For the last three and a half years, and until recently, I worked as a venture capitalist in NYC focused on early-stage enterprise investing. Through my own career path and experiences I’ve learned a number of things about venture capital investing, working with entrepreneurs, and building a career in venture capital. Here’s twenty-three things I’ve learned so far.
1) Back theses, not product visions.
Josh Miller explains it as such:
… early-stage investors should be looking for entrepreneurs who are thesis-driven and implementation-agnostic.
When I first started, I was overly tied to evaluating product visions, and made decisions based on specific implementation paths sketched out by founders. What I learned 1 was two things:
- Markets have an indelible impact on the opportunities and available paths for startups
- Product visions and paths will change as an entrepreneur builds experience in a space
- People’s ability to create and execute on a theis in a market was what determined success
I quickly came to believe in two heuristics, "bad market beats great team" and "bet on technology risks, not market risks, that guided how I thought about markets, products and teams. Instead of asking about product features or product paths, I learned to spend more time learning about an entrepreneur’s thesis on how the world is evolving and what people need. I learned to look closer at the people and how they came to their theses, rather than the specific product vision they were able to articulate at the moment. And I learned to love people and markets more than products.
2) Build investment theses, invest in people.
A common consideration for VCs is whether they want to be thesis-driven or more opportunistic, i.e. do they want to create a thesis about how the world will evolve and then invest in companies building towards that, or do they want to be opportunistic around trends and just focus on backing great entrepreneurs? The difference is how you build your own skillset: do you develop a deep competence in a specific set of markets, or are you more of a generalist with a more shallow understanding in a larger set of markets? The ultimate answer is to not think of it as an either/or choice; it’s important to understand your own skillsets, personalities, and experiences to help you choose the right ways to focus your own career as a VC.
Theses matter to the extent that it determines the markets you choose to invest in and the people you work with. After that, it’s all about people.
Know what you’re building in yourself and your firm, be clear in your differentiation and value-add, and back entrepreneurs that need and can leverage what you’re building. Your work to develop a depth of knowledge and relationships in a market will be how and why you find the entrepreneurs you back. I worked hard to develop my point of views about advertising and advertising technology, particularly around the role of intent data, native advertising, programmatic advertising, web publishing, mobile messaging, and it played a direct role in how I met and was able to support the entrepreneurs I met, advised, and invested in.
3) Timing matters.
It took me awhile to understand and fully embrace how important timing is to investing: critical for a startup to understand why right now is the time for a particular business or technology to succeed, and also critical for dealmaking. Timing, the sense of why something matters right now, is important, but is matched with pace, the sense of how fast markets, companies, technologies, and people are moving. In dynamic environments, understanding timing and pace is critically important, yet it’s also hard to observe from the outside. Much technological and business progress happens behind the scenes and will never be observed by the public, so it’s very difficult for outsiders to observe and judge pace accurately and appropriately. Always ask: "Why now?"
4) Be clear in how you define "great" entrepreneurs and teams.
An easy cliche for a venture capitalist is to say that "we look for, back, and support great entrepreneurs building great teams". And while it’s true, what does "great" mean? The cleanest way I would describe a great entrepreneur is someone with a unique, differentiated reason to be better at executing this business, in this market, with their team, than anyone else, an inner capacity and ability to build a great company. "Great" is hard to define and even harder to identify a priori, but focusing on the how and why someone is uniquely qualified to win at this business provides a bit of grounding that helps one figure out greatness.
5) Listen first, listen always.
Listening is one thing I’ve always worked hard at, and one thing that entrepreneurs have said that I do well. Telling entrepreneurs what to do may feel great, but it’s more important and valuable (to both entrepreneurs and VCs) to listen first, talk second.
VCs are guides and mentors, not managers. Actively ask questions about thought processes, learnings, and goals in order to understand their situation, listen and internalize what people say, and then draw on your own experiences and knowledge to give the right guidance for the situation. And because any advice is inherently shaped by one’s own experiences, personality, and perspective, it’s important to listen first so we can assess how our advice fits the situation at hand.
