The Myth of the Top Investor

Someone asked me recently if they should raise a fund, because they had access to investments that were being made by "top, brand name investors".  

Whether there even is such a thing relies heavily on your perspective.

It is absolutely true that many of the firms you've heard of being called the "top" funds consistently perform in the top quartile, even decile, of all funds, over time--Sequoia, Accel, etc.

If you drill into that data, what you wind up seeing is that they get a disproportionate access to many of the "once in a lifetime" type exits--the Facebooks, Whatsapps, Googles, etc.

They do not, necessarily, have a better than average winning percentage.

So what does that mean?

It means that if you ever have an opportunity to be a Limited Partner in Sequoia, and to do so over multiple funds--with a very long term (20+ years) time horizon--you should probably do it.  A few home runs over time will likely net you huge returns in the end.  

What doesn't it mean?

What it doesn't mean is that by co-investing with them, you're guaranteed any success.  For one, the sample size is far too small for you to have that much more of a chance of being in those one or two deals.  Unless you're doing lots and lots of deals, your own chances of being in one that hits is far too low for it to make a difference whether Sequoia is in one of them.  In fact, there's a good chance that if you're an average Joe and they're in your deal, they might not be showing the same kind of conviction in this opportunity they would if they were trying to take the whole thing.

It also doesn't mean that, if you're an entrepreneur, they're the right partner for you.  Much like those damn Yankees, these winning franchises have had a number of employees come and go over the years, many of whom weren't so good at their jobs.  On the Yankees, for every Derek Jeter, you had a few Bubby Crosbys.  So you might get a top partner on your deal at one of these firms--someone who is responsible for the kinds of multi-generational wealth creation kinds of deals, or you might get someone who is relatively new, or simply has yet to prove out their Midas touch when it comes to investing.  

Perhaps the investor you're turning down is the next pre-Twitter Fred Wilson.  Was Fred a "great" investor before Twitter, or did the experiences and network that he picked up in that deal put him into an elite class?  Probably a little bit of both--but he certainly didn't have the same kind of brand beforehand, and I'm sure lost a deal or two to "top" firms because of that.  

In fact, most investors would agree that as a founder, *you* are the one that creates the value.  You may decide you want Benchmark in your round for signalling purposes, because you know they're seen as successful, but you would undoubtedly be just as successful no matter who you took money from.

Does Harvard make smart kids or do smart kids want to go to Harvard?  Would they have done just fine anywhere else?

On top of all this, these "top" firms aren't the only ones who get into these top deals.  Given the size of these funds, they often don't participate with more than a token amount, if at all, in the seed rounds of top returners.  They simply can't manage deals that small on a regular basis because of the time and effort for the amount of money at stake.  So, from a fund perspective, there are certainly other funds that do just as well in a given cycle.  

Lastly, it takes a long time and many many funds to tell whether or not the funds that we think of as top are actually top performers--and even then it's not clear that they're built to last several generations of partners.  

There are some funds that, in the last seven years, have raised four or five funds.  We're *just* seeing whether or not their first fund is a good performer now and now they're managing a fund that is perhaps five to ten times larger than that original size.  For all we know, the three or four funds after that are complete clunkers.  Deals look great until they aren't anymore--Theranos, Fab--these are the kinds of opportunities that enable you to raise another fund or maybe even two because of the on paper returns.  They may or may not win out in the end.

To say that a firm is a top performer when they started out with $50mm and are now managing $500mm or more seems ludicrous to me.  It's a completely different game at that size, and the work being done is likely now spread out across many more people than just the original partners who made that first fund successful.  On top of that, they probably did nothing in that first fund other than invest.  Now, they're spending a lot of time managing staff, going to board meetings--and much less of their time is spent sourcing and investing.  

There's also a difference between "top" and "brand name" investors.  There are lots of investors who have built brands in the last few years--names of people that we may associate an exit or two with, but whose full track record we really haven't seen.  A lot of times, their record is two early to tell and other times, it may not be all it's cracked up to be.  Also, it could have been just dumb luck that isn't likely to be replicated again.  Is every Uber angel investor likely to be the finder of the next big deal?

So before you start aiming to work with or follow "top" investors, think long and hard about what you're getting yourself into and what you're likely to experience.  There's a lot of star power in the venture capital world right now around both individuals and firms--and everyone is trying to convince themselves that getting closer to the light will cause some to shine on them, too.  

The Thing About the Best Pitches

The best pitches have a hook.  The very first sentence gets me leaning forward, not back.

They have an unrelenting storyline--and they don't let a boring team slide get in the way if your team isn't the most exciting part of what you're doing.  

