A Deeply Personal Investment Thesis
I listened to an investor share his investment thesis and why he chose it. For a surprising reason, he invests in clean tech. He grew up near contaminated soil that affected him and others in his hometown. Because of this exposure, he’s been getting treatment (including multiple surgeries) for a failing organ for years. The organ is vital—if it fails, he could die. Because of his personal experience and that of others in his hometown, he’s been passionate about clean tech investing for several years.
This investor isn’t focused just on returns. He wants to make sure others don’t have to endure the suffering he has. That passion is what drives him, and he puts that same passion into helping the founders he invests in.
If you’re a founder seeking capital, consider asking potential investors why they chose their investment thesis. If their story is as compelling as this investor’s, you’ve likely found a good partner.
Figma, Speed of Execution, and $20 Billion
Last week, Adobe announced that it will acquire Figma for $20 billion. That’s a massive outcome for founders, employees, and investors. Digging into Figma’s history, I noticed something interesting. The company was founded around 2011, about eleven years ago. But it didn’t launch the product until around 2015. Even then, the product wasn’t readily available—it was launched to a group of private beta users around 2015 and made publicly available around 2016. That means the company spent roughly four years getting things right before putting the solution in customers’ hands.
Speed of execution matters for start-ups. It’s one of the most important characteristics of successful founders. It might appear that Figma wasn’t executing quickly since it went four years without shipping a product. Given the product’s growth post-launch and this acquisition, I’d bet otherwise. I don’t have any direct knowledge of this situation, but I suspect the team was executing quickly—it was just that what they were trying to accomplish was so massive that the hurdles were extraordinarily high. They were trying to displace entrenched tools like Photoshop (which Adobe owns). They likely had to dive deep to understand the component problems with tools like Photoshop and to understand what users needed (not wanted) and then take a first-principles approach to create a new solution. That’s not an easy or quick process.
I’m sure there were lots of mistakes along the way, too, that prolonged things. But in the end, Figma spent four years building a better mousetrap to disrupt Adobe (and others) and ended up getting acquired by the eight-hundred-pound gorilla it disrupted. I’d say things worked out pretty well and the approach was the right one for what they were trying to do.
When you’re trying to accomplish something great by disrupting incumbents in an established industry, speed of execution is crucial, but it might look different (especially to those outside the company). And that’s OK as long as the end result is a solution that’s ten times (at least) better than what’s already available. Figma understood this and ended up with a superior product that customers (and now Adobe) love.
Limited Partners’ Early-Stage Investing Dilemma
VC funds can have a big influence on start-ups. VC funds get the capital to invest in companies from their limited partners (LPs). LPs can be individuals, families, or organizations (pensions, endowments, corporations, etc.). I connected with someone who knows the LP world well and helps LPs discover and evaluate VC fund managers. One of his points, which is accurate, is that when LPs find a VC fund manager to invest in, they want to back multiple funds managed by that person (i.e., invest for many years). He also said many LPs want to back VC managers who invest early in emerging technologies and markets. Said differently, they want to invest in a VC fund that can help them invest early and for many years in innovative companies.
Early VC investing is done at a nascent time in a company’s life cycle. Founders haven’t found product–market fit (if they’ve even built a product). It’s not surprising for founders to have a problem they’re passionate about and just an idea about how to solve it. This stage is commonly referred to as the pre-seed or seed stage.
Pre-seed and seed stage investing is different than later stages (when product–market fit has been achieved) in various ways. It’s more transient and in a constant state of flux. Let’s dive deeper into this:
- Flux – The rate of change in the world is accelerating. People are constantly discovering new problems, creating new technologies, and thinking of new ways to repurpose existing technologies. And they’re doing this at a faster rate. Some things end up being viable to form a company around, and some don’t. Keeping a finger on the pulse of all this flux and identifying the promising people and problems isn’t easy. It requires constant refreshing of your perspective and relationships, among other things.
- Transient – Companies either succeed or fail, so companies are constantly transitioning into and out of this very early stage. VC fund managers investing at this stage (likely emerging managers) are similar. The managers that fail stop investing. The successful ones raise a larger fund, which usually pushes them to start investing at a later stage ( more on that here and here). When this happens, it can cause misalignment between LPs and VC fund managers (more on that here) and cause VC fund managers to transition out of investing at this stage too.
