How to Build a Successful and Diverse Venture Capital Portfolio Without Really Trying

After checking out The Information's "open dataset" on diversity in venture capital, I felt pretty disappointed.  It didn't include the most important statistic of all--the results!  Who is actually building a portfolio whose founders reflect the diversity of the greater population?

I went back and calculated the number of companies in the first Brooklyn Bridge Ventures portfolio who have at least one founder who is female, from an underrepresented minority group, or LGBT.

A whopping 17 of the 32 companies (53%) have founders that fit into those groups.  So, while my fund might be 100% run by one white guy, I'm sure I'd fare pretty well on The Information's list if they added actual funding data.  

Yet, here's the thing: I'm not actually aiming for diversity.  Not directly, anyway.  There's no social impact clause in the fund's mandate and the background and status of the founders arent criteria.

So how's that possible with such a skewed ratio?  And does it work?  Well, so far, the fund is clocking in at about 64% return, compared to the NASDAQ's annualized return of about 15% over the same period--so I'd say it seems to be going in the right direction.

Here are some ways I think this works out in practice:

The Earlier You Go...

Most people need a little bit of capital to bring a product to market--or they're an engineer.  Well, if the stats say that most of the people getting funding are guys and that most of the engineers are guys, then if "have money or code" is your criteria, you'll wind up funding mostly guys.

Of the 32 companies in my portfolio, 18 (56%) were pre-product.  If you're doing that many companies at such an early stage, you're bound to be choosing from a wider audience.  You'll have more zeros, but your winners will be that much bigger for you because you'll be in at attractive valuations.  Four of my best performing companies--Canary, Orchard, Ringly and Tinybop--were all pre-product investments.  

Be Accessible

I think the biggest unnecessary speed bump in the world is the requirement for a warm intro to an investor.  If you're putting yourself out there that you invest for a living and you want to see deals that fit into a certain criteria, then you should be willing to see those deals.  In today's world, who *isn't* connected to you somehow?  Making entrepreneurs grab a random coffee with someone they haven't spoken to in a while just so that person can write up an intro to you wastes at least two people's time.  VCs have an inflated sense of the value of their own time.  We should be willing to go through the firehose of crappy deals in their inbox for the money we make.  Warm intro or not, no VC has the magical stream of only quality deal flow with nothing stupid added.  Heck, most of the worst deals I see are from intros to perfectly nice people with perfectly awful startups.  Why?  Because those people aren't VCs so their deal sense has no reason to be any good.    

When one of the problems is that certain groups aren't connected to capital and you make the prerequisite already being connected, you're just going to perpetuate the problem.  

Diversify Your Life

What do you have in your life that mixes up your network?  Obviously, if everyone in your network looks like you, that's going to be who you fund.  While diversity isn't a criteria in my fund, it certainly is in my life.  The kayaking program that I run serves a population of an estimated 50% minority participants and is staffed by an extremely diverse volunteer base ranging in age from 20 to 68.  My home and office are in Brooklyn--one of the most diverse places in the world.  I've even tried to diversify the investor base of my fund.  Five women actively invested in my previous fund (not counting couples where a husband has taken the lead on the investment) and I'll be adding at least three more in my next fund.  

Stay Unfocused

Some of the biggest startup opportunities in the last few years have come in categories that you wouldn't normally have considered to be VC backable--Tesla, Uber, Blue Apron, WeWork, Shake Shack, Fitbit, Warby Parker, etc.  If you keep an open mind about areas in need of disruption, there are serious returns to be made--and you're likely to get exposed to entrepreneurs who don't look like the base of entrepreneurs already getting funded.  In my first fund, I've invested in seven companies that make a physical product and two companies that have a physical retail location.  I've also made investments in the daily fantasy sports, financial infrastructure around cannabis, and three companies in the kids space.  So, yeah, it's quite a mix.  

Run More Events Than You Attend

If you keep showing up to panels of white guys and audiences of developers, maybe you should think about taking the reigns on what you participate in.  Brooklyn Bridge Ventures hosts multiple dinners a month across neighborhoods all over NYC.   I run #notapitch events where anyone can come and share their ideas while getting super early investor feedback.  By doing all of the marketing and much of the curation for these events, I can change who is in the crowd of people I get exposed to.  

So far, it's all worked out pretty well--and to be honest, it's been a lot of fun.  I can't say that this approach is going to work for everyone, but hopefully it's something investors can be more conscious of as they run their portfolios and think about how to spend their time.  

Tips for Investing in Startups if You're a Celebrity

I've wanted to write this post for a while, but now that my friend Beth has joined WME, feels like the perfect time to do it.

I don't really know many celebrities.  If I threw a dinner party in NYC, I think I could get Morgan Spurlock, Gabrielle Corcos & Debi Mazar, Carmelo Anthony, and maybe former Met pitcher Glendon Rusch if he happened to be in NYC as we're randomly Twitter friends.  I met Brooke Shields a few times at the Union Square Hyatt where she was holed away writing her recent book.  She was lovely, and doesn't look a day over 35 without makeup, in case you're curious.  

