe that it is up to them to change the world. Teams that have experienced the problem they are fixing personally and who genuinely think that if they don’t solve this issue, no one else will.

I want to invest in the next Elon Musk, who thinks that it is his personal responsibility to make mankind an interplanetary species, rather than the next Jeff Bezos, who saw the online trend before anyone else and took advantage of it to build one of the world’s most dominant businesses. Now obviously investing in either the next Musk or Bezos would be an incredible investment, but the choice is clear to me.

I want to invest in the dreamers that have a mission and a purpose permeating everything they do. I want to invest in the builders that believe that tomorrow will be better than yesterday and that no problem is insurmountable. I want to invest in the founders that will never give up because they can’t stand the thought of letting the problem they are trying to solve effect one more person.

I want to invest in people trying to change the world.

If they win, we all win.

An Introduction to Opportunity Zones

My wife and I are celebrating our 1-year anniversary this weekend with a quick getaway to somewhere yet-to-be-disclosed (I planned and surprised her with our honeymoon and now we plan to switch off for our anniversaries moving forward). As such, this week I will be doing a somewhat abbreviated post. Don’t let the brevity fool you though, the topic of Opportunity Zones is one that I am spending a lot of time researching and thinking about. This piece of legislation passed as part of the 2017 tax reform has some exciting implications for investors and low-income communities In the above video, Steve Glickman co-founder of the Economic Innovation Group (the lobby group that pushed for this legislation) outlines what exactly opportunity zones are at a high level.

(Side note: I read a very interesting article on why some of the measures of growing inequality and lack of financial prospects in this country may be overplayed that you may find interesting. My view is that there are definitely structural problems that need solving, but it requires a more nuanced approach than sometimes suggested. I think Opportunity Zones (OZs for the cool kids) can be that approach. Anyways, back to your normally scheduled running train of thoughts from inside of my head)

My understanding of how Opportunity Zones work on a high level (not tax advice):

• Investors can defer taxes on existing capital gains by investing those gains into an Opportunity Zone fund for up to 9 years

•   If those gains are held in the fund for over 10+ years, the investor does not have to pay any taxes on the additional gain those funds have realized over the life of their investment

The purpose of this initiative is to spur economic development in emerging market areas within the US. The incentive is investment type agnostic so venture capital investors can take advantage of these incentives alongside other investors such as real estate and private equity. The IRS just released some very investor friendly initial guidance, but there are still some questions that remain to be answered.

If you want to learn more, below are some excellent resources that I have been using to get up to speed on the potential opportunity (come on you knew I was going to do it at least once. Be impressed I showed this much restraint).

Economic Innovation Group - The lobby group that pushed for the OZ legislation. Their site is a great resource for the latest developments for the program and also has some interesting resources (including an OZ map that is weirdly fun to play around with).

Hypothesis Ventures - A new VC firm that was formed with the sole intention of investing in opportunity zones. Their website is a great resources as well as their podcast and some of the press coverage they have been receiving

Upside - One of my new favorite podcasts highlighting startups outside of Silicon Valley (sound familiar). They have a great episode with the founder of Hypothesis.vc that is definitely worth a listen!

Venture Capital and the Red Queen

This past week I came across a fascinating concept in evolutionary biology called the Red Queen Hypothesis. The Red Queen Hypothesis proposes that organisms must maintain a perpetual state of adaptation and evolution, not only to gain a reproductive advantage against rivals from within their own species, but merely to survive in an ever-changing world filled with other constantly evolving organisms. The Red Queen Hypothesis paints evolution not as an inevitable outcome of generation after generation of survival of the fittest, but as a species-level arms race of life or death.

Evolutionary Biologist Leigh Van Valen developed the Red Queen Hypothesis as a potential explanation for why a species’ extinction rate is relatively flat over time. Under the core tenets of the theory of evolution, one would expect that as species evolve over time, the chance of them going extinct would diminish, but empirical evidence has shown this to not be the case. Van Valen named his hypothesis after the Red Queen from Lewis Carrol’s 1871 novel Through The Looking Glass (sequel to Alice’s Adventures in Wonderland). At one point in the book, the antagonistic Red Queen tells Alice that:

“Now, here, you see, it takes all the running you can do, to keep in the same place.”

Exhibit 1. The wily and cunning fox. Notice the hallmarks of an evolutionary predator. Pointed ears, sharp claws and a stylish three piece suit with occasion appropriate accessories.

Exhibit 2. The swift hare. Large ears have developed to be able to sense the slightest sounds. Evolutionary biologists maintain that the true reason behind the hare’s insistence on wearing gloves and proclivity to ask “whaddup, doc?” were lost a millenia ago.

