The Quality You Never Hear Pitched When People Want in to Venture Capital

In my effort to rewrite the deck for my next fund, I've been spending a lot of time reflecting on what it is that I try to do.

A lot of people can say they work hard, or work smart, but that doesn't leave me off where I think I'm setting my goals.  I've been trying to figure out if there's any differentiation in how I do my job versus how other people might assume it gets done.

So I asked a few founders that I've worked with and they mentioned a word that struck me--because I've never heard any of the hordes of people in my inbox asking for internships, VC job recommendations and advice, etc. mention about themselves.

Generosity.  

People always tell me how smart they are or how much experience they have--or why they have a passion for startups.  No one ever tells me how generous they are, or shows it. 

I went through eight years of Jesuit education, both at Regis High School and Fordham University--and one of the tenets they tried to convey was to be "Men and Women for Others".  

That's largely how I think about my job.  I think of venture capital as a service business.  

How can I leverage what I know to help people?

How can I leverage who I know to help people?

How can I spend more time being helpful and less time focused on the internal overhead of running a big firm?

At the end of the day, every chance I have to improve--to be of more use to the people I back, to build better relationships with other investors, I find that I can really just boil it down to one question:

How can I be more generous?  

It really does drive how I work.  

If I need to fill an open position for an iOS developer, I don't go around asking people for recommendations.  I ask, "What could I do for iOS developers so that a bunch of them show up in a place and I can create an opportunity for this company to get in front of them?"

If I want dealflow from other VCs, my first thought is, "How can I send more dealflow over to others?"  

Thinking about how you can offer more is a great way to be a better investor, and it gives people a reason to want to work with you over and above a check that clears.  

Questions a Potential Venture Fund Limited Partner Should Ask

I have a draft deck put together for a next Brooklyn Bridge Ventures fund.

I pretty much hate it.

Don't get me wrong--the numbers look great.  That's not it.  It just doesn't really get at what's really important.  I wasn't sure exactly how it missed, so I went back to first principles. 

What *is* really important for a venture fund?

It really only boils down to a couple of questions--and that's how I'm going to simplify the story of my deck.

  • Does the firm have access to quality deal flow?
  • Why would anyone want to take their money?
  • Do the expected returns make sense, given typical entry valuations for their stage, reasonable mortality rates, potential ownership, and rational exit sizes?
  • Are your interests aligned by way of the proper incentives?
  • Will the experience of partnering with this individual be a positive one?

That's basically it.  

Much better deck coming soon.

Community Rot

Lists are bullshit.

That's what you get a lot of times when you ask people about the latest "25 Startups You Should Know About" in name your tech publication.  

It's incredibly hard for a tech journalist to know who is actually doing well other than who seems to be good at raising money...

...or who has actually spent time with them.

...or who has already been on other lists.

While you may be getting offers for a $25 million dollar growth round just a little over a year into your existence, there's some junior tech beat reporter making a list of who's hot.  You've never spent time with them and you probably won't, because you've got an exclusive with the Wall Street Journal.  

Besides, who reads that local tech blog anyway?

Well, you'd be surprised.  And you'd be surprised who shows up at the local tech meetups and who's poking around Twitter.  You don't have time to post your kids or your dog to Instagram because you're hiring 10 people this month.  Priorities, right?

Only, a weird thing happens when you don't put your time into the community--when you don't grab a booth at Techday or Uncubed.  The buzz around your WSJ article starts to fade, and no one is talking about you locally.  And if no one in your home city is talking about you, what are the chances they're telling their friends who want to move here that they should work for you.

Open positions start taking that much longer to fill--because you're not getting the inbound that you need and you just lost a candidate to that bullshit startup at the top of the list with the business model that doesn't really work.  

And that next big article, from the reporter at the NY Times who just moved to NYC--it's not being written about you because they didn't know how good you were doing.  They were going off some of those lesser lists to figure out who they should be spending time with.

It's a case of your roots not getting watered.

Some startup founders seem to spend more time going to parties and meetups and tweeting more than they're selling (#hustle).  That's not a winning strategy either--but there's something to putting the facetime into the more aspirational places in your community, especially in NYC.  

New York is far from an efficient ecosystem.  The best people don't always know about the best companies--and they often come over from other industries.  We have a lot of things going on here, and keeping up with who the top venture backed startup isn't our #1 priority.

So make it a point to get your people out there, to bring the press in regularly, and be an active human in the digital places where other humans congregate.  You never know when a cute dog and baby picture on Instagram leads to a TV feature for your company or a clojure developer hire happens at a meetup.  

Following on in a hot market

Conventional wisdom says that you follow on in your winners in venture capital, but I'm not sure you can always accomplish that so cleanly.

In hindsight, if you were an Etsy investor, you would have wished you participated in every single round the company ever did, putting as much as you could in.

But what if you had done the same thing with Fab?

Did those companies look so different in the first few rounds?  In fact, didn't Fab look like much more of a $3 billion IPO after those first couple of follow ons than Etsy did?