Listen before you talk. If you don’t listen, you don’t learn. 2
6) Become intimately aware of your biases.
Biases are inherent to humans and impossible to completely remove. And we shouldn’t: biases, heuristics, patterns, and stereotypes are all ways to describe how we use past information, experiences and observations to process new information. They are natural, as it’s impossible for the mind to process all past and present information to make brand-new decisions, so we have to store the results of some decision processes in our memory to call on in the future.
The results of those stored processes is what we call judgment and gut, but it’s also the source of biases and stereotypes. We can’t defeat and expunge our biases without shredding our judgment ability, so instead, be acutely, intimately aware of where our biases come from, and call them out to make sure our decisions are not guided by biases. Note our inherent biases when seeing new information, when meeting new entrepreneurs, when looking at new markets, when testing new products. Pattern matching is important, but we can’t be beholden to the patterns we’ve developed. And that’s why it’s important to use a diversity of perspectives and ideas to make good decisions.
7) Lean into what you don’t understand.
Don’t discard what you don’t understand. The most interesting and valuable ideas tap into emergent user behaviors that we won’t understand at first (that’s why big ideas often emerge disguised as bad ideas or toys). Use your befuddlement over why anyone would want to do something as a signal that it’s worth learning more about. Emergent behaviors only make sense in retrospect.
I visited Las Vegas and the Downtown Project a couple years ago for a Tech Cocktail Tech Week and remember watching Tim Draper quiz the Romotive founder in their apartment as he played with a Romo robot, asking question after question, probing the founder to understand everything about the product, their thesis, and their approach. His intense curiosity stood in my mind, a reminder of why we have to work to learn what we don’t intuitively understand.
8) Ask dumb questions.
Hopefully, in every meeting you’re in, the entrepreneur will know more about their business, market, product, idea, and team than you do. Don’t let your intellectual ego stop you from asking your dumb questions; dumb questions can be good questions.
Why? For one, you can help an entrepreneur understand their own inherent biases and mind blocks in how they think about and sell their ideas. Entrepreneurs will have to explain their ideas, products and businesses to range of people, including press, prospective hires, prospective partners, and more, and it’s important to see and help how they communicate their ideas.
In addition, it can open up new avenues and new patterns in ways you wouldn’t have immediately recognized. You don’t have to know the answers, but you do have to know the questions. And you have to know how to understand and synthesize what you hear so you can give good feedback.
Since I was focused heavily on advertising and marketing technology the last couple years, I developed an expertise in the space and saw a lot of similar ideas, but found that I still had to keep a beginner’s mind; just because we’ve seen it before doesn’t mean we’ve seen it all. 3
9) Make time to learn.
Your job is to believe in things others don’t, so start by taking the time to learn what you believe and why you believe it. It’s easy to be a slave to one’s calendar, and see every free space as a time to meet someone and talk about their ideas. But at some point, you have to spend the time to develop the ideas and grounded, unique perspectives that can differentiate you as an investor. Sounds easy, but it takes a consistent, conscious effort to make the space for investigation and reflection.
I make a point to allocate two afternoons a week to researching and understanding ideas, trends and spaces that I thought would be valuable for me. Every Wednesday and Friday, 12-5, were times that I blocked out on my calendar ahead of time, and worked hard to keep clear of meetings, calls, email, and requirements so I could make the time to learn and write.
Leave open space on your calendar, just like your mind.
10) Form your own opinion.
Venture capital can be a lonely endeavor, but it’s important to decouple interpersonal loneliness from intellectual loneliness. It can differ by firm, but interpersonal loneliness is something inherent to the job that you can combat by building networks with entrepreneurs, partners, investors, press, and great people.
Intellectual loneliness is what allows you to develop non-consensus viewpoints and investments. Pursue things you think are interesting, not just things everybody thinks is interesting. 4 And being intellectually lonely is a precursor to making non-consensus investment decisions. Don’t just form an opinion, form your opinion.
11) Bias for curiosity, friction, and serendipity.
