So You Want to be a Venture Capitalist? Required reading for any aspiring VC

Books are one of the best ways to learn about a topic.

Art. Science. Finance. History.

A book allows you to absorb in a few hours what it may have taken an author decades to learn.

In the past, I have talked about how I always try to be reading two books at any given time, one fantasy book and one non-fiction book.

In fantasy, I exercise my imagination.

In non-fiction, I exercise just about everything else.

It will come as no surprise to most of you that a significant portion of the non-fiction part of that experience takes the form of books directly, or at least adjacently, related to the world of venture capital. I regularly get asked for resources about the industry. I thought a good place to start would be some of my favorite books on (or around) the topic. I should note that this is in no way an exhaustive list, this is simply the books that have had the biggest impact on me, my career, and the way I think about venture capital.

Without further ado, my list of must-read VC books (Amazon affiliate links included):

The Hard Thing About Hard Things by Ben Horowitz

The book that started it all. During the summer after my junior year of college, I had the opportunity to intern at a venture capital firm. I knew I wanted to be an investor, but that was about as specific as I could get. On the first day of work that summer, my boss handed me a list of books to read (many of which are included below). The first book I read was The Hard Thing About Hard Things by Ben Horowitz. The rest, as they say, was history. This was the book that first kindled my love of all things venture capital, tech, and entrepreneurship. It is a fascinating look into the ups and downs (and downs and more downs and somehow eventually even greater ups?!) of a dot-com era startup. Come for the lessons on leadership and entrepreneurship, stay for the rap lyrics and no holds barred commentary on the startup world. An amazing opportunity to learn from a successful technology entrepreneur who just happened to found one of the world’s most successful venture capital firms as his second act. Casual.

Creative Capital by Spencer E. Ante

If you want to learn about something, what better place to start than its beginnings? Creative capital is the story of one man, Gorges Doriot, and the monumental impact he had on the world by founding what we know of today as the venture capital industry. Doriot was an unassuming Frenchman academic who answered his adopted country’s call-to-arms by serving in World War II. After the war, he went on to found the first venture capital firm. An enjoyable and enlightening book that takes you back to the metaphorical primordial ooze of what turned into the modern venture capital industry.

Venture Deals by Brad Feld and Jason Mendelson

The definitive must-read for anyone interested in learning about the nuts and bolts of how venture capital deals are structured. Brad Feld and Jason Mendelson are legendary venture capitalists in their own right, but their contribution to the industry in the form of Venture Deals is pretty tough to beat. If you are a VC, read it. If you want to be a VC, read it. If you are an entrepreneur trying to raise venture capital, read it twice. Venture Deals walks you through the ins and outs of deal terms and gives you a baseline understanding of what you can expect when hand shakes have been made and the lawyers start putting pen to paper. If you are going to be spending any time in or around this industry, you will be a step behind if you haven’t read Venture Deals.

Zero to One by Peter Thiel and Blake Masters

Zero to One is the ultimate place to start understanding the world view of one of the most successful technologists and investors in history. The book is about how to think differently and build truly innovative products the world needs, instead of simply inventing better and better mousetraps. In some circles, Peter Thiel may be derided at worst and thought cliche at best, but I for one couldn’t have a higher opinion of his technological and ideological contributions. Zero to One is one of those books you are either going to love or you are going to hate. You will either be inspired by Thiel’s unique perspective or you will find yourself diametrically opposed to it. And in some ways, that is precisely the point.

The Lean Startup by Eric Ries

Another seminal book in the world of technology and venture capital. If you have had any exposure to modern technology development or startup building, chances are that you have come across at least some of the ideas contained in this book. Reis’ ideas have become so pervasive in the world of startups that they have become completely core to how companies are built. There are no such things as “lean startups” simply because nearly all high growth technology companies are built using the lean methodology today. The book is not without its share of critics COUGHkeith raboisCOUGH, but it is a pillar of the modern technology ecosystem. At the end of the day, The Lean Startup is about tightening feedback loops, pushing decisions as close to problems as possible, and getting customer input before you start building something they don’t want. Which business couldn’t use some of those strategies?