This idea of running just to stay where you are is an apt metaphor for the necessity of an organism to constantly evolve just to maintain its current place in the evolutionary order. The most obvious example of this in nature also involves running. Imagine the perpetual evolutionary dance between the wily fox and the swift hare. The hare constantly evolves to become faster as the slowest hares are removed from the gene pool by the hungry fox. The inverse happens to the fox, with their slowest numbers dying out from not being able to get enough food to eat. This plays out as a balancing act of co-evolution where both foxes and hares will get faster and faster over time. If either species stops keeping pace in this evolutionary arms race, it will either die out or be forced to adapt in other ways. As long as both the fox and the hare keep at roughly the same pace, their relationship will remain locked in place.

The world of technology startups and venture capital has many of the hallmarks of the Red Queen Hypothesis. Incumbents and disruptors are often locked in a battle of the hare and the fox. As soon as either starts slowing down, their demise is relatively swift. Companies need to constantly be reinventing themselves to stay on top. This is easier said than done. If you look at the tech titans of 20 years ago, only Microsoft has been able to maintain its status as one of the leaders in the space (and even then it is no longer as dominant as it once was). It will be interesting to look back in 20 more years and see whether the Amazons and Apples of the world are able to maintain the current status they enjoy. Some might point to the incredible power that today’s incumbent companies have, but at one point it was similarly hard to imagine that seemingly invincible tech titans like AOL and Xerox would ever fall from grace.

Startups have a biological imperative to constantly be growing and innovating. If they don’t, they will die just as surely as hares would if foxes suddenly evolved to be born with jetpacks. The other day I saw a well-regarded venture capitalist compare startups who take venture funding to sharks. Sharks are only able to “breathe” by constantly swimming so that water passes through their gills and can be absorbed. Constant innovation is similarly the only thing that keeps startups flush with oxygen. You may argue about whether this is the way that things should be, but it is hard to argue with the fact that once a company gets on the venture train, it is exceedingly difficult to get off at the next station. As a founder, you should understand that an ability to evolve and adapt is table stakes. It is not enough to build one great product. You need to constantly and consistently be improving and building better and better products.

How can this be done? Are all companies doomed to fail at the slightest slip up? What can a company do to keep on innovating?

Luckily our world is in a constant state of change which means that there will always be new opportunities for companies that truly build themselves to constantly innovate. The path to constant innovation is surprisingly straightforward, but only an extremely small number of companies ever execute on it over the long term.

The first step is to create a diverse and high quality talent pipeline that will continuously refresh your company with new ideas and perspectives. A focus on diversity must start on Day 1, because if you, as a founder, don’t start focusing on diversity within your first 10 hires, it will be extremely difficult to start doing so after our first 100 hires.

The second step is to keep your eye on the horizon. Reinvest in yourself to stay on the bleeding edge of innovation. Don’t rest on your laurels and expect that what worked yesterday will work tomorrow. Always be on the look out for new opportunities recently enabled by social or technological change. If companies only tried to build upon what made them initially successful, Amazon would be the world’s best place to shop online for books (but nothing else) and Netflix would be the first place we would all go to rent our favorite DVDs through the mail.

The third step is to think for the long-term, without losing the ability to block and tackle over the short term. Apple is the master of this. They never fail to deliver on their quarterly objectives, even as they maintain a long-range focus on the next quarter century. Their obsessive focus on long-term planning has allowed them to build products that people will love to use today, even as they incorporate the building blocks of what their future products will be 10 years down the road. When Apple first built the fingerprint scanners into iPhones, they were preparing us for a day when our face would be the key to our most valuable data. If you pay attention, Apple has slowly but surely been incorporating more and more health and AR focused capabilities into their products. Don’t be surprised when new products with each of those categories at the forefront are released in the coming years.

The fourth step is to think based on first principles about the way things should be done, not the ways that they are done today. The insurance industry has been notoriously slow to embrace new technology and innovation. There are some structural advantages insurance companies have that make it a great sector to be a part of, but these same structural advantages allow them to sometimes forego evolution. In Columbus, we have seen the birth of next-generation insurance companies like Root Insurance and Beam Dental that underwrite risk based on measured activity, instead of age and demographic characteristics. Constantly ask yourself why things are being done a certain way and how should they work based on your understanding of people and available technology.

And that’s all it takes. Not so hard right? The difficulty comes in execution… and the fact that everyone else out there is going to be the fox nipping at your heels. Success is possible, but it won’t ever be easy.

Run fast.

Run hard.

Run hungry.

And you might just stand a chance.

---

How to Invest Like the Best of the Midwest for the Rest

I had the privileged of seeing Andy Jenks, Partner at Drive Capital speak last week at Ohio State’s Venture and Startup Summit. Drive are the big dogs in town with over half a billion dollars in capital and investments into some of the top companies in the Midwest. I really enjoyed Andy’s speech and thought there were some insightful nuggets in there that were worth sharing.

