Sports, Startups, and the Competition Trap

It has been an interesting week from a sporting perspective. A week that has made me reflect on my relationship with sport and with sport’s relationship with life.

Now I am a big sports fan in general, but my one true sports love has, and will always be, Arsenal FC. My dad was an Arsenal fan ever since he was a kid and I had little say in the matter with some of my earliest ever memories involving watching Arsenal games with my dad. To anyone who knows soccer, you will know what a long, strange journey being an Arsenal fan so often is. This week has been no exception.

It started last Sunday with a painful tie at home against Brighton. This was a horrible result which sealed our fate to finish 5th in the table and miss out on a coveted top-4 spot and automatic entrance into next year’s Champions League.

But not all hope was lost! On Thursday we played Valencia in the second leg of the Europa League semi-final, winning 4-2 and booking our ticket to the Europa League final at the end of the month. Besides being Arsenal’s opportunity to win our first European trophy in 25 years, the game also represents another chance to get into next year’s Champions League, with the Europa League victor always being granted automatic access.

Today, we won out 3-1 away to Burnley in a game that contained little significance other than helping our star striker, Pierre-Emerick Aubameyang, get the goals necessary to win this year’s Golden Boot trophy (awarded to the league’s top goalscorer).

The rollercoaster week did not end there. This is just covering Arsenal’s exploits on the field! If you are any sort of sports fan at all you will have likely heard of Liverpool and Tottenham’s exploits in the Champions League this past week. Both teams came from huge holes to win their respective semi-finals in spectacular fashion. Their fans and the sports world at large were jubilant. I was crushed. You see Liverpool and Tottenham are two of Arsenal’s fiercest rivals. Especially Tottenham.

And I just could not stand to see them win and their fans happy. It ate me up inside.

Now I am not overly proud of this negative mindset, but rooting against your rivals is a fundamental part of sports. It underlines a certain masochism that comes along with being a sports fan.

You are really only happy when your team wins and, by definition, most teams won’t win trophies each year. So you are setting yourself up for failure right off the bat. Even if you look at the teams who win all the time, expectations are so incredibly high that fans are still miserable when Real Madrid only wins one trophy in a year!

Now I love sports and that isn’t going to change. But being miserable at other people’s happiness was somewhat of a wake up call for me. That is just not how I want to go through life. I think there is a way to be a sports fan without the negativity. Focus on enjoying your team’s journey. The highs and the lows. Try not to focus too much on what everyone else is doing.

And remember, the most beautiful part of sports is that there is always next year.

This competition trap is not unique to sports. It is all too common in everyday life and business. We are so focused on what other people have we don’t appreciate what we have. We look at the 10% of peoples’ lives that they share on Instagram, we assume they live like that all the time, and then we compare it to the 100% of our lives that we are familiar with and can’t help but to feel like we don’t measure up.

Comparison is the death to joy.

Focusing on what other people have will only ever bring you negativity. Either you will be envious of what others have or you will look down on them for not having as much as you.

I think this phenomenon exists in businesses too.

All too often I think businesses get so wrapped up in competition with one another that they forget about the things that made them great in the first place.

Startups are especially susceptible to this. Too often entrepreneurs get overly wrapped up in their competition when that is really an issue for another day. Your competition is not going to matter if you are unable to create a product that solves a fundamental need for your customers. Entrepreneurs, leave competition until you find yourself in a more mature competitive market. No business was ever successful by focusing on what everyone else was doing.

Comparison is natural, but you will lose your way if you give your competitors too much of your attention.

Instead, focus on being the best that you can be. In life and in business.

Focus on the journey, not the destination.

And remember.

There is always next season.

Why Brushing your Teeth is the Secret to Success in Life and Startups

Brushing your teeth is the secret to being successful in life and entrepreneurship. In this post, I am going to tell you why.

Brushing your teeth is not difficult. It is something we all do. But how many people do it the right way? It’s recommended that you brush your teeth twice a day, every day. There is proper form and improper form. I am sure some kinds of toothpaste are better than others, but admittedly, it can be difficult distinguishing which toothpastes are the best given that each and every one is recommended by 9 out of 10 dentists (I hope I never come across the 10th dentist. Must be a terribly negative person).

The key to dental health is consistency. You need to put in consistent effort day in and day out. Brushing your teeth for an hour at a time will not allow you to skip brushing your teeth for the next month.