Powerful by Patty McCord

You want to learn how to build a world-class organization? You start by reading this book. Patty McCord was the architect behind the culture of one of the world’s most effective and impactful modern companies. Patty joined Netflix during its early days after previously working at Reed Hastings's prior startup. She was instrumental in creating a culture that favored candor, transparency, and trust over the normal HR jibber-jabber of engagement, hierarchy, and performance plans. Her key insight: People want to work on something important while being surrounded by really smart people and they want to be treated like adults. Get that wrong and all the hand-holding, all-staff retreats, and ping pong tables in the world won’t save you. An incredible book that guides you through thinking about building a company culture that is fit to excel in the dynamism of the modern world. Be warned though, if you are reading this while finding yourself stuck at a company with its head in the sand, you will find yourself in for a world of frustration.

Creativity, Inc. by Ed Catmull and Amy Wallace

The story of Pixar. Does anything else need to be said? Creativity, Inc. takes you behind the curtain of one of the most exciting and fascinating companies ever. It gives you an inside look at the trials (so. many. trials.) and tribulations of one of the most beloved companies in the world. If you read it for the heartwarming stories about how to capture the imagination, you won’t be disappointed, but this book is so, so much more. Creativity, Inc. isn’t just the history of Pixar, it is a guidebook on how to create a company where innovation always comes first. Where envelopes are pushed and conflict is handled directly out in the open instead of through anonymous feedback inboxes. The placement of Creativity, Inc. next to Powerful is no coincidence. You will see many of the same themes about transparency, treating people like adults, and holding employees to the highest possible standard echoed across both books. It’s almost like they might be on to something…

Elon Musk by Ashlee Vance

Hero or villain. Sympathetic or despicable. Genius or idiot. The modern titan that is Elon Musk refuses to be defined by easily traced lines. You really have a chance to know the man you need to be one of the few he lets into his inner circle. For the rest of us, we read this fantastic biography by Ashlee Vance. Halfway through the book, I wanted nothing more than to be Elon. By the end of the book, I wanted nothing less. Elon Musk’s life is one that defies all attempts at shallow categorization and in some ways this book reads more like an action novel than a biography. If you want to become an expert at building innovative companies, you absolutely must take the time to read about the life of the world’s most innovative company builder.

Loonshots by Safi Bahcall

One of my favorite books that I have read in recent years and one that, if you know me, I have probably recommended to you multiple times. Safi Bahcall excellently examines why it is that some companies are able to innovate and others aren’t. Why some are able to nurture the crazy ideas that change the world and others bury their most promising talent under paperwork and bureaucracy. So many non-fiction books follow the trope of “Here is my idea and here are 27 chapters that include slightly differing examples.” Loonshots is among the minority that truly break the mold and I found myself on the edge of my seat throughout. Throughout the book, Bahcall examines some of the very companies and people discussed on this very list and why their companies were able to succeed where competitors didn’t. I’ll give you a hint: It’s all structure.

Have you read any of these books? Are there any other must-reads for the next generation of venture capitalist? Let me know in the comments or on Twitter.

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Gaming will Eat the World

In 2011, Marc Andreessen wrote one of the seminal thought pieces in the history of Venture Capital. Why Software is Eating the World basically was the rubberstamp that the age of the internet had truly arrived. Going back and reading it today, it almost reads as quaint. The idea that every company is a tech company is so widely accepted today, that it is hard to believe that under a decade ago this was a novel insight.

I am not Marc Andreessen. And I never will be.

He is one of the forefathers of the internet in addition to being the founder of one of the world’s top venture capital firms. So far, the only things I ever founded are this blog and the school of fashion consisting entirely of Polos + Gym Shorts.

I don’t expect this post to ever reach the same rarified air that his did. But I do believe one day a post on the same topic might.

And that is because, though gaming isn’t eating the world today,

I believe that it one day will.

eHype

Getting excited about gaming and esports (not eSports, I have gotten flammed for that before so watch out) is not exactly a revelation these days. Every investor and their great grandmother’s aunt Judithe is paying attention to the space. The larger gaming market is going to do about $152B in revenue this year and that figure is expected to grow to $180B by 2021. Compare that to the traditional sports market which is worth in the neighborhood of $500B (but has about a 4,000-year head start) and you can start to see why people like Judithe are putting her retirement money into a Croatian GS: GO team. More people watch videogame streams any given day than tune in to the NFL. It is a massive and quickly growing industry.

All that is great, but I’m not telling you anything new.