That's about where I top out, though--so I don't pretend to know what it's like to be a celebrity.  

Celebrities should also know that money and fame doesn't automatically make them qualified to be investors.  Some of them appear to be very good investors, though--and some investors are borderline celebrities.  Crossing over is hard on both accounts, so here's some tips for people who have broken through the 15 minute fame barrier.

  1. Investing in startups is hard and it's going to be hard for you, too.  Don't think that everything you touch is going to be the next Uber.  Ubers come around once in a generation and while it seems like a lot of celeb investors are doing well, there are a TON of bad deals no one ever shares.  It's like the stock market.  Everyone seems to be making money all the time, right?  Respect my craft and I'll respect yours.  
  2. Find some partners that you trust who do this kind of thing all the time.  Do you know who the worst people in the world are?  The trusted celeb manager who doesn't know anything about startups, never made an angel investment before, and thinks they're big shit because some celeb picked them out of a hat to look at deals for them.  I'm sorry, but I can't take those people seriously.  Celebs are better off investing in a few funds and working with the VCs in those funds that they've built a trusted relationship with to vet deals for them.
  3. Don't ask for a special deal if you're not a co-founder.  What Jessica Alba has done for Honest and what Kim K did for Glu Mobile is amazing, but they were founders of those businesses, actually putting the work in.  They deserve every penny of the rewards from those companies.  If you're just putting in $25k, you're just an angel, and you should want to be helpful to the company.  If you're not risking any capital at all, well, that's just offensive.  Sticking your hand out to a founder when you're rich and they're busting their butt to keep the company going is maybe the worst thing ever, besides being the aforementioned manager person.  
  4. Let the world know what you're looking for with an Angellist profile.  How am I supposed to know which celebs want to lean into the whole parenting image so I can show them Tinkergarten?  What are the sports celebs that want to tie into SocialSignIn because the company is signing up NBA venues as customers?  What fashionable investors want to be on the forefront of wearable technology as a Ringly investor?  It's a ton of work that the rest of the startup world has joined a network to make a lot easier.  
  5. Read up and learn!  Chantel Waterbury told me that Ashton Kutcher was a thoughtful investor who always had a lot of great input.  If you're going to do this, you should do the work to figure out the basics, and try to get better at it.  Otherwise, you're just money and Twitter followers--both which are commodities.
  6. Be accessible.  The best deals don't always look like the best deals.  Canary, one of the hottest companies out there right now, raised their seed before their pre-sale and before their product.  There were a million reasons to pass on these first time entrepreneurs.  Tens of millions of dollars in revenues and almost 100 employees later, missed opportunity.  Uber wasn't a hot deal.  Neither was Casper.  Same with Kickstarter.  Hire someone willing to wade through all the crap because some of it actually isn't crap.  That's what makes this hard.  See #1.

Thanks for listening.  

If anyone has tips on how I can be friends and/or coinvestors with Drew Barrymore or Christopher Walken, let me know.  

Leave Money on the Table

I was having a conversation last night with another VC who was suggesting I monetize the pro-ratas that I don't take by creating SPVs.  As a small fund, I've been writing one check only to a company to help get them off the ground that that has served me really well so far.

"But you could charge fees or at least carry for that...  You're leaving money on the table!" he said.

I said, "Dude, I run an $8 million fund and I'm about to finish raising a $15 million fund.  I'm the King of Leaving Money on the Table."

For me, I'd rather have a very simple, straightforward business model--one where no one has to think to figure out if I'm giving advice on your next round based on some special vehicle or deal I have on the side.

It made me think of an investment I just made where the entrepreneur found an extremely profitable niche that he is already taking advantage of.  He was pretty flexible about terms because he felt like he was going to make so much money that the terms of the deal didn't really make that much of a difference.  

My favorite ice cream shop, Ample Hills Creamery, has some flavors that are less profitable than others--but that doesn't stop the shop from making them.  They could probably make more money replacing these flavors with simpler ones, but they wouldn't be Ample Hills if they did.

That's the kind of company you want to fund as an investor--not something that only gets big when you need to squeeze every last dime out of the opportunity.  You're never going to be able to do that as a startup, and often times that comes at the expense of your user experience and happiness.  

Same thing happens with people.

Who wants to be around someone who counts every last penny and never misses an opportunity to cash in.

Those aren't the kind of people I want to be around and it's not the kind of relationship I want to have with a company.  It's definitely not the kind of relationship I want to have as an investor.

The Nature of Greatness

I was talking to someone recently about striving and desiring to be great at what you do.  That brought up the question of what makes someone truly great at something.

We refer to people as "great entrepreneurs" in the startup community all the time--but are they?  I've noted for a long time that too many people have untested, hollow reputations based on things like social proof that go untested.  How many founders have made hires, especially consultants, who were supposed to be great that didn't turn out to be?  Ask around for recommendations of who is great at marketing, PR, or anything else and you'll get lots of answers--and probably few of these folks have actually achieved "greatness".

So what makes someone great?

In sports, when I think of greatness, Greg Maddux is who comes to mind.  It wasn't so much that he was successful.  A lot of people have great stats.  It was the nature of his success.