You can’t learn by staying in the office, only meeting the people you know, only reading the normal things you read, only agreeing with what you read. Be curious, find opposing viewpoints, find new people, find different networks, find new ideas. Take odd meetings to create serendipity. Reach out cold to people doing things you find interesting. Be willing to be wrong. Test, try, and learn.
When I see or read about something interesting, I don’t just read the news article about it: I research the people behind it, find their email or Twitter, and send them a note to tell them I thought it was interesting. I made a lot of great connections over the years by reaching out and saying hello.
12) The intellectual side of meeting and evaluating big, new ideas is fun and interesting, but VC is won and lost on more than intellect.
For a number of years before I came to VC I used to read about, interpret, and armchair critique venture capital fundraising announcements, wondering and analyzing and often knocking the viability of an investment. I’ve now come to realize a couple things: that there’s a lot more that goes into VC than the investments, that there’s a lot of context behind an investment that the public will never see, that deciding on investments is far harder and more meaningful than analyzing ideas, and that figuring out where valuable companies are going to be built and then actually positioning yourself to invest in them are related, but ultimately separate things.
Andrew Parker of Spark Capital explained it well when he talked about the challenge in VC:
The lesson here is that venture capital is less about identifying great investment opportunities and is far more about getting access to those opportunities. Knowing that this handful of companies would become interesting in 2010 is not what makes a great VC. It’s convincing the entrepreneurs in all these companies to partner with you on their journey; that’s the battle.
This is a part of the tactical and operational side to VC that I didn’t understand before, but have worked hard to learn over the last three years.
13) Uncertainty is a feature, not a bug.
Uncertainty is your friend. Uncertainty is what creates the opportunity for you to build things others don’t see, to make decisions others don’t understand, to learn things others won’t spend the time learning about, to invest in entrepreneurs and companies others aren’t sure will succeed. Uncertainty is what provides you the opportunity to make the non-consensus decisions required for outsized returns.
Marc Andreessen explained the process as:
"We think you can draw a 2×2 matrix for venture capital. …And on one axis you could say, consensus versus non-consensus. And on the other axis you can say, successful or failure. And of course, you make all your money on successful and non-consensus. … it’s very hard to make money on successful and consensus. Because if something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate ‘non-consensus’: in sort of practical terms, it translates to crazy. You are investing in things that look like they are just nuts.”
Embraced in a conscious, repeatable manner, the uncertainties you choose to invest in will define your investment thesis.
14) Entrepreneurs are more important than VCs.
Don’t waste an entrepreneur’s time. Be prepared. Be present. Be on time. Follow-through. Check your ego. Call out your biases. Mentor, don’t preach. Know when you can give advice, but also know when you can’t. Allocate success (and failure) appropriately.
For the last couple years I surveyed every entrepreneur I met to solicit their anonymous feedback so that I could find out what I was doing right and wrong. I leveraged Phin Barnes’s approach and asked a set of structured and open-ended questions, which I reviewed regularly to understand what I was doing right and wrong. I worked hard to integrate the results into my work, making sure I was clear in my follow-ups, explained our process and thesis clearly, followed through on my introductions and feedback, and made meetings valuable for entrepreneurs regardless of the investment decision. In 2013 I explained the process and published the results, and still regularly run and review the survey.
15) Be clear in your decision process.
"Saying no" is a controversial topic among entrepreneurs and VCs; entrepreneurs generally want to hear decisions quickly and efficiently, while VCs are incented to wait to make decisions in order to observe more information and reduce the risks behind investing. Writing "pass notes" to entrepreneurs is one of the first things Darren Herman taught me to do, spending the time to teach me at first, and then giving me the room to develop my approach and voice. I take the approach of:
- If it’s a no, say no.
- When I say no, I make a point to say why.
- If it’s a no, be open to talking again in the future.
I make an effort to be clear about the decision process and timeline, and to follow-through with entrepreneurs on information and decision points proactively. To do that effectively, it’s important to define your process, communicate it with entrepreneurs, and do what you say you will. Being clear, constructive, and being open to having conversations about decisions helped me build productive, closer relationships with entrepreneurs.