I don’t want to talk about how gaming is the future of entertainment.

I want to talk about how gaming is the future of EVERYTHING.

I believe that gaming and esports will become so much more than simply entertainment. As I pointed out above,it is an interesting opportunity worth investing in, in and of itself, but honestly, I think people are sleeping on just how big gaming really will be.

You had one Job

You know me. Big Future of Work guy. Gaming is a big reason for that. Gaming is going to create countless jobs in the years to come.

There will be the obvious jobs that have been part of the industry for some time now. Game development/marketing/ etc.

Then there will be the modern gaming jobs.

Esports athletes. Tournament casters. Esport reporters and news personalities. Video game streamers. These are already here and not only can you make a pretty penny from them, but they are the new aspirational careers for Gen Z.

What I am really intrigued by is the next wave of jobs. New technologies like Tokenization create the potential for creatives to buy and sell their digital wares within the economies of games themselves. Selling skins for characters and items is nothing new, that’s how many game companies make the bulk of their revenue off of free-to-play games (the most expensive CS:GO skin was sold for over $60K). A16Z had a really interesting podcast recently on the future of gaming monetization. New strategies to incent early adopters, creatives, and entrepreneurs could allow people to support themselves off of creating and selling digital goods. Imagine Etsy but for digital goods to be displayed on digital avatars. This is the way the world is going and it will be a massive opportunity for gamers and creatives alike to build income through jobs that have never existed before. And the best part is that they could do it from anywhere on earth.

Gamify me, Captain

Not only will gaming grow in new and unexpected ways, but I predict that it will start to permeate other aspects of our world. Many of the cutting edge technologies of our day like AI and high-end processors started off in the gaming world, it is not a stretch to believe that other aspects of gaming will make the jump into other industry verticals.

Today we are currently experiencing the consumerization of the enterprise stack with technologies like Slack and Zoom. Tomorrow we will see the gamification of the enterprise stack.

Generally, when people hear the term ‘gamification’ they think of stickers or leader boards. Really what gamification is is the creation of compelling incentive structures that re-frame something mundane in a compelling way. This could mean taking advantage of people’s competitive nature to try to perform better against their coworkers. Or adding a layer of abstraction to create user enjoyment where there wasn’t one before. There are already examples of teams being effectively trained through gamified modules instead of the traditional boring training seminars. I expect that this will only continue to grow and touch more aspects of people’s jobs. It is much less expensive to keep a current employee than to try to get a new one. Gamification can be powerful tools borrowed from the world of gaming to drive increased retention and employee engagement.

Of course, work is just one of many aspects where we will see a growing influence of gamification. Relationships, education, and healthcare are just a few of the aspects of our life that would stand to benefit from utilizing some of the tools and strategies developed by the world of gaming. One of the trends that I am most excited to watch is the improving UX of work. The adage that “work is supposed to feel like work” is quickly growing extinct. Today billion-dollar companies are being built by removing friction from work and simply making things like collaboration and communication not suck. I believe that tomorrow we will see billion dollar companies built to make work actually fun.

Here Today, Game Tomorrow

If you aren’t paying attention to the world of gaming and esports, you are sleeping at the wheel. Gaming is no longer for kids or the counter culture. It is a multi-billion dollar industry that is not only here to stay, but one that will continue to seep into more and more aspects of our everyday life.

My focus is not on the business as it is today, but on all that it could become in the future.

See you at the Auction House.

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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: 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!

The Globalization of Venture Capital: Is United States Innovation Falling Behind?

Photo by NASA on Unsplash

There was a story doing the rounds this week about a new Center for American Entrepreneurship study about the globalization of Venture Capital. CAE’s study showed that the United States’ share of global venture capital investment had fallen 20% in the last five years and 50% in the last 25 years. These statistics were framed with alarming rhetoric from both the tech media and the Center for American Entrepreneurship.

VentureBeat stated that this report should give Americans “cause for concern.”

Richard Florida, one of the leaders of the study, stated that “[he] thinks for the first time, the U.S. is truly in trouble.”

Much of the discussion around this report has represented similarly disheartening views of the outlook for innovation in the United States. Media sites and commentators have worried over America’s loss of “edge,” and forewarned of dark days ahead.

My response:

Are we really so insecure that our place in the global order is threatened by the United States only receiving HALF of the globe’s capital invested into innovation?