Maddux seemed to understand how the machine worked better than anyone else.  It was like someone gave him the instruction manual on how to pitch and no one else had it.  He would count in his head how long fly balls were in the air, and get annoyed if he got to a certain count and the ball wasn't caught--because an outfielder should be able to get to a ball staying in the air for a certain amount of time.  

One time, he was sitting next to a player in the dugout and told him that he should move or he's going to get hit with a foul ball on the next pitch.  Sure enough, the very next pitch sent a screamer his way.  

The great ones have a deep working knowledge of the systems around them that they are able to exploit for their own purposes.

This next one is easy.  If you're truly great, then mastery on your level is rare.  If everyone is doing what you're doing, then how hard could it really be.  When Babe Ruth hit more home runs than any other American League *team* did at the time, that was pretty serious.  When you can't think of anyone else doing the kinds of things a person is doing, that's truly great.

I don't think greatness is innate.  You might be born with certain natural talents and predispositions, but I can't think of anyone who was great at something and didn't have to work at it--especially in competitive situations.  If you're great at what you do in a competitive situation, someone else is working hard to beat you the next time.  Greatness is about continuous learning and striving to be better.

When I worked at First Round Capital, Josh Kopelman seemed tortured by the question of what more the firm could be doing for entrepreneurs.  They already had the reputation for being the most value-added seed investor on the planet--but that didn't seem enough.  He knew other people would start doing the things that they were doing, so he was always trying to figure out what was next.  Look at how much they've stepped up their game in the content space in the last year or so--all that came *after* they already were a top tier branded firm.  

What makes you so great?  I think you need to be able to answer that.  Greatness comes with introspection.  Because no one is perfect, to be great, I think you have to understand yourself, and your strength and weaknesses.  Great ones inevitably wind up getting you to play their game--and they know what their game is.  They lean into it.

Greatness makes an impact.  You can't be great without actually doing anything.  This is when most people fall off when I'm told that so and so is great at something in the startup world.  What have they actually done?  

When you are great at something, it's not about a great game or a single great space--it's something you can count on day in and day out.  Greatness is consistent. 

When you're good at something, people what to be as good as you.  When you're great at something, the top performers in that area look to you, your accomplishments and your abilities as a goal.  That's when you get great referrals--when you ask all the top people who's really doing it the best.  

Back to sports for a second.  One of the reasons why I like sports is that you can measure things--and not just total outcomes, but outcomes in context.  When you look at a player's statistics, you can measure that against what everyone else is doing, or who that player has faced, and figure out who is actually outperforming.

Same with investments.  Alpha is defined as the outperformance you get not that isn't from the rising tide of the whole market, but from your picks.

Greatness outperforms.  It creates more than what it is given and achieves far more than the wind that it has at its back.

So, if you got invited into the first Open Angel Forum, a pitch event where Uber was trying to raise its seed round, and you just decided that seemed like a cool idea, it's hard to credit you as being one of the best seed investors of all time.  You wouldn't have been there without the invite, and that invite had a lot more to do with your success than your filter.  

Greatness also moves the bar, setting new standards.  In a world where achievement gets analyzed, practices get shared, and performance generally improves, the ones at the top generally raise the bar higher and higher.

Lastly, I think great ones make others around them better.  Whether it's because they push, or teach, great individual performers who don't make their teams better aren't that great--because teams can achieve more than individuals and it would be short-sighted not to want to make your team better as a whole.

Greatness, unfortunately, isn't universal.  It feels very specific.  There's no question in my mind that Mike Tyson was a great boxer.  He plowed through opponents in record time.  While he fought like a man playing with boys, it seems like he actually wasn't much of man in his youth.  He was immature, violent, and probably achieved success too early without a lot of guidance.  A lot of top performers go through this.  Steve Jobs wasn't nearly as much of a father as he was a product visionary.  Michael Jordan couldn't play baseball and Julia Child, at 6'2'', wasn't a particularly good basketball player, other than the jump ball.  

So before you say someone is great at something, think about pulling it back a little to very good.


Be Someone that People Want to Work With

I mentioned this in my newsletter yesterday and decided to make a post out of it.

People ask me all the time how you find talent, money, etc.

My startup Golden Rule is this:

Be someone that people want to work with.  

That's how you get funded.  That's how you get hired and how you can hire the best people.  It's why you get press and even how to get customers.  

It's key to getting into venture capital.

If you were driven to be the very best person anyone could ever hope to work with, you'd go on to do amazing things.

That means you'd have a skill to offer--one that you strive to improve on everyday.  You're constantly learning.  You listen.  You're well connected.  You're pleasant.  You're curious.  You're calm under pressure.  You work both smart and hard.  You're thoughtful.  You enjoy helping others and want them to succeed.  You are innovative.  You aren't stuck in your thinking.  

When I set out to raise my next fund (which is thankfully going quite well), I wrote the deck based on why I thought others would want to work with me--because it seemed like the only important question you had to ask when considering a VC. 

Follow anything more specific and you run the risk of losing the context of why something worked for someone else.