They mostly talk about where you're going, because the what you've done up until now in a seed pitch usually isn't that much.

The best pitches acknowledge the reason why we're here--for you to ask me for money and for me to make a bundle of it investing in you.  If we don't talk about how that's going to happen, what's the point?  Ask for an amount, tell me what you're going to do with it, and tell me how that leads to a big exit.

They don't come from templates.  Every startup is different.

They don't have the word advisor in them--because that's just a code word for "Someone who didn't invest, but probably could have."

The best pitches follow the word problem with... you know... an actual problem, versus something that maybe could be better but otherwise has been working ok for quite a while now at a huge scale.  

The best pitches are ambitious--they ask for enough and aim to do something big.

They're told, not read--it's your story and if you can't remember it, no one else will.

Confessions of a Privileged White Male and Former Conservative

I was born in Brooklyn in 1979, which means that the number one issue growing up in the 1980's and early 1990's was crime.  In 1990, there were 2,245 murders in the city, nearly 10x the annual rate we have now.

By the way, I'm white and back then, similar to now, you can't talk about crime without taking about race.

I grew up in Bensonhurst.  You might remember that as the area of Brooklyn where Yusef Hawkins was killed in 1989.  Hawkins, who was black, and a group of his black friends came to the neighborhood to buy a car posted in an ad.  They walked right into a group of Italian kids (I'm 1/2 Italian) who were waiting to ambush a group of black or latino guys who supposedly had dated a neighborhood girl.  Hawkins and his friends were attacked by a group of over a dozen young white men with baseball bats, and one who had a gun.  

He was shot to death at the age of 16.

Around the neighborhood, people whispered about what black kids were doing in "our" neighborhood and how they weren't supposed to be there.  

Actually, no, they didn't whisper.  

They said it out loud--all the time--just like people are talking now about how struggling on the ground with a cop (or not struggling at all or "heightened circumstances") is a justification for getting shot by one.  

I was socialized to think of crime as the kind of thing where whites were the victim and people of color were the perpetrators.

What I didn't know at the time was how much the media reinforced that.  Crimes with white victims get disproportionately covered, especially when they are committed by blacks.  

I didn't know either that most people get killed by their own race.  As a white person, I'm about ten times more likely to get killed by another white person as I am likely to be killed by anyone of color.  

That's not what I thought as a kid.  I never would have believed that stat.  

So when we elected a "tough on crime" Republican Mayor, Rudy Giuliani, that cemented my Republican leanings.  I mean, why would you be anything other than tough on crime?  Was soft on crime even a position that reasonable people would take?

I didn't remember at all that, actually, Giuliani's black predecessor, David Dinkins, presided over the beginning of NYC's historic drop in crime.  I also didn't remember that he, not Giuliani, hired Police Commissioner Ray Kelly.  What he also did, unlike Giuliani, was advocate civilian review boards and neighborhood policing where cops worked together with their communities as partners.  

I was for the death penalty--because there were some really bad people out there and they didn't seem to deserve to be alive.

I never read the statistics about how the death penalty was more expensive, and not a deterrent to crime at all.  

I felt on the Republican side of a lot of other issues, too... 

Welfare?  A handout.  People should work for a living.  After all, my parents did.  Both of them.

I didn't see how far ahead of the game I was having two parents at home, neither of whom had spent any time incarcerated.  

Abortion?  How could you be for killing babies?

I didn't bother looking into the policies that tied into abortion, like women's health, contraception availability, sex education, etc.  I'll never ever be "pro" abortion, but when you start looking at unwanted pregnancy as the key statistic to address and not abortion itself, you realize that the only way you solve that is with policies that include a women's right to make decisions around her own body.

And, of course, it was cool having a strong military.  Kicking Saddam's ass out of Kuwait made us feel good and patriotic.  Smart bombs were cool and I was all for paying for more of them.  

I didn't know enough about the Middle East to understand how badly we could fuck things up there in the future and what we would unleash when we opened Pandora's Box.  They don't exactly teach you much about the Middle East when you grow up on European centered history.

Drugs?  Against them--even today.  I don't use them myself, never did, and can't see any good reasons to recommend that anyone else start.  So, if you're against something, you make it a crime, right?

I didn't understand the plague that widespread incarceration for drug offenses would bring disproportionately upon communities of color.  Over 45% of our prison population is in there for drug offenses.  Even though white Americans are more likely than black Americans to have used most kinds of illegal drugs, including cocaine, marijuana and LSD, blacks are arrested for drug possession three times more often.  I never thought about what happens to people both in prison and after prison--and what happens to families and kids and the cumulative effect it has on communities when black men disappear and return unable to find work because of their record.