The United States represents approximately 4% of the world’s population. By any objective viewpoint we are significantly punching above our weight to receive over 12x our share of the world’s risk capital.

But Erik, what about the relative decrease in our portion of venture capital investments? Shouldn’t we be worried about investment into our country decreasing by 20% in 5 years?

Short answer: No.

Long Answer: This is why Intro to Statistics is required coursework. Venture capital investing into the United States has not decreased by 20%, the share of global venture capital received by US-based companies has decreased by 20%. The difference is incredibly important.

Via NVCA. As of June 30, 2018.

2018 is, in fact, poised to be the largest year for venture capital investment into US startups since the Dotcom crash. At the halfway point of 2018, about 3/4 of 2017’s total investment value has been deployed. This means that we are on pace for a potentially record breaking year (for discussion of whether this should even be something to be celebrated or not, check out last week’s post.) Yes, our piece of the overall venture capital pie is shrinking, but the overall size of the pie is magnitudes greater than it used to be. That is what matters most. Innovation is not a zero sum game, our ability to innovate is not hampered by China’s or India’s. In fact, it is the reverse. Increasing levels of global innovation create network effects which the United States can take advantage of to propel us even further.

It is short sighted and, frankly, close-minded to believe that the United States has some sort of divine right to be the innovation capital of the world. Innovation, by its very nature, is meritocratic. The United States’ shrinking share of venture capital dollars should be met with fanfare, not rumors of our impending demise. The rest of the world is catching up, and that can only be a good thing. More innovation means more impactful technologies that can improve people’s lives for the better. Where that innovation occurs is far less important than the fact that it is occurring, and if we are being honest with ourselves, there are many parts of the world that need ground-breaking innovation a lot more than the United States needs a new social media app.

We are not facing an innovation crisis in the United States. We are the pioneer of modern technological innovation and the rest of the world is starting to build up their own capabilities on the back of 80 years of the United States writing the playbook.

This is a good thing.

For everyone.

To suggest otherwise is both alarmist and misguided.

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How I got a job in Venture Capital

Photo by Nick Jio on Unsplash

Ever since I started in my new role as an Analyst at Rev1 Ventures, I have been intending to write a post detailing my experience trying to break into the world of venture capital. VC is a notoriously difficult sector to make your way in to, especially junior roles for someone only a couple years out of college. A common refrain that you will hear during informational interviews is that there are more professional baseball players than there are venture capitalists. This fact may be overblown (and certainly compares apples to oranges), but it does demonstrate just how difficult it can be to get into the field. Many arguments can be made as to exactly why this is, but at the end of the day, it boils down to a lot of people vying for relatively few open positions. 

I was able to make the transition because I made a plan and executed on that plan. There are things I would've done differently, but I think the fact that I was able to make it to final round interviews at 4 different firms demonstrates that my planning was effective.

One of the first things you learn as you start exploring a career path in VC is that the world of venture is filled with people that are willing to take time to help someone along their journey. Hopefully, some of the insights I have learned can be a resource for other people trying to make their way into the big leagues. 

Fake it till you make it 

The biggest piece of advice I can give to someone trying to get into the world of venture capital, and the place where I think I did the best job in my process, is to fake it till you make it. This means that even before you start working in VC, you should start acting like a venture capitalist. Working in private equity at The Carlyle Group, I knew I was in a related field and at a blue-chip firm that would help get my foot in the door (which it definitely did, but I was on my own past that point), but I also knew that my day-to-day at Carlyle was nothing like what my day-to-day would be like working at a venture capital firm. At Carlyle, I was dealing with billion-dollar transactions that involved decades-old companies, compared to early-stage venture capital where companies may or may not even have a product in the market and any financial records are slim at best. This meant that I had to take it upon myself to demonstrate that I had what it took to be successful in venture. 