Some LPs want to invest in cutting-edge companies early and they want to back a VC fund manager who can do this for them for many years. This approach works at later stages (Series A and later), but given the flux and transience at the pre-seed or seed stage, it doesn’t make sense then. These two goals are counter to one another when investing this early. I believe some LPs want to invest in innovative companies as early as possible because of the potential financial upside and societal impact. But backing the same VC fund manager for many years isn’t the right action to support that goal. It would likely have the opposite effect. I suspect LPs want relationship consistency (or something else) for various reasons and think backing the same manager is the answer. They may believe this because it’s all that’s been available to them historically (other than sourcing founders themselves).
There’s a disconnect here. The stated goal and the action being taken to accomplish that goal aren’t aligned, and I’m not sure people realize that. I suspect this is affecting the efficiency of capital and resource deployment to early-stage founders. There’s likely an opportunity to present an alternative solution that embraces the transient and flux nature of this early stage but also addresses LPs’ other concerns (e.g., relationship consistency).
Weekly Reflection: Week One Hundred Twenty-Nine
Today marks the end of my one-hundred-twenty-ninth week of working from home (mostly). Here are my takeaways from week one hundred twenty-nine:
- Pitching rough ideas – Sometimes the best people to pitch on an early, rough idea are those closest to you. It’s likely to happen during casual conversation about what’s new, which is a more relaxed setting than a formal pitch meeting. If they care about you, they’re more likely to give you honest feedback. It’s also a safe environment in which to refine your pitch. I did this myself this week, and it was helpful.
- Trusting my gut – Sometimes my gut pushes me to take certain actions that just “feel” right. I can’t always explain why it’s the right move at that moment, but after I reflect later, I can. This happened a few times this week. One resulted in an entrepreneurial insight that could prove pivotal. Note to self: trust your gut.
- Not sure what they want – If you ask customers what they want, they’ll tell you they want a specific solution. If you ask them what they’d like to achieve long term, they’ll tell you something else. This week was a reminder that sometimes people don’t realize that what they say they want doesn’t align with what they’re trying to achieve. If you can recognize these instances, they can be opportunities to present an alternative solution they haven’t thought of.
Week one hundred twenty-nine was a great one. Looking forward to next week.
Another Bootstrapping Seven-Figure Founder
I had a great conversation with a founder who bootstrapped her software company to over $1 million in annual recurring revenue. I got a product demo and learned about the customers she’s signed to date. A big part of her ability to bootstrap was that she got multiyear agreements with a material amount of the price paid up front. She has big growth plans and is evaluating whether she should raise capital to accelerate her growth.
During our chat, she shared her seven-year goal—to reach nine figures in annual recurring revenue—and more of her thoughts about how she wants to get there. She likely isn’t going to tolerate large losses for the sake of growth. She also isn’t focused on an exit. Instead, she will likely achieve rapid growth in a way that’s authentic for her and her team—measured, calculated growth with an eye to profitability and ownership for the long haul.
This founder has built her business in an intentional way. She’s capitalized it using customer revenue, and that’s served her well. She’s positioned herself to have options so she can build the company in a way that fits her. I’m excited to follow her journey and curious to see how she decides to fund her growth plans.
First-Principles Thinking Is Easier Said Than Done
I’ve been chatting with founders and investors about a problem I’m working on. I’ve noticed that as I’ve described the high-level problem, some people tend to relate it to something they’ve seen before and suggest existing solutions to fix it. They don’t understand that the world has changed materially in the last few years and this problem is something different than what we’ve encountered before. They also don’t understand the components of the problem.
I’ve been intentional about taking the time to break the problem down to its core and acknowledge that though I have experience, I don’t know what I still don’t know given the changes in the world. I’ve tried to fill these gaps to better understand the problem so I can craft a new solution that best fits it, rather than pick an existing solution and apply it. It hasn’t always been easy, but I think this is the best approach.
My conversations and experience with this problem have reinforced that first-principles thinking is easier said than done, and it’s the exception, not the norm. If I want to devise a solution that creates maximum value and is an outsize success, I can’t come up with the answer before I know what the question is.
The Top-Ranked VC Firm Is . . .
I read about a new ranking system for VC firms created by two college students. Founder’s Choice VC Leaderboard crowdsources rankings of VC firms. The platform allows founders to rank the VC firms that invested in their start-up. It verifies the founders’ identities via LinkedIn and fact-checks the investments in the company via CrunchBase. The process isn’t perfect, but it does provide insight from a founder’s perspective.
