A few weeks ago, I wrote about an example of an emerging VC fund manager’s success creating a problem because his fund size increased. I’ve heard this multiple times from both emerging fund managers who’ve raised larger funds and established fund managers who started with small-fund investing at the earliest stages. I recently had a chat with someone from a family office that’s a limited partner in venture capital funds (i.e., it invests in them).

He shared a few interesting things. The first is that they want to invest in great companies as early as possible (i.e., a few hundred thousand dollars at the pre-seed level). They don’t have the ability to source them internally, so they try to find fund managers who focus on this segment and invest in their funds. They believe that emerging managers with micro funds perform best at the pre-seed stage (more on this in another post). Finding and evaluating these emerging managers is difficult. It can be just as hard to find a promising emerging fund manager as it is to find a promising early-stage founder (they’re both early-stage founders in my mind), and this family office isn’t staffed to do that kind of outbound sourcing.

The second challenge was around stage creep. If they find an emerging manager to invest in whose pre-seed investments perform well, that manager usually raises a larger fund. The larger fund likely causes the manager to start investing at a later stage than the family office’s target (e.g., a few million dollars at seed+ instead of pre-seed). And this causes another problem: the family office has deployed capital with another manager at the later stage (that is, it already has a seed+ fund manager), so it now has overlap.

The family office now must start the cycle all over again. It needs to find another emerging manager who focuses on pre-seed or go with an established manager focused on pre-seed-stage investing whose larger fund will negatively affect returns.

There are lots of variables and things to consider that I didn’t get into to keep this simple, but that’s the gist of our conversation.

Of course, all family offices aren’t created equal, and family offices aren’t the only type of limited partner. Different classes of limited partners have different risk appetites for pre-seed investments, and even within those classes, each organization is motivated by different things. This is an anecdotal story, but one I've heard from more than one family office.

It’s interesting that there’s a desire for certain types of limited partners and emerging managers for investment at the earliest stages of a company’s life cycle, but the current VC construct isn’t working efficiently for emerging managers, limited partners, or start-up founders.

Today marks the end of my one-hundred-twenty-sixth week of working from home (mostly). Here are my takeaways from week one hundred twenty-six:

• Music industry – I spent time researching the music industry. I think there are some things they’ve done well that can be applied to venture capital. My network in Atlanta came in handy for this research.
• Insights – I’ve been working on a project that has had its ups and downs. This week I was able to piece together some insights that led to a breakthrough. Excited to build on this momentum next week.
• Routine – I changed my routine a little this week. I felt like I needed a spark. The changes worked. I was a bit more energized and productive.
• Problem on my mind – I’m thinking more about a particular problem. I’ve noticed I wake up at night with new ideas about it. This week I started jotting them down so I can go back to sleep. I’m struck by the fact that, like I said in another post, the last time I thought about a problem this much, I started a company to solve it.

Week one hundred twenty-six was busy. Looking forward to next week.

Today I attended Georgia Tech’s Create-X demo day at the Fox Theater. Around 80 start-ups in this cohort were working to solve interesting problems. More info on each company here. I always find the early founders at this event to be top-notch, and today was no exception.

One thing I noticed that added value to today’s event was its format. It was an open house: People could move around freely. No sitting at all. No pitches. Each start-up had a booth, and people could visit the booths at their own pace. I really like this format. It allowed visitors to spend more time with the start-ups they were most interested in, and it promoted serendipitous interactions among the visitors. I bumped into several people I hadn’t seen in some time and had some great conversations. And I was able to introduce people who didn’t know each other.

Rahul and team did a great job. I’m glad I attended, and I plan to keep supporting the program!

I’ve been learning more about Jimmy Iovine’s knack for identifying new markets. I watched an interview he gave in which he shared what’s allowed him to continually succeed: he harnesses fear. He “turned it into a tailwind instead of a headwind.”

Jimmy went on to say that fear is a powerful force that can work for you or against you. If you can harness fear, you have an asset that gives you a big advantage. Most people don’t know how to harness fear, so this powerful force works against them. Jimmy has trained himself to lean into fear when he feels it (Mike Tomlin has a similar approach). Everyone is always afraid of something. The “something” changes over time, so fear is never gone. You can’t eliminate it, so harnessing it is the best strategy.

I agree with Jimmy on this. Fear has been a powerful force that helped me accomplish things that I didn’t think I could. I’m still working to harness it as well as he does. But I’ve gotten better at recognizing when I’m fearful or uncomfortable as I’m making a decision. If there’s a fear-producing or uncomfortable option, I usually go with that option. Nine times out of ten, it turns out that I’m happy I made that choice and I grow because of that decision.

Is fear your headwind, or your tailwind?

I think of outlier markets as new markets that are both outside the purview of the masses and growing quickly with the potential to be massive. I’ve spent time learning about people who took innovative approaches to finding outlier markets and helping them reach their full potential. This led me to learning about Jimmy Iovine.

He’s a producer turned record label executive turned tech start-up founder. He cofounded Interscope Records, which helped usher various music genres to the attention of the masses. His method was to partner with little-known musicians and independent label owners who understood these genres better than he did. His role was to help them navigate the politics of the music industry and handle marketing and distribution. Interscope has been a massive success. It’s been home to artists and record labels such as Death Row Records, Maroon 5, Lady Gaga, Dr. Dre, Tupac, Snoop Dogg, Nine Inch Nails, Eminem, 50 Cent, Kendrick Lamar, Limp Bizkit, and others. All have been huge successes and had a big impact on the music industry. Hip-hop alone has gone from being an outlier genre to dominating global charts.