You are reading the first way I did this. I started this blog for a variety of different reasons, but one of the main ones was so that I could build a "thought-record" for recruiting firms to look at and see that I had put time and effort into thinking critically about startups and the tech ecosystem. My write-ups on specific startups and my sector thesis deep-dives also gave me something to talk about in interviews. This may seem contrived, but if there is one piece of advice you take away from this post, START A BLOG. To be fair, it doesn't have to be a blog per se, but if you are interested in getting into the world of investing in startups, you need to start creating some sort of content that demonstrates you have spent time thinking critically about, you guessed it, investing in startups. (sidenote: I think this advice is applicable for anyone looking to change fields. Get out there and start creating content around where you want to GO, not where you are right now) I chose to blog because I had some limited (and angst-ridden) experience blogging in my high school days, I wanted to get better at writing, and, as a fan of many blogs, I felt like I had a good idea for what other readers would enjoy. Content creation takes work and commitment. No doubt about it. Before you toss aside this idea as not being worth the effort, you should know that the other analyst that I work alongside at Rev1 also started a blog as a way to help get into the industry. Must just be a coincidence... 

The other way that I started acting like a VC was through angel investing. Now, I do not have the capital to qualify as an accredited investor (generally a requirement for angel investing), but I am fortunate enough that my father does and was interested in trying something new (he is in private equity, so investing isn't new, but investing in tech startups was). We read Angel (a book about angel investing by one of the best angels in the business), joined angel syndicates on sites like AngelList and Funder's Club, and were off to the races. I helped my dad analyze startup investment opportunities and was able to practice doing some of the things I now do in my job such as writing investment memos, developing front-end deal flow, and portfolio management. This experience of actually practicing some of the skills that I hoped to one day be performing professionally was absolutely invaluable. It gave me something to talk about in interviews and I believe it helped me to stand apart from the crowd of other would-be venture capitalists. I was lucky that I was able to get some exposure to this world by working with my dad, but you can still get this practice without a connection to an accredited investor. Sites like SeedInvest and WeFunder offer even unaccredited investors opportunities to invest in startups. You actually don't even need to make investments. You can sign up for these sites and just look at deals without making any actual investments. Maybe start a shadow portfolio where you track what investments you would've made and how they performed. If you see something especially promising that fits a firm's investment thesis, send it to the attention of a VC you have met through networking. It might not be something they invest in, but if it is thoughtful and fits their firm's investment guidelines, I have never met a VC that wouldn't be impressed. 

Whenever you are trying to make a career change into a field different from where you have tangible experience, you need to take it upon yourself to find a way to get exposure outside of your normal working hours. This is especially true in as competitive and nuanced a field as venture. Come up with a way to demonstrate that you are being thoughtful about whatever space you are interested in jumping into. Go to industry-specific events and meetups and connect with people that are actually doing the work you want to be doing. However you want to approach it, faking it till you make it will give you a leg up on landing the role you want. 

Take advantage of the resources that are out there

There are a ton of excellent resources on venture capital that you should be immersing yourself in if you want to work in the space. Below I have listed a few of my favorites. 

Podcasts

20 Minute VC - An awesome and bite-sized way to get smarter on the "wonderful world of venture capital". In each episode, Harry Stebbings interviews a venture capital investor or startup founder in about twenty minutes. I really enjoy this podcast and Harry is a super nice guy that was kind enough to be a resource to me during my job search. 

Invest Like The Best - This podcast hosted by Patrick O'Shaughnessy is my absolute favorite podcast. It covers a wide variety of topics including investing of all types, as well as ways to lead a better and more productive life. The podcasts on venture capital are a great resource, but my favorite episodes are the ones that have nothing to do with investing at all. Patrick also has done a great intro to crypto series that is an awesome first step into that world.

How I Built This - This NPR podcast with Guy Raz is a super interesting and entertaining exploration about how entrepreneurs and business leaders built the companies they are famous for. Not every company explored was a venture-backed startup, but I have found interesting insights about the entrepreneurial journey in every single episode. 

a16z Podcast - Andreessen Horowitz's podcast is my favorite firm-sponsored podcast. They mostly showcase topic or sector deep dives from various a16z speaker events. Definitely a great way to get smarter on specific sectors.  

Angel: The Podcast - Jason Calacanis' podcast accompaniment to his previously-mentioned book on angel investing. Excellent interviews with both angel and institutional venture capital investors. Jason hasn't done an episode of Angel in a while, but he is also the host of This Week In Startups which is very good. 

Websites

avc.com - The definitive venture capital blog by the grandmaster of venture capital, Fred Wilson. Fred publishes a new blog every single day and is a surefire source of wisdom about both life and investing.