Now, as much as I appreciate the importance of dental hygiene, this isn’t really a post about brushing your teeth. This is a post about life and business, two areas where we all too often brush for an hour once a month.

The key to success in life is consistent application of effort. This is true for everything from relationships and startups, to exercise and reading. Very rarely will you find yourself in situations where a single herculean effort is all that stands between success and failure. Much more often, slow and steady really does win the race.

When I was working at Carlyle the head of my team had a favorite phrase, “Do your day job.” It means taking care of the fundamentals of your role and making sure that you excel on the little things. Because if you don’t, it tends to be a slippery slope.

I am a big Broncos fan and our newest coach, Vic Fangio, put it well in his introductory press conference. When asked to explain his famous “death by inches” mantra he said:

“If you're running a meeting, whether it be a team meeting, offense or defense meeting, a position coach meeting and a player walks in, say 30 seconds late, 45 seconds late -- that act in it of itself really has no impact on whether you're going to win or lose that week.

"But if you let it slide, the next day there's two or three guys late or it went from 30 seconds to two minutes. It causes an avalanche of problems. That's 'death by inches.'”

The little things matter. Showing up consistently and putting in the effort is what makes the difference between success and failure.

No place is this truer than with startups.

On the startup battlefield, wars are not won in a decisive moment. Startup successes are a culmination of years of executing on the little things and consistently making progress. In tech, that steady progress tends to grow exponentially. This fact is sometimes hard to see among twitter hype threads and Techcrunch headlines, but the saying “an overnight success, 10 years in the making” really does ring true.

Execution is so, so key. A VC I really respect once told me that he would take a team that can execute in a small market over a team that can’t in a big market every single day of the week. Execution really is what sets apart A+ teams from the rest, and in venture you need those A+ teams to get the outcomes that justify the whole model.

You can bet that this hyper-focus on execution is something that VCs pay attention to.

A great example of this is due diligence. Due diligence is a necessary, but slow, and sometimes painful, process for everyone involved. A secret of venture capital that not many may know is that how an entrepreneur conducts themselves during due diligence, is just as big of a signal about whether the startup will be successful as anything else. An entrepreneur that is organized, prompt, respectful, and who has a masterful understanding of the ins and outs of their business during due diligence will likely exhibit that same attention-to-detail and execution mastery when it comes to running their business. Entrepreneurs who are difficult to deal with and get easily frustrated or are dodgy about direct questions about the business are unknowingly flying a pretty big red flag for all investors involved.

So now that we have agreed that consistent effort is the key to success, what is the best way to go about applying that effort?

In the immortal words of Joel Embidd:

“Trust the process”

The best way that you can ensure that you are properly applying just the right amount of force and using the proper technique when brushing your way through life is to build a process and stick to it. Our culture is far too outcome oriented. We operate on a last-in-first-out basis and optimize based on the outcomes we see, even when those outcomes are often nothing more than luck. If you flip a coin 4 times and get tails every time, you would not conclude that a coin will always land on tails. And yet, far too often our personal and professional actions are the equivalent of flipping a coin once, and assuming that every other time we ever flip a coin we will get the same result.

I have had a big focus on process ever since reading the book Chop Wood, Carry Water by Joshua Medcalf. I can honestly say this book has had a bigger impact on my life than any other. The subtitle says it all, “How to fall in love with the process of becoming great.” I highly recommend this book to any looking to lead a more process-oriented life.

My advice for you:

Focus on doing the little things right.

Fall in love with the process of becoming great. If you are able to truly do this, the outcomes will take care of themselves.

Maintain consistent effort instead of bursts of hyperactivity.

Take care of things like your health, your body, your relationships, your spirituality, and your mindset that only need a little bit of time each day to maintain and yet, are all too often neglected. These are things that are vitally important to your success in life, and yet not one of these things can be maintained by brushing for an hour once a month.

And speaking of.

Brush daily with consistent application of effort.

You’ll be surprised where you end up.

The only thing that is permanent is impermanence

I don’t like change.

Never have.

Never will.

I am a creature of habit and I get used to having things be a certain way. Life unfortunately rarely works that way.

I saw the final Avengers movie on opening night and it got me thinking about change. Not the movie itself (though it was amazing), but what the movie represents.