The Midwest startup ecosystem is flourishing right before our eyes…

Now this is something Andy and I agree upon! The Midwest has all the ingredients to be a successful startup ecosystem. High quality universities, low-cost of living, and a strong corporate base combine to form a potent cocktail for growing new enterprises. The Midwest is also slowly, but surely starting to get some startup momentum. Successful startups inject new capital into an ecosystem and unleash the next generation of entrepreneurs in that area. In 2013, ExactTarget was acquired by SalesForce for $2.5 billion. In 2017, CoverMyMeds was acquired by McKesson for over a $1 billion. In 2018, Duo was acquired by Cisco for over $2 billion. Acquisitions like these will seed the next wave of great startups in the region.

… but investors on the coast still have a bias against the region despite their claims to the contrary.

This was disappointing to hear, but maybe not completely surprising. Despite increased media attention and success story after success story, Jenks claimed that coastal investors are still not willing to give Midwestern startups a fair shake. The cynical part of me would call this blatant geographic bias. The more optimistic part would point to the fact that venture investing is a relationship business and being located closer to the startups you are investing into means you can better support the entrepreneurs you are partnered with. The truth probably lies somewhere in the middle. The fact is that if a startup wants to raise serious institutional money from the coasts, they need to have better metrics and more traction than a similar startup in the bay area or New York would need to raise the same amount.

Getting the most out of your board

I love this one. Andy mentioned that he tells all of the founders of boards he serves on to “give him homework.” I think this is a great mentality from a board member, but even more so I think this should be a mindset that all founders should adopt. You don’t have to spend much time in the space to see that unhealthy founder-board relationships are pretty pervasive throughout the startup landscape. Too often founders look at their boards in an antagonistic light. This is a recipe for disaster as founders begin to withhold information from the board and then by the time these issues surface, it is too late for the board to help. The best boards have a symbiotic relationship with a company’s founding team. The board’s purpose is to support and advise the founder, not hound them or tell them how they can do their job better. I love the accountability that assigning each board member a task to complete before the next meeting brings. I think this is a great way to keep your board aligned and engaged, while generating value for the company from the most knowledgeable, experienced, and well-connected people at the table.

Focus on the market first

One of the most interesting parts of the presentation was Andy’s discussion about how Drive develops their investment theses. Drive takes a very market-driven approach to investing. They spend a lot of time building what they call “market maps”. These market maps chart out all the different aspects of a particular market and help Drive determine how they want to attack a particular market and what sort of companies they would be interested in investing in. There is a debate in venture about what matters more, the market or the team. What Drive would tell you is that markets need to be big enough to support the sort of outsized return they need to generate on their successful exits. Proponents of the market first approach will also point to the fact that a good team in a bad market will not be successful, but a bad team in a good market may still be successful despite themselves. My response would be that the absolute best teams have the ability to build markets that never existed before. My personal view aligns much more closely to that of Peter Thiel’s strategy, find a niche that you can attack, build a defensible position, and then build the market from there. To be honest, I think that much of the debate depends on what stage you are investing in. For larger, later-stage shops like Drive, it makes 100% sense to focus on market sizes because when you are deploying hundreds of millions of dollars at a time, every company you invest into needs to have a market large enough to support a billion (or even multi-billion) dollar enterprise. When you are investing in the the earliest stage companies, I believe it makes more sense to invest in the best possible teams. The best teams will be able to pivot when others won’t and may even be able to build a multi-billion dollar market where one never existed before.

There are things we need to still do better on

One of my favorite parts of Andy’s speech was that it was relatively pragmatic in nature. A lot of the presentations around the Midwest startup ecosystem can take on a very ra-ra tone, which makes sense. The great companies being built here continue to be overlooked and it is important to bring attention to them and the growth of the region as a whole. However, as promising as the Midwest’s trajectory is, not everything is perfect. Jenks highlighted a few ways that we need to improve if we really want to take the next step towards being a bonafide startup ecosystem. He urged investors and entrepreneurs alike to aim higher, raise more, and attack bigger markets. I like this. I will be the first to tell you that venture funding is not for everyone, but if it is right for your company, you are joining a game of fastballs and home runs, not grounders to left field (is it weird how many baseball metaphors I use when I am not even a big fan of the sport? I need to start working in more soccer references. Something to think on…). I want to invest in companies working on big ideas. Capital B BIG ideas. I want to invest in companies working on solving world hunger, traffic, cancer, the melting ice caps, and water shortages. And I think that the Midwest is the ideal place to build these sort of companies.

We need only to dream a bit bigger.