I also didn't know what I had.  We didn't think of ourselves as rich.  We felt pretty average.  My dad was on the fire department, and semi-retired into running a little accounting practice out of our house.  My mom was a teacher's aide in the school system.  I went to private Catholic schools, but mostly on scholarship.   There were things we couldn't afford for sure.  We didn't eat out much, nor did we go on expensive vacations.  Our big trip was driving down to Disney World by car when I was 10.  I made NYU, but couldn't afford to go.  

We didn't feel "privileged" at all.  We felt middle class, even though we above the middle of NYC's per capita household income.  

In fact, up until as recently as a year ago, the word privilege, especially in the phrase "white privilege" made me bristle.  I was incredibly bothered by the idea that somehow I was a "have" and that I didn't get to where I was purely on my own work ethic.  

No one likes to thank the wind at their back--particularly not middle class white people.

I was way more "self made" than the Ivy Leaguers who went into finance.  I was proud of the fact that I was the Fordham grad in a crowd of Harvard, MIT and Princeton at my investment internship.  Being the local guy climbing up from the mailroom (which was literally my first job), was part of my identity.  My family's name isn't on any buildings and they didn't have the money to fund my investments, so I felt like I didn't have help to break into my industry.

I quickly forgot that I had ever interviewed at McDonald's for a summer job.  I also forgot that I was embarrassed to do so.  My brothers were embarrassed on my behalf when they found out that I had applied.  Flipping burgers wasn't something anyone in our family was going to do--so they both actually found me the same kind of "respectable" mailroom job at their respective brokerage firms on Wall Street.  

We never specifically said that I shouldn't flip burgers because I was white--but that's what it was.  We were just somehow "past that stage" economically and socially, so I was able to use my family connections to get a more respectable job.  Nevermind that I had friends who worked at summer beach clubs.  It seemed fine to be handing someone in a mostly white environment their burger, while the Golden Arches seemed "beneath me".  

Getting that mailroom job through connections wasn't the same, in our eyes, as the way wealthy white people used the "Old Boy's Club".  That was something else altogether.  This was just what you did for your family to "help out."  I felt lucky to have that connection, but not privileged.  

My high school was a scholarship school.  Regis is one of the best high schools in the country and it specifically tries to diversify its student base.  Compared to neighboring schools like Marymount and Sacred Heart, where tuitions were almost $20,000 a year at the time, I didn't feel privileged at all.

What I didn't see was the compounding interest of privilege.  I succeeded, I thought, because I did well in school--but I never thought about the advantages I had.  I had two educated, working parents.  My mom found a flexible job where she could be home when I was home--and my dad's business was largely out of the house as well.  Even though I grew up in a time of high crime in New York City, I lived in a low crime area.  I "avoided" drugs, but I was never really exposed to them.

These are all things that statistically were more likely to be the case because I was white. 

But it extends even further back than that.  My dad had healthcare and a small pension because he had a civil service job--but had he been black, he would have been a lot less likely to get on the fire department.  Look at the numbers.  Even if he did, he probably wouldn't have felt welcome enough to put twenty years on.

We owned our house--and that was the basis of our financial security.  I never gave much thought to the likelihood of getting a mortgage or being able to buy a decent house in a low crime neighborhood if you were black in NYC in the 1960's.

Sure, my grandparents were poor in the Depression--but because they were white, no one could refuse to rent to them.  They didn't make much money, but they worked.  Black unemployment during the Depression was twice the rate of whites--so while it felt like a lot of people they knew in their neighborhood lost their jobs, they never knew how bad it was in neighborhoods of color.

Their parents came here as immigrants who had nothing around 1915, but at least they weren't a generation or two removed from slavery.  That's, you know, a pretty decent advantage that no one talked about because they had no way of feeling it.  I imagine it was easy to feel like the lowest person on the totem pole at the time when you ignore the blacks below you.

Whether we realized it or not, everything was easier for us, for generations--and privilege compounds like a high yield bond.  

That didn't mean we didn't all work hard--but we didn't know what it would mean to have to work that much harder if we were people of color.  Not being aware of that formed the basis of our beliefs about the world. 

What started to change for me was my interest in numbers.  I'm an extremely logical person, and I always press for facts, statistics and the "truth" behind things.  

The truth, as it seems, is a little more complicated.  

When you start asking "why" and "how" instead of "what" you get a much less black and white view of solutions to society's problems.  You start seeing the failure of prisons, of capital punishment, of the anti-abortion movement, of the drug war, and of US foreign policy.  