When the first Iron Man came out on May 2, 2008, I was 14 years old in Denver, Colorado. I was in eighth grade, the school year was almost over, and after the summer I would be headed to high school.

11 years and 21 movies later, I watched Avengers: Endgame sitting in a movie theater in Columbus, Ohio watching with my wife.

In that time, I went to high school, college, met the love of my life in the library, had internships in Chicago, Portland, New Hampshire, got a job in private equity, lived on my own in DC, got married, moved with my wife to Bethesda, and finally moved to Columbus to take a job in venture capital.

For someone who doesn’t like change, I sure have done a lot of it!

Maybe it is just a movie and maybe I shouldn’t be so introspective, but in some ways it is hard for me to look at Avengers and see anything other than a monumental shift in my life from adolescence to adulthood.

By the end of 2019, Avengers, Game of Thrones, and Star Wars will all have come to an end. Three stories that have brought me countless hours of entertainment, joy, inspiration, and in the case of Game of Thrones, intermittent spurts of horror (but in the best possible way).

Now I am sure that these worlds will live on in the form of infinite sequels, prequels, add-ons, tie-ins, and everything in between. But it won’t be the same. Because I won’t be the same.

And that is ok.

As much as I don’t like change, I have learned to embrace it.

Life is a story, and if you want your life to be a tale of adventure, you are going to have to put up with a little bit of change here and there. The idea of change will always put a little tiny pit in my stomach, but I can honestly say that I haven’t regretted any of the changes I have made. There have been missteps and pitfalls along the way, but each fork in the road has led me to where I am today, and I wouldn’t trade that for anything.

They say, you overestimate what you can accomplish in a year, but underestimate what you can accomplish in 5.

If my life is any example, that is definitely true. A lot can change over the years.

Especially over the past 11 years and 21 movies.

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I know this post didn’t exactly include earth shattering insights about the tech and venture capital world. That’s the beauty of writing a personal blog. Sometimes you can make it just that. Personal. And on a rainy day after my childhood came to an end, I am hoping you can indulge me.

What was your life like 11 years ago? I am sure a lot has changed for you too!

A Game of Venture Loans

The premiere of the final season of Game of Thrones is tonight. I am sure it will not surprise you to learn that I am a massive fan. I have read the books and watched and rewatched the series. One of the major overarching themes of the show is the zero-sum competition all characters experience in Westeros.

In the game of thrones, you either win or you die.

At a much more benign level, we see this zero-sum phenomenon play out in our world too. One of the reasons I have never been particularly enamored with the public markets is that there is someone “on the other end” of every trade. What this means, is that if you are purchasing a stock, the person who is selling you that stock almost always expects it to go down. If the stock goes up, you win and they lose.

I love venture in part because it is not a zero-sum game. There isn’t anyone sitting on the other end of our “trade.” When done well, there is enough incentive alignment to ensure that no party is succeeding at the cost of anyone else. Investors in funds win when VCs win when entrepreneurs win (say that fast five times). Perfectly in balance, as all things should be <<insert Thanos meme here>> (speaking of Thanos, it’s kinda wild that GoT, Avengers, and Star Wars are all concluding in 2019. I am firmly aboard each respective hype train, but it will be a bit bummer when all is said and done).

The one area that this does not necessarily hold true is getting into a hot round. The dynamics are such that in venture, entrepreneurs are always trying to thread the needle between raising too little (short cash runway) and raising too much (dilution). This means that for a given company, at a given valuation, there is going to be a cap to the amount of money the entrepreneur is going to want to raise. For most entrepreneurs, the worry is getting enough dollars in the door to close out the round, but for the hottest deals with experienced entrepreneurs or in a sexy space, rounds can fill up quickly. This can lead to significant competition between investors trying to get into the round. While not as competitive as Stark vs Lannister, things can heat up pretty quickly.

I should note that I have only ever witnessed this competition second-hand. My experience so far has mostly been centered around investing in the Midwest where the focus is much more on getting enough money around the table than trying to elbow to the front of the line. The simple fact is that there are not nearly the same numbers of investors here as there are in a bay area or a New York. That is changing as more and more people start paying attention to the exciting things being built in cities like Columbus, Pittsburgh, Kansas City and more.

I am thrilled for this increased attention and I think that it will be hugely beneficial to the region as a whole.

My one hope is that midwestern investors can maintain the same collaborative nature that they have cultivated thus far.