The top-ranked firm is Union Square Ventures in New York. I’ve read the founding partner’s blog for years, and I’m not surprised his firm is ranked highest. The top ten included Atlanta-based TTV Capital, which was a great win for the city. Most surprisingly, the most notable firms weren’t in the top ten. Sequoia is often regarded as one of the best firms with the most consistent track record, but it ranked number eleven. Again, this ranking approach isn’t without flaws, but it’s interesting, nonetheless.
Venture capital firms serve two main stakeholders: the limited partners who trust them with capital to invest and the founders to whom they deploy the capital. I’m glad there’s another platform on which founders can share their perspectives about the VC firms they’ve worked with.
Why Early-Stage Investing Is Interesting
A long-time friend asked why I’m so intrigued by early-stage founders and investing. He’s surprised that I don’t like later-stage investing more because there are more measurable data points. I enjoy helping founders at any stage, but I do like the early stage the most. I define “early stage” as pre–product/market fit, so it includes the pre-seed or even seed stage. Here are a few reasons I like this stage:
- Empathy – I started my own company, so I empathize with the zero-to-one segment of the journey. I don’t think you can fully understand it unless you’ve lived it.
- Turnover – The more I’ve zoomed out, the more I realize that early-stage investing is often transient. Founders moving to the next stage is expected and a great thing. I don’t think people realize that many VC investors move to later-stage investing if they’re successful and raise a larger fund. As the VC investors transition, so do the limited partners that invested in their funds. Given all of this, turnover at the earliest stage of investing is high for all stakeholders. I enjoy helping others navigate this transient environment.
- Impact – Helping founders at this stage can have a massive impact. The right piece of advice or the right introduction can change someone’s trajectory.
- Challenge – It’s a difficult stage to invest in. Many people shy away from pre-seed investing because of its challenges and the high failure rate. I view these as problems that can be solved for.
I don’t think the current VC construct for early-stage investing efficiently deploys capital outside traditional VC networks. It can be improved. I want to be part of that solution.
What’s the Mamba Mentality?
I was going back and forth with a buddy this week about Kobe Bryant’s mentality and why it led to outsize success in a league where he competed with the best of the best. I came across a short clip of him describing the “mamba mentality” and why it works. Here are my takeaways from the clip:
- Kobe’s mamba mentality was about being the best version of himself through continual improvement.
- Kobe understood the power of focusing on the right habits to produce his desired outcome. He developed a habit of training every day, which increased his chances of being the best. (Atomic Habits is great for understanding the power of habits.)
- Kobe understood the effect of compounding effort. He trained more often—four times a day—by starting early in the morning. With this much training, his skills improved rapidly. So much so that after five years, he was so far ahead of his peers that there was nothing they could do to catch him. In a league of the most gifted individuals, he left everyone in the dust.
Kobe’s clip reminded me of a post I shared a few months back. Self-improvement is the key to sustained outsize success. The biggest limit on your success is your ability to improve yourself.
Kobe was smart enough to develop his mamba mentality early in his career, and he became a legend. I’m not as smart as he is, so it took me longer to fully understand this mindset. Because I now understand how important it is, I have daily habits focused on improving myself by acquiring knowledge. I’ve been sharing daily posts for over two years, and that’s a big part of my efforts. I also spend around two hours a day learning. I can’t predict or control the outcome of these efforts, but if I stick with these habits, I’m confident I’ll have outsize success over the next few decades. Maybe I’ll be as fortunate as Kobe and leave my peers in the dust too.
I’m no Kobe Bryant, but I subscribe to his mamba mentality (in my own nerdy way!).
No One Else Is Looking at This. Is It a Unique Insight?
I’ve been looking for data to quantify how the network problem in VC affects fund returns and efficiency of capital allocation to early-stage founders. I suspect that VCs that subscribe to the usual approach have funds that perform worse than those with diverse networks closer to ground level (i.e., network entrepreneurs are already in). I’ve read several academic papers that dive into VC networks, but they’ve all looked at this from the perspective of existing VC networks. Said differently, the papers look at how well VCs network among themselves and how that affects fund performance.
My observation seems obvious, but it’s been challenging to find research or data on this point—either way. I’m starting to wonder why people haven’t spent more time looking at things from this perspective. Maybe it isn’t as obvious as it feels to me. I connected with one other person researching VC from this perspective, and he shared that he too feels like no one else is looking at things from this angle. There seems to be a miniscule contingent that is. Others accept the status quo in VC. This makes me wonder if this a unique insight that could be the foundation of a game-changing solution.
I’m not sure right now, but I’ll be keeping this top of mind as I progress. I’ll be excited if this is a unique insight!