If you're making investments in seed stage companies, I'd argue that if you don't have a very big fund, you're much better off just writing one check for each company, and not following on.  The multiples of return you get in a winner when you're in at single digits are more than enough to make up for missed follow on opportunities, and the truth is, the Series A guys want as much of the next round as possible anyway.  You actually make things easier for the entrepreneur--because once things "take off", they can't fit everyone in.

The funny thing, though, is that "take off" these days usually just means "raises money."  It's not clear whether the metrics of pre-sales, downloads, or customers acquired with venture dollars are really predictive of great outcomes.  Yet, companies are able to raise tens to hundreds of millions of dollars before you can really confidently say you've got a winner.  I question whether or not seed funds leaning into Series A and B deals really know that they have a winner on their hands just a year to 18 months into the life of the company.  If that were true, why is the average Series A fund such a mediocre performer?  

Plus, the idea of leaning into your winners makes it sound like these funds are really being selective about their follow ons.  When's the last time you saw a seed fund not participate in a next round because they thought the price was too high or because they still weren't sure if the risk was off the table enough to call something a winner?  If you're just doing all the follow ons available, in a market like this it almost means you're following on in every deal.  

Is every deal going to be a winner just because their Series A came so easily at such a high price?  What happens with this Merry-go-round stops?

Not to mention the prices at which you're being asked to follow on at.  When the average IPO market is a bit flat from last year and 9 out of 10 M&A transactions are $100mm or less, does it really make sense to lean into Series A valuations of $25, 30, even $50mm?  

At minimum you have to call traditional thinking into question in times like this if you're a small seed or angel investor without a large pool of capital that you're trying to return.

VC Value add: Why it probably doesn't matter, but I try anyway.

A while back, a larger fund courted one of my portfolio companies heavily.  I wasn't sure if this firm was the best partner for the company, so I reached out to an experienced founder who had been through lots of rounds as both an entrepreneur and an angel investor.  

He told me the following:

There are maybe two or three VCs on the face of the earth that add any value to the eventual outcome of a company, so there's really just a few criteria that matter...

- They should do no harm.

- They should be able to close the round quickly and without too much distraction.

- You should like them enough to have them on your board.

- They should hit your bogey in terms of price.

He said if you could check off all four of those boxes, you should just do the deal and move on.  I was so surprised because he had taken money from investors who had a tremendous reputation for adding value to their companies.

When you look at venture returns, however, the reality in most circumstances is that you're either in the big deal or you're not.  If you're in a billion dollar outcome, it overshadows anything else you do as an investor. 

Sometimes, the "best" firms are in the best deals, but often times, they're not, or they're joined by a lot of randos.  That top tier VC firm might be the lead on the Series A for unicorn you've heard of, but the seed round might be filled with lots of other firms who don't do squat for their companies--except take credit for their success.

Sometimes, firms get into deals not because they're highly sought after--but because the team pivoted several times.  Dumb luck dictates that the firm who got the deal just happened to be the eighth firm down the list for a pitch after the  game-changing pivot.  The first seven firms--the ones the entrepreneur really wanted, got the first business model pitch--the one that didn't have a chance of working out.  

Way to go, 8th best seed fund!  

Other than having the guts to keep writing checks, it's not clear that any VC has ever done anything to enable a company to get to a billion dollar plus exit where the entrepreneur couldn't have done it with any other check writer.  Don't get me wrong--writing checks in the face of uncertainty, especially when you're basically the only one doing it, is a very difficult thing to do, but most VCs portray themselves to be doing a lot more than that, including me.

I know that I do a lot of things to help my companies--but I also know that the founding team is responsible for 99.999% of the outcome.  If I didn't help them make that developer hire, would they have made one on their own?  Sure.  If I didn't get them some PR, could they have gotten it anyway?  Probably.

Do I know how to do this any other way? 

Nope. 

Like tigers with tuna fish sandwiches, I suppose I'm kind of stupid that way.  I certainly ask myself whether it matters that I take the time to meet with my companies every four weeks, when others just say "Let me know when you need me."

And the best ones certainly are there when you call them--so why not just leave it at that and be an open phone line?  

Three reasons:

a) I just don't know how to work any other way.  I don't like idely sitting by.  I'm always trying--and I know I would have been better off with more feedback as an entrepreneur.  Would I have had a billion dollar exit with the world's greatest investor behind me?  No.  I probably still would have failed, but I would have gotten a lot closer to success.

b) On the margin, when you're dealing with a sub-$20mm fund, it can matter.  When you've got hundreds of million dollars of investors behind you, it only matters if you're in a unicorn or not.  With a small fund, turning a couple of zeros into break evens, and helping a small win become a bigger one do make a difference.  That's why I'd encourage entrepreneurs to think about the fund size of the folks who back you.  The bigger their fund, the more they're just going to encourage you to raise lots of money to go big or go home.  The smaller the fund, the more likely they'll focus you on the little things that add up incrementally, because it adds up for them, too.

c) Starting a company is the hardest thing you'll ever do (maybe besides having a kid), and the least I can do is make you feel like I've got your back and I'm there with you along the way.  If not feeling alone gives you any comfort, I'm doing my job.

It will probably be eight to ten years before what I do now for companies ever sees the light of day, before we find out whether or was all worth it, but I'll stay the path regardless.