Because zero-sum competition is not a ton of fun.

Just ask the Starks.

A Slice of Humble Pie

Photo by Irina on Unsplash

This may come as a shock to you, but I sometimes have a bit of an ego problem. Yes, yes, I know. Hard to believe the guy who likes to hear himself talk so much he puts it into written word and blasts it off to the interwebs on a weekly basis has an ego problem.

Point is, I think I am awesome.

And I think that this is generally a good thing. But sometimes it is a bad thing.

Following?

I have a lot of self-confidence. I truly believe that I can achieve anything I set my mind to. I am someone that likes to throw himself head first into whatever roadblocks or hurdles life puts in my way. I am a big believer in the idea that if you don’t like something that is going on in your life, stop making excuses for it and take the necessary steps to change it.

I think this confidence is good. But sometimes it’s bad.

Sometimes I can get a little bit ahead of my skiis and fall down too much on the side of “better to ask for forgiveness than permission.” This approach works well in some settings, and significantly less so in others. One of my biggest weaknesses, my tendency to de-value the accomplishments of others, stems directly from this overconfidence and the related insecurities it can cause.

Another way that this confidence can sometimes manifest itself is through eagerness to take on more. I am supremely confident in my ability to upskill and do what I need to take on more and more, but sometimes this can be at odds with my choice of career.

Venture capital is not a fire-from-the-hip industry. Or at least, I believe that it is not when done well.

VC is an apprenticeship industry. It takes time to learn the craft. Sometimes that is hard for me to remember. I want to do more and take on more responsibility and have opinions on every company and every sector. But I have been doing this for less than a year. And I have a lot still to learn.

This week I got a reminder of that after hearing more experienced investors than myself talk about board governance. What a huge responsibility it is and all the perils that responsibility entails if its gravity is not appreciated.

After hearing about their trials and tribulations on various boards throughout their career, it really struck me how much more I have to learn.

I am so excited to be in this industry.

I love working with entrepreneurs and helping them build great companies.

But it is important to keep in mind that I don’t know everything. That this industry is a craft and like all crafts it requires reps and experience before you can become a master. Rome was not built with enthusiasm alone.

I write this post not because I am discouraged. Quite the opposite actually.

When I think about how relatively inexperienced I am and how much I still have to learn, I am not demoralized.

I am not daunted.

I am not intimidated or frustrated.

Instead, I am excited to get back to work and keep learning. To keep beating on my craft.

I think that is a pretty good sign.

The Monkey Trap of the Mind

Photo by Go Sourav on Unsplash

I am currently reading Robert Pirsig’s Zen and the Art of Motorcycle Maintenance. It is a fascinating book with many concepts that could be the inspirations for future blog posts. One such concept is the idea of Monkey Traps.

In colonial times, monkeys were trapped using a hollowed coconut connected to a stake in the ground. A hole was carved in the coconut that was just barely large enough for a monkey’s hand to fit into. Inside the coconut would be food for the monkey such as a banana or rice.

A monkey would come along, smell the food, and reach his hand into the coconut to grab it. Unwilling to let go of the food and unable to escape, the monkey would be trapped.

Too often we are trapped in monkey traps of our own making.

Our thoughts, actions, and opinions are held on to with a vice grip, no matter the consequences or existence of contradictory evidence. What’s worse, our culture shames those who change their mind as “flip-floppers.” We live in such a constantly changing world that I’d argue that questions should instead be asked of those whose views and opinions never change.

This adherence to our own cognitive biases is damaging and dangerous in all walks of life, but it can be especially fatal in venture capital.

Venture capital is concerned with the cutting edge of what is next. When you operate in this world, things change. Fast. To hold on to your preexisting beliefs in the face of overwhelming evidence is a surefire way to make mistakes like investing in the wrong company, or even worse, passing on investing in the right one. That’s why I so respect VCs who show a willingness to change their mind. A16z and their famous “strong opinions, loosely held” mantra comes to mind.

This is something I struggle with myself. I have blind spots due to my internal biases. I sometimes fall into the trap of minimizing others’ achievements to make myself feel better. I think if we are honest with ourselves, we all have moments when we fall into these monkey traps.

But that does not have to be our destiny.

The first step is to admit that we do these things. The second is to actively fight against them.