John Gannon's Blog - The go-to source for anyone trying to break into venture capital. John's site lists helpful resources as well as a constantly updated source of open positions at venture capital firms. 

TechCrunch - Cliche I know, but if TechCrunch is my favorite of the big tech news sites (others being VentureBeat, Recode, Hacker Noon etc) and somewhere I check at least once a day to get a view of what is going on in the ecosystem at large. 

Feld Thoughts - Brad Feld of Foundry Group is another one of the big-name investors in the space and his blog is a great resource on the ecosystem. He has also written some must-read books for anyone interested in venture investing like Venture Deals. 

Newsletters

StrictlyVC - A venture-only daily newsletter that covers the biggest stories and latest investments in venture. 

Axios Pro Rata - Dan Primack's daily blast of the latest news in business and politics.

Fortune Term Sheet - Another great newsletter written by Polina Marinova that covers a wide swath of the latest news in business. 

Network your socks off 

Does networking matter?

Yes.

Moving on.

But seriously, networking is a key part of any venture capital job search. The reality is that at most firms, networking will be a relatively significant aspect of most junior roles. If you can't network your way to decision makers at firms, how will you ever be able to network your way into meeting the best and brightest founders? To be honest, networking did not come naturally to me either when I first started my process. When I thought of networking, I thought of the overly-eager undergrad business students that would suck-up to anyone and everyone. I thought I was better than that. But I was so wrong about what exactly networking really was. It finally clicked for me when one of my colleagues described networking as meeting new people and hearing about their stories. I am an outgoing guy that enjoys meeting new people and making new friends and thinking of networking through this new lens helped it to really click for me and turned it from something I looked down on (and if I am being honest was anxious about doing) into something that I actually enjoyed. Now it is not all rainbows and butterflies. It is a skill that you need to practice like any other and it can be hard work. But like other skills, you will improve on it as you do it more and more. Networking through informational interviews with current venture capitalists is a great way to expand your network, learn more about specific firms/sectors of the venture ecosystem, and get your foot in the door. 

Getting into venture isn't solely about networking, but it is an important aspect of any job search. For reference, 3 out of the 4 final round interviews I had with firms came about because of networking. BUT I ended up taking a job at the one firm where the opportunity came from me responding to a job-listing online. I think my experience is a great demonstration of just how important networking can be, but also how it isn't the end all be all. 

Be flexible 

Have you gotten the impression of how difficult it can be to make it into the industry yet? If I have not made it clear, let me do so again. Something something more baseball players than VCs something something small number of job openings something something a lot of people trying to get into the space something something 4 partners for every 1 junior level person. 

You get the picture. Unless you have been part of a successful start-up, it will be difficult to get hired as a junior level person in the space. A way that you can mitigate this difficulty somewhat is by being flexible. 

This doesn't mean apply for anything and everything in the space (though that is a legitimate strategy). Instead, pick one or two characteristics that are really important and be flexible on others. 

I was very certain that I wanted to work at an early stage pre-seed/seed firm. I wanted to work with companies at the earliest level and really get in the weeds working alongside entrepreneurs. Because early-stage was a must for me, I decided to be more flexible on other things like where the firm was located. 

Let me tell you, when I started my search a year ago, I did not expect that I would be writing this blog post from Columbus, Ohio! Being flexible will open up more opportunities for you and you just may end up falling in love with a place you never expected like my wife and I have with Columbus!

Why VC

Now that I have given you my playbook for getting into VC, you should step back and ask yourself if this is really the sector you want to be in. I can personally attest that it is not as glamorous as Techcrunch headlines would cause you to believe. There is a ton of hard work and grinding. The feedback loop for success is very long and for failure it is jarringly abrupt. If you are motivated strictly by financial upside you are better off going to Wall Street. 

But for the right kind of person it is absolutely awesome!

I love what I do. I believe venture capital is a service industry whose customers are your founders and I love working alongside brilliant and motivated entrepreneurs to build game-changing companies. I am excited to go into work every day and gone are feelings of anxiety on Sunday nights. I love getting up to speed on new companies and learning about technologies that I didn't even know existed the day before. I love creatively solving problems and brainstorming ways for founders to run through the walls in their way. I love helping to build an ecosystem and I love working alongside people that are just as passionate as I am. 

If venture still sounds like the place for you, give me a call (or reach out to me on twitter).

I'll be your first informational interview.