16) "What do we believe without question that will be proven mistaken in the future?"
Peter Thiel famously asks entrepreneurs:
“What is something you believe that nearly no one agrees with you on?”
In a related way, I’ve held the belief for a long time that at any point in time, there exists a belief throughout society, so deeply held that it’s never questioned, that will ultimately be proven wrong or mistaken. Whenever you look back at time and think about the widespread beliefs that people held that seems ridiculous now, remember that someone will say the same about you in the future.
That’s why I hold the thought question "What do we believe without question that will be proven mistaken in the future?" in my mind as a reminder to always look for innovation and be open to changing my mind. "Strong opinions, weakly held."
Thiel’s question asks you to explain something you believe but everyone else doesn’t; my question asks you to explain something we all believe but shouldn’t. While Thiel’s question is perhaps more instructive for evaluating entrepreneurs and forcing people to explain potential startup ideas, my question is a bit different, and focuses the attention on questioning current truths.
17) "To know what you think, write it down."
"To know what you think, write it down" is true. I’ve always used writing as a way to crystallize my thinking, and over the last couple years, writing in public has been a critical way for me to learn and connect with people. Writing has helped my career tremendously, and has directly led to introductions, relationships, talks,panels, keynotes, and even investment deals.
Start a blog. Don’t focus on what it looks like, or what platform to use: focus on thinking and writing first. As you build your voice and relationships, you can create a more complex content strategy using social media, newsletters, guest posts, and media publications to aid in distribution, but it all has to start with your own writing.
I’ve used writing as a core output of the learning time I allocate each week; writing about a topic is how I force myself to develop and express a viewpoint on a topic that I’m curious about or need to know. Lately for me, those topics have been mobile apps, computational photography, deep linking, unbundling, card architecture, native advertising, and much more: /categories/perspective.
18) Focus on trendlines, invest in step-changes.
Bill Clinton used a quote in his closing speech at CGI 2013, which was close to a thought he’d expressed in the past:
Focus on trendlines, not headlines.
It’s been interpreted in a number of ways, but at the core is the thought that behind the immediate headlines are often years, even decades, of hard work with little recognition, and that you have to build the trendlines to get the headlines.
Venture capitalists focus their time and efforts in understanding the underlying trendlines behind market shifts, changing consumer needs, and the state and growth of companies, and in many ways these changes won’t hit the headlines; but when it comes time to invest, it’s important to focus on the step-changes behind the trendlines. Predicting that a change will happen in "3-5 years" is easy, but it’s more rewarding to think about what events will create the changes. Step-change events signal investment opportunities that lead to exponential growth, rather than trendline growth, and provide the foundation for outsized returns.
19) In the short-run, judge a VC by how they play the game; in the long-run, judge a VC by their successes, not their failures.
Venture is a long-term, multi-turn game with long memories and long feedback loops. When you make a number of investments, your failures often come first and your successes take time to mature. Successes and failures are events subject to incredible environmental distortion, and for a VC, often outside their ability to impact.
A good exit isn’t necessarily proof for a good investment decision (and vice versa). (link)
If there are about 200 startups each year fundable by top VCs and 15 companies that will generate 95% of all economic returns, that means that we’ll invest in a lot of companies that fail. But given the distribution of returns and the massive wins that come from the 15 winners, it’s more important to invest in a winner than to have a high average of successes. It takes quantity to get to quality, and you have to make a lot of investments (and fund a lot of failures) to find winners. The required sports analogy: judge a VC by slugging percentage, not batting average.
20) Know how you can uniquely best help your investments succeed, and execute on that.
Early-stage investing is drastically different than late-stage investing. Lead investing is different than follow investing. Angel investing is different than Series A investing. Know the game you’re playing and understand how expectations and rules change, and build your knowledge, relationships, and skillsets accordingly. And it’s true: networks, relationships, and the ability to help entrepreneurs succeed through connecting them to solve needs are the keys to building a successful career in the space.