These aren't opinions.  They're provable facts.  The failures are measurable.  

You start looking at the cash flows in poor neighborhoods, where you probably don't own your property, and your landlord doesn't live locally.  When you pay rent and when you shop at big box retailers and fast food joints, you literally suck profit out of your own pocket and redistribute it to the owners of equity--i.e. not poor people.  

Locally owned means "the money stays here" and where I grew up, we never ate at a fast food chain and we nearly always shopped at places owned by our neighbors.  

It keeps going...  How about unemployment rates among the formerly incarcerated?

That's one that hit home, because I knew someone who got arrested for a white collar crime.  

This person is white.  

They had a good lawyer.

They never did any jail time, but they then had a mark on their record that made employment more difficult.  

Thankfully, this person had family support.  They were able to start a business in another line of work, aided by the fact that someone in their family owned a building where they could get started for cheap.  

I realized how different this would be if they were black.

If they were black, they would have been less likely to get a white collar job in the first place--so their "theft" of money would have been more likely to come out of a cash register than a retirement account.  Let's not even go there for a moment--that if you steal money, your sentence really depends on where you stole it--but let's think about the aftermath.

It would have been a lot less likely that this person could have had the connections to find and hire a top lawyer.  They would have been more likely to actually do prison time and that much less likely to have someone in their family own some property to help them get off the ground in another business.

I remember this person's family being worried about where he might have to serve community service--hoping that it wasn't a bad neighborhood.

"You know what's a bad neighborhood?" I said.

"Prison.  At least he doesn't have to work there."

Prison was a bad place.  I knew that much.  I knew people didn't come out of it better than they went in--and I imagined that to survive in prison, you probably had to do things and become a person who wouldn't exactly reenter society so easily.  That's when you start to realize that prison is a cycle--one that starts with the factors that lead to crime, like poverty, lack of employment opportunity, lack of positive role models--because big chunks of your community are missing.  

Then you think about your chances of being sent there.  It is statistical fact that you're more likely to be stopped by a cop if you are black and if you're actually caught doing anything, your sentence is likely to be tougher.

It snowballs from there.  It's now very obvious to me how "fighting crime" results in criminalisation, oppression, and discrimination.  We have to find better ways to bring people back from the edge of society, even when they turn to crime.  This includes sex workers as well--one of the most marginalized populations that gets caught up in continual cycles of abuse.

Funny enough, now that drugs have become more and more of a problem in white communities, you're starting to see the white people in power become more sympathetic to the disease of addiction versus the crime of it.  

You know what else I didn't realize?  The power of speaking out and of pushing people to think.

That's where I originally failed on gay marriage.  

Unlike a lot of Conservatives--I never had a problem with gay marriage.  That, too, is a product of being in NYC.  Ten or so years ago, however, I thought this was the kind of thing states should decide--that you shouldn't force right on people who were wrong.  I thought that you were better off letting states topple like dominos--because *of course* freedom to marry whoever you wanted to marry was inevitable, right?

It had never occurred to me that nothing is inevitable, and that the other side feels like they're on the right side of history just as much as you do--and that if their way of life feels threatened, they'll work even harder than you will to turn the tide.  

It didn't occur to me that if you don't lead by strong and loud example and national law, you empower those who seek to discriminate and even worse, act violently towards the LGBT community.  

You make unequal treatment ok if you don't do everything you can to stop it everywhere.

That was the wrong position to take, but I got it right when the country finally did.  

In 2008, we had a choice in this country to follow someone who understood that problems are complex and require nuanced solutions--that strong isn't always the answer, especially when paired with wrong.  The campaign and presidency of Barack Obama was a turning point for me politically, because I had come to realize a lot about where I had come from.  

in 2008, I was in a failing business that I had started.  Yet, I could feel just how far I was from really having any problems.

It didn't matter what my bank account or credit card statement said--there were no worries that I could pull out of it.  I knew I would have no problem getting hired for my next job.  I had family support, community support, and my failure could be worn like a badge of courage.  The $550,000 of investor money that I "lost" would see not nearly the kind of lifetime punishment that someone who stole $550 would experience.

That's when you get the sneaking suspicion that you've got something in the bank that not everyone does.  

Over six years, culminating in the news that a little black kid got shot carrying a toy gun that looked way less harmful than the toy guns you ran around with as a kid, I learned for sure that I am privileged.

I am privileged by being white. 

I am privileged by being male.

I am privileged by being straight.  

So, what do I do about it?  

Seems the most obvious thing to do after realization is education.  When someone tells you that you have a disease, you read up on it.  You don't just talk out of your ass about it.  