Jimmy went on, with Dr. Dre, to form Beats Electronics, which he sold to Apple for $3 billion. Jimmy and Dr. Dre saw that streaming and headphones were markets with huge potential. They built Beats to take advantage of this insight. The headphones were a big success, but the Beats music app was what Apple wanted. The technology is the foundation for what’s now known as Apple Music. Apple doesn’t break out the revenue for Apple Music, but the category that includes this service generated $19.6 billion in revenue for the quarter ending June 2022. Apple Music alone likely generates multiple billions of dollars in revenue quarterly.

Jimmy has a knack for outlier markets—they’ve had an outsize impact culturally and generated outsize financial returns for him. His approach was tailored to music, but I think there are elements of his playbook that can be applied to other spaces, such as start-ups or venture capital.

Luck can play a big role in the life of a start-up. Especially in the early days. The right, seemingly random event can materially change a company’s course. I had a chat with a friend recently about luck. He thinks luck is random. I disagree.

One definition of “luck” is “favoring chance.” Said differently, it means favoring the possibility that a particular outcome will happen.

Luck is about probabilities. What is the probability that something you want to happen will happen? Depending on the outcome you want, there could be ways to skew the probabilities in your favor. A simple example is the power of staying top of mind with people. I have a close friend who many people consider lucky because he’s regularly presented with great opportunities. He’s been successful because of these opportunities. What people don’t see is the consistent effort he puts into staying top of mind with lots of people, which increases the likelihood that people will think of him when new opportunities arise. My friend creates his own luck by increasing the odds in his favor.

What actions can you take to increase the probabilities you’ll get the outcome you want?

Yesterday I shared a few takeaways from reading The Power Law: Venture Capital and the Making of the New Future. The book does a great job of describing some early-stage venture capital investments that had outsize returns (Cisco, Apple, Google, eBay, Alibaba, Facebook, Uber, etc.). There’s a story behind each of these deals, and the book tells each story in an interesting way and even gives specific financial details on some of these investments.

These deals were all different, but they had one thing in common: the companies were early into new markets that quickly became massive. Most ended up dominating their markets (for better or worse).

Markets matter a lot. They have a material impact on outcomes. Founders should be aware of this and be honest with themselves about the market they’re going after. If you’re solving a problem in a slow-growth or declining market, an already difficult journey will likely be many times harder.

I just finished reading The Power Law: Venture Capital and the Making of the New Future. I’d pieced together the history of venture capital, but this was a fascinating chronological account of the industry with lots of details. A few takeaways:

• Family office origins – 1946 was the year venture capital investing was begun by wealthy families. The Rockefeller and Whitney families started to experiment with investing in risky early-stage businesses. It took time for others to embrace this model and put the right structure behind it.
• Angel investing – Google raised $1 million from individuals in 1998, which was unheard of at the time. This contributed to the rise of angel investing.  
• Sequoia – Founded in 1972 by Don Valentine, this firm has been at the top of its game for many decades. It has continued to evolve and expand the ways it invests by being curious and intentional. There’s an entire chapter dedicated to Sequoia because of the impact it’s had on the industry.
• China – The evolution of China’s venture capital industry is well chronicled. China’s tech industry was heavily influenced by American venture capitalists who found work-arounds to invest in promising companies.
• Ownership – In the early days of venture capital, investors would routinely own a significant percentage of companies in early founding rounds. A six- or low seven-figure investment for 40% of the company was not outside the norm. Over the years, these figures have come down as more capital has flooded the industry.
• Larger funds – Funds have exploded in size. The book details the impact of this fact on the industry and on founders.
• Networks – The industry was (as still is) highly dependent on who you know, for better or worse.
• Disruption – Even though it invests in disruptive companies, venture capital didn’t evolve until it was forced to because of disruption. Love them or hate them, investors such as Yuri Milner (DST Global), Chase Coleman (Tiger Global), and Masayoshi Son (Softbank Vision Fund) forced the industry to change. It’s likely time for more disruption in the industry.

This book is full of details and information about the industry and the most prolific investments over the last few decades. This book filled a lot of gaps for me, and I highly recommend it to anyone curious about the industry and how it evolved to what we see today.

Today marks the end of my one-hundred-twenty-fifth week of working from home (mostly). Here are my takeaways from week one hundred twenty-five:

• Culture – I spent time immersed in a different culture this week. It was interesting to see the differences in relation to entrepreneurship. Value creation means different things in different cultures.
• Network effects – I’ve been thinking about how high-quality networks have an outsize impact on early-stage entrepreneurship. Ideas and information flowing freely to early founders can be game changing. I’m wondering how to improve the network in Atlanta.
• Research – I spent time this week reading academic research and trying to track down the authors. I’ll spend more time hustling in that effort.

Week one hundred twenty-five was busy. Looking forward to next week.

I caught up with an investor about evaluating early-stage technology investment opportunities. Specifically, I was interested in his process is to get conviction. He went deep and shared things that made sense about timing, technology advantage, etc. And he described an interesting approach to evaluating founders.

He developed a concept that most founders fit into one of a few “buckets.” As he talks to them, he’s trying to figure out what bucket to put them in. He’s looking for founders who fit into a bucket he calls “builders.” This bucket is a mix of visionary and early-stage execution with a unique twist.

Builders can tell you what they believe the world will look like in five years and can get you from zero to one based on a unique insight that others have missed. The magic with this person is that they understand that the first step to a successful company isn’t linear. The first step is nonobvious. They have a contrarian insight on going from zero to one that others haven’t thought about. They also recognize their limitations and will surround themselves with other people who complement their weaknesses. For example, they aren’t master executors and won’t get a company from one to five, so they add execution ninjas to the leadership team.

This investor believes that other founder profiles can lead to success, but based on his experience, builder founders are key to a company having an outsize outcome.