Cultivate a curious mind and embrace information that causes you to question your pre-existing beliefs. When the goal becomes learning and moving ever closer to the truth, then evidence that violates your held beliefs becomes something to be celebrated instead of shunned.

Maintain relationships with people who hold you accountable. The most important relationships in your life are the people who are able to call you our on your own bullshit (I know that I need a regular and steady dose of that).

I say all this as someone who often sucks at walking the walk. But I am working on it.

And I try to grow a little bit better every day.

My Investment Checklist

Photo by Jason Abdilla on Unsplash

I like checklists. You can do a lot with them. Help you stay on task. Focus your analysis. Remind yourself about things you might otherwise forget.

Checklists are great when looking at investments. Companies are complicated thing. Checklists can help you focus in on what is really important. I wanted to share my checklist of the things I look for when evaluating a startup.

Is this a hair on fire problem?

The first and the most important question. This one is not optional. If your startup is not solving a real problem for real people, you don’t stand much of a chance. It can’t be a nice to have. People don’t change their habits and make buying decisions for “nice to haves”. You either need to solve a top 2-3 problem your customer experiences every day or you need to create a product that is so incredibly compelling that using it literally creates tangible joy for your user. 95% of successful startups are in the game of solving problems. If your startup is in the 5% that creates unbridled joy in your customers, you can stop reading this article now, you’re probably fine.

The number one reason why startups die is because there is no market demand for their product. They aren’t solving a hair on fire problem. If the answer to this question is no: do not pass go, do not collect $200 dollars. I don’t care if your total addressable market is a million billion trillion dollars (which apparently every market is based upon pitch decks), if you aren’t solving a hair on fire problem for people, you are going to need to spend more time cooking on your product.

Does the founder fit the market?

Ahh the much-debated “founder-market fit” question. There is significant debate in the industry about just how important it is for a founder to have first-hand experience with the problem they are solving. I have written about my feelings in depth here. Suffice to say, I am a big believer. Entrepreneurship is hard. Like really, really, really hard. Like trying to write a blog about investment criteria while your wife is watching Season 5 of the Gilmore Girls (it should be easy to to ignore, but it is just so catchy. And I like this new Logan fellow, he is a much better fit for Rory than Dean or Jess.). But in all seriousness, entrepreneurship is brutally difficult and I want to be sure that an entrepreneur will stick with it when the night is cold and the chips are on the table. As much as I like to take founder-market fit into account, it is not a must for me. Experienced entrepreneurs can build excellent businesses. And people can fall in love with their customers’ problems without having experienced it themselves. BUT having a personal connection really helps. Founder-market fit is a nice-to-have, but not a must-have. It is something I always look for though.

Who is experiencing the problem?

Notice this question is not “how big is the market?”. Every single investment pitch I listen to talks about how epicly big their market is. Caring about big markets isn’t that helpful when every entrepreneur claims that every market is enormous. Furthermore, I think investors get too hung up on market size anyways. In venture capital, you are investing in the companies of tomorrow. Markets change a lot in 5-8 years, which is how long it takes a company to mature. Looking at the way that markets are today is less than helpful. What is much more important is to understand who the users/customers are for the product. If you truly understand who is going to use the product, you have a much deeper insight into how big this company can be. You can form an opinion about where the company is today and where it will be tomorrow. Understand the who, and you can develop a thesis on the where.

Is there an axehead here?

This is the most recent addition to the list. I unapologetically got this concept from Fred Wilson at USV (though I think it has its true epistemological roots in Thielism). This question is about a startup’s market entry strategy. An axehead strategy is when a startup enters a niche market (sharp edge of the axe), gains momentum, and then is able to carry that momentum into adjacent larger markets (the wedge of the ace). This along with our prior question on who the customers are is my substitute for “how big is the market?”. I am much more interested in a truly compelling product with a smart market-entry strategy, than a company playing in a market 2.5x the size of the world’s GDP (you laugh, but I have seen some wild assumptions in pitch decks before). Truly transformational startups often seem to conjure a brand new market out of thin air. This is how they do it.

Can this team execute?