How you are able to leverage your experiences and expertise to support your portfolio will define your reputation with entrepreneurs. Be clear about how you can help an entrepreneur upfront and build that relationship from the beginning. Reactive, sporadic support is less valuable than proactive, consistent support. Build clear lines of communication. Leverage platforms and tools and define clear ways to provide value-add to do more than the semi-regular and reactive "catch-up". 5
Every firm will be different. For us, we undertook a number of efforts to make us a corporate venture capital investor that knew where and when we could be valuable for entrepreneurs and for the firm. We created and published a book about entrepreneurship, we created an educational program to teach people at the firm about entrepreneurship and venture capital and help build relationships between the firm and startups. We created events, panels and talks to bring people in the advertising industry together.
Would that be the strategy for all firms? No. But it fit our particular focus, the kind of startups we backed, and the goals of the larger organization.
21) Doing the right deals is more important than doing the best deals.
While the amount of capital raised is the most public news about new funding announcements, price (i.e. valuation) is the most-rumored debated aspect of financings. In practical terms, valuation should be looked at only around the context of financing, i.e. the price an investor paid to invest capital into the business, and not a market-clearing determination of a company’s value compared to other private or public companies. Even beyond that, without evaluating the broader terms of the deal, which will never be public, prices of investments are not strictly comparable by the public.
But even for VCs executing deals, price matters only to a degree. Price is determined a mixture of a company’s performance and the broader market climate for comparable investment opportunities. And while it’s generally beneficial for an investor to invest at a lower valuation than a higher valuation, even that only matters to a degree. While the economic returns of VCs fit a power law distribution, the results of startups largely fit a binomial distribution: they succeed or they fail. If the startup succeeds, the valuation of an early round likely has very little impact on the financial returns of the investment; and if it fails, then a zero is a zero regardless of the price you paid.
22) Disrupt, or be disrupted.
Recognize that the market between entrepreneurs and VCs has traditionally suffered from information asymmetry: VCs are able to see the overall fundraising market at a much more macro level than entrepreneurs, and so their information about the process is typically far better than entrepreneurs. But that’s changing: AngelList, Mattermark, Crunchbase, accelerators, blogs, Twitter, and the web is providing far more information to entrepreneurs and changing how venture capital firms use information and media to build reputations and source deals.
When I first worked at a startup in 2000 and went through the fundraising process, it was drastically different: none of these sources of information existed the market was far more opaque. The market for venture capital is trending towards being more transparent, more participatory, and more efficient. Venture capital is being disrupted, because the game isn’t the same it used to be, and it won’t be the same in the future.
The examples are plentiful: many firms are adapting, hiring recruiters, community managers, business development partners, helping with press and PR, and building portfolio communication tools in order to make them more attractive to entrepreneurs and a better source of capital than other firms. And funds are investing in their own analysis toolsets, using custom, proprietary tools and platforms like Mattermark, Disruption, and AngelList to help them source and analyze potential investments.
23) Do the hard work.
It takes a long time to succeed in venture capital, as it takes a long time for relationships to build, for companies to mature and exits to occur, for hard work to pay off. Think long-term. Don’t go for "hot" deals just because they are hot. Know how you’re different from other VCs, and continue to evolve and build your value-add. Know why you’re backing the entrepreneurs and companies you’re backing. Be honest, intellectually and interpersonally. Make the time to build long-term, meaningful relationships.
It takes a long time to realize returns; as Mark Suster explained:
But the truth is only time will tell whether I’m financially a successful VC… Any VC 3 years in saying otherwise would either be exaggerating, lucky or an extreme outlier.
Stay true, consistent, and do the hard work, and it will pay off in one way or another. 6
I’ll be the first to acknowledge the range of things I haven’t talked about here: raising a fund, managing LPs, managing struggles or difficult situations with founders and portfolio companies, being a great board member, and many other topics. Always more to learn.
Did I learn slowly or quickly? Perhaps the entrepreneurs I met could tell you. ↩
I haven’t been perfect at this, but I’m working towards it. ↩
At least that’s my belief to date. ↩