You start listening.  

I'm happy to get suggestions on books and essays and such via Twitter.  (I don't like comments because they're an unmanageable medium for me.)

Second, I imagine, I'll try to make others in my circle aware of it.  If I can do that in some small way through my personal brand and footprint, I hope I can help affect some change.

Third, is that I will continue to participate in activities that promote diversity and inclusion.  

At the Brooklyn Bridge Park Boathouse, we have built a diverse community of volunteers and paddlers who are regaining ownership of their environment and improving their health through activity.  This includes advocating on behalf of the Park's own diverse constituency with respect to neighboring, mostly white and wealthy, communities.

It means raising money for tech inclusion programs like ScriptEd, which teaches a diverse base of students how to code. 

To me, it also means being accessible in my job as a startup investor--and doing away with systematic exclusion tactics like the "warm intro" where you can only break into the tech community if you already know people in it.  It doesn't mean that I'm doing anything other than trying to make money for my investors--a responsibility I take very seriously.  I'm not an impact investor, but I know who I invest in makes an impact.

It means being conscious about how I screen opportunities.  It means speaking and taking pitches in front of more diverse communities.  It means judging pitches in the context of the person--and knowing that the very same company is going to get presented very differently to me when a white male is pitching versus a black female.  Language will be different and so will the signals that we typically associate with confidence.  

I don't have perfect answers to what to do about any of these situations, but I'm up for listening and I'm definitely more aware about what my status means than I ever have been.  

Are those people idiots? How to think about competition.

A lot of founders who pitch me tell me that they're the only ones doing something.  They're in the same ballpark as a major player, doing something just one tiny bit off from what they are, and they expect this company to get their lunch eaten over the next seven years while an IPO-sized company is grown right under their noses.

The people who work at your competition...   Are those people idiots?

So there's this super obvious key to victory that doesn't require more than a seed round to prove out, and you've got someone already in the space with all the connections and awareness they need, but... what... They're just twiddling their thumbs like idiots?

I can't tell you how many times I've asked people that question.  It's not that I think competition really matters a whole lot in the early going--but what matters more is that you understand your market.  

I want you to be able to thoughtfully articulate why the competition is hamstrung.  Maybe you differ in your view of where the future of this industry is.  Maybe they got caught up using the wrong technology.  Maybe your whole design DNA is different.

Maybe it's just that they just don't care, or that their people aren't good enough to execute what you can execute.

Or, maybe their team is actually stupid.  That could be your bet--but if it is, own it.  Make it an intentional bet, not your fallback bet because you were too lazy to do any real market research or that you're not a team who knows enough about a market to be in it.  


Writing Checks Doesn't Make You an Investor

I met with a family office investor yesterday and we were talking about his family's interest in diversifying their investments into early stage companies.

They mostly participated in real estate transactions--an asset class where actual due diligence is conducted, deals take months, even years to close, and assets are sometimes held for decades.  It's an asset class built on relationships.  You become a steward of not just property, but of neighborhoods, homes, offices--the places where people conduct their lives.  These are incredibly impactful relationships dependent on trust.  You might work with the same group of investors, contractors, agents and management companies for decades.

A lot of these people have started getting into the angel investing world.  The growth of co-working shed light on just how big an impact thousands of small startups can make on a market--and when these companies make it, they take down some significant space.  Participating in the upside of a company that started out as three people and now has a full floor in your building seems attractive to many.  

Something he said at the meeting struck me.  He said that he might like to get into the business of investing, but if he's going to, he'd actually like to get into the business, and "just writing checks doesn't mean you're in the business."

Here's what it means to me to actually be "in the business" of investing:

It means building long term relationships and acting in such a way--professionally--that you care about maintaining your reputation.

It means establishing a track record of not only success, but of trust.  This includes transparency around what deals you've worked on, and what your role was.  

It means having a strategy that leverages advantages and resources you have, and doing your homework.  

It means actively trying to learn and improve.  

You might not have a year to close a transaction, but that doesn't mean you can't be smart and professional about how you go about your business.  

Anyone can write a check--chasing the "hot" deal like a dog chases a car.  Without a plan, without a network, without trust, without transparency, or a path to learning that doesn't mean you're an investor.  

That makes you a gambler, or a hobbyist.

If you're a VC, you should do whatever you can to make your limited partners feel like investors.  Aim for engagements that make them more than just check writers.  You can do this through transparency, communication, opportunities to meet companies, like co-investing, talks, content and networking opportunities. 

It's better for them and for you--because check writers come and go, but investors are much more likely to see things play out over the long term.