Team, team, team, team. When you are an early stage investor, team is everything. Later stage investors may focus on other things, but team is the alpha and the omega of early stage investing. A strong team will be able to drive a mediocre idea to a decent outcome. A weak team will snatch defeat from the jaws of victory even with the best idea ever. At the early stage of a company the team is absolutely key. And this makes sense. Without momentum all you’ve got is the blood, sweat, and tears of your team. And with small teams, each person is responsible for a huge portion of the value of the company. The trick is to really understand if this is a team that can execute on their idea. A great way to do this is to spend time on site with the company and really get to know the ins and outs of the team. The best way to do this is to help fill gaps on the team with operators out of your own network that you know can get the job done. Either way answering the question of whether or not this is the right team is absolutely vital, especially at a company’s earliest stages.

It’s important to know that these items are always evolving. This is what I look for in investments today. I think it is good to memorialize that. If your company checks all these boxes, reach out.

I want to hear from you.

Why?

In our day and age there is a lot of airtime and energy spent on the “What”. What people are doing in their career. What is going on with the weather (hint: if its early March in Columbus it probably sucks). What movie won the Oscar. What outrageous remarks politicians made yesterday. What is important. What has its place, but I want to use this post to talk about the “Why”.

Because I think Why is very important.

Why is what gets you through the cold nights when your back is up against the wall. Why sets successful people apart from unsuccessful people. And Why sets world-changing people apart from successful people.

Why is important, but it is often overlooked.

Your Why is what motivates you. It’s the reason you are doing or acting the way you are. Too often we stop at the What and never ask about the Why.

There are two instances I see regularly where I think that people need to take some time to figure out their Why.

The first is people trying to break into venture capital. Believe my, I get it. It is a cool job. You don’t have to tell me twice. But there are a lot of cool jobs out there. I think people too often get sucked in by the glitz and glam of working with big name brands in cutting edge industries. As awesome as working in venture is, I can assure you that it is not as glamorous as it appears from the outside looking in (most things aren’t). Behind the scenes, things are complicated, messy, and every deal is closed with blood, sweat, and LOTS AND LOTS of paperwork. There are also better (and easier) ways to make money (especially in finance) if that is what motivates you.

The one thing I can tell you about getting in to venture is that it is hard. Trust me. Firms are often top-heavy and rarely hire outside of fund cycles. And there is always an abundance of people looking to get in to the industry. It can be done, but it isn’t easy to get a job, and once you do, it isn’t as glamorous as it looks on tv. Who is a good fit for VC?

If your Why is that you obsess over being a part of building things that will change the world, venture might be a fit for you.

If your Why is a deep desire to learn by constantly diving headlong into industries you didn’t even know existed the day before, venture might be a fit for you.

If your Why is building relationships with people doing exciting things and providing them with value without any strings attached or expectation of return, venture might be a fit for you.

If you want to work in a sexy industry and become rich, I’d look elsewhere.

The second area where I think the importance of Why is severely understated is when evaluating founders. I have talked about founder motivation before, but I really believe its importance cannot be overstated. If you thought venture capital was hard, wait until you see entrepreneurship. I like Brent Beshore’s description of entrepreneurship as a “daily knife fight”.

I, like many others, watched movies like The Social Network and read books about the great tech titans and thought to myself “hey I could do that.”

After almost a year working as a venture capital investor, my tune has changed to “hey with a great idea and a lot of super smart people around me, I could do that. But would I ever want to?”

I have seen first hand how hard company building is. And I sit in the privileged seats. I get to grab my 6-1/4” 7.5oz heavy duty utility knife (I spent a summer as a knife salesmen before college and still geek out about kitchen cutlery) and hop into the trenches every day. But when my day is done, I climb back out and get to set my knife in a regulation bamboo knife block (a well sheathed knife is a safe knife).

Entrepreneurs are not so lucky.

Their whole life is the trenches. If their company is successful, they could spend more than 10 years down there before they get a real breather. If they aren’t so lucky, their stay will likely be much shorter.

Kitchen cutlery brawl metaphors aside, building something out of nothing is never easy. It requires 100% commitment. There are going to be times where nothing is working. There are going to be times where things are working but a seemingly “better” opportunity comes along.

A lot of entrepreneurs like being entrepreneurs more than they like being founders.

They like the accolades and admiration more than the accountability and the brutal decisions.

They like the business cards more than the business.

Rare is the entrepreneur that is able to see it through to the finish line.

And every single one of them has a Why that gives them a fire to preserver. Whenever I meet an entrepreneur, I am looking for that Why. I want to see a founder starting a business because they think that if they don’t build this company, no one else will.

And the world needs this company too much to risk that happening.

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.