POSTS FROM 

January 2023

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Adjusting the Pitch on a Stalled Fundraise

Had a great chat with the founders of a new start-up. They’ve been pitching investors and trying to close their current fundraising round. They’ve had some success but haven’t been able to raise all the capital they need. Part of the challenge is the fundraising environment. The founders can’t control that, so today we focused on what they can control. Here’s what we discussed:

  • Origin story – Their pitch jumped right into the problem. This didn’t do the founders justice and was a cold way to begin the pitch. They’ve been in this space for two years, learning and experimenting. One of the founders built a large company before starting this new business and is applying the learnings from that start-up to build this one. We refined the origin story and made sure it includes how the founders discovered the problem they’re solving, how much time they’ve spent obsessing and tinkering with solutions, and how their experiences uniquely qualify them to solve this problem.
  • Analogy – The solution made sense, but it took time to understand. I had to ask pointed questions about the value of the solution. Eventually, I said they’re “XYZ for 123 space,” and it clicked. That analogy was to the point and will connect the dots for any investor they pitch.

With these tweaks and some practice, I think these founders should be able to raise the capital they’re seeking.

Pitching isn’t easy. It takes time to refine a pitch. Sometimes going over the pitch with friendlies who can provide honest feedback will accelerate the refinement process. For early-stage founders, I highly recommend including the origin story in the pitch.

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Recording “Lessons Learned”

Today I spent time reflecting on past investments. I thought about what I did right and what I did wrong. I’ve done this before and made mental notes, but I realized that wasn’t consistently preventing me from making the same mistakes. Today I created a “lessons learned” doc to capture in one place all the learnings floating in my head.

I’m glad I did this exercise. Seeing everything I’ve learned in one place helped me pinpoint the areas I need to work on more.

I’m excited to add to this doc as I reflect more and use it to help me improve my evaluation of investments.

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You Can Be Wrong and Still Win Big

Outsize success requires making decisions with imperfect information. You’re going to get some of them wrong. I believe a material percentage of them, 25% or more, will be wrong. That can be a big number. For every twenty decisions, you’ll get five or more of them wrong. What people don’t realize is that you can get lots of things wrong and still be wildly successful if you’re deciding and executing quickly.

You don’t just make bad decisions and end up having outsize success. There are a few key things to be aware of. One is to reflect and learn from your mistakes. Each decision produces information. Spend time thinking about the information that decision produced and why the decision was wrong. Sometimes it’s chance and there’s nothing you could have done to change the outcome. Often, there’s something you missed. You want to understand what you missed so you don’t make the same mistake going forward. When I reflect, I learn; when I learn, I improve my decision-making; and when my decision-making improves, I increase the percentage of decisions I make correctly with imperfect information (it will never be 100%, though).

The last thing you need to do is important and something I haven’t always done: when other people are involved in your decision-making process or affected by your decision, verbally acknowledge your decision was wrong. It’s hard for many people (including me) to do because of pride and ego. But there are so many benefits that it’s worth putting those things to the side.

When you’re the leader, you set the tone. When people hear their leader acknowledge that he or she isn’t perfect, they realize they don’t have to be perfect either. When people hear their leader share reflections from an incorrect decision, they start to reflect more and share their learnings. This has a huge impact on culture. People start to embrace acting with imperfect information instead of being paralyzed by the fear of making mistakes. They begin experimenting more and taking ownership of the results of their decisions.  

It's also important to speak directly to those who expressed opposition to your decision. It’s important to acknowledge that they were right and you were wrong. It’s not about competing with them; it’s about encouraging people to have confidence in their instincts or analysis. If someone is right and you don’t listen to them, you don’t want to discourage them from sharing their thoughts next time. You want them to have more confidence and conviction in sharing in the future, especially if they help your decision hit rate.

If you talk to people who’ve achieved outsize success, you’ll see they’re just like the rest of us. They made some decisions that were incorrect. What separates them from everyone else is the speed at which they decided and executed and what they did after a bad decision.

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“Spotter” Entrepreneurs

I recently spent time chatting with an entrepreneur. I wanted to connect with him because he’s in a non-tech sector I’m interested in getting more involved in. As we chatted, I realized that he has his finger on the pulse of what’s happening in a niche corner of his sector. He understands where it’s going, too. He’s been able to spot opportunities earlier than others and create solutions based on those opportunities. The key to his success is being at the ground level of this niche in his sector, spotting an opportunity early, and executing on what he sees.

The conversation helped me realize the scale of success this entrepreneur could have in the future. I wondered if he recognizes the potential and knows what’s keeping him from getting there. As we chatted, he shared that he does recognize the potential in what he’s doing. He explained his vision of where he wants to be and quantified what success looks like for him. Then he shared what’s holding him back:

  • Capital – Executing on the opportunities he identifies requires capital. He’s got some personal capital but needs more to execute on larger opportunities. He doesn’t know how to access investor capital (not venture capital).
  • Structure – He knows how to execute profitably on the opportunities he finds using his own capital. He doesn’t know how to structure deals that involve outside investors. He’s not sure what waterfall (i.e., profit sharing) or other deal mechanics are available to be used or how they should be combined to attract investors.
  • Presentation – He understands why something is a good opportunity because of his positioning at the ground level and is confident executing with his own capital, but he isn’t sure how to present the opportunity to investors who don’t have their boots on the ground like he does.
  • Back-office admin – He hates dealing with accounting, tax filings, entity formation, and a variety of other back-office tasks. It’s a burden that takes time away from finding and executing on opportunities. He does some of this himself and outsources some of it.

He candidly said that in a perfect world, he could get these things taken care of by someone else, focus on doing what he’s great at—finding and executing on opportunities—and take his business to the next level quickly. He realizes that a perfect world isn’t likely to appear. He plans to tackle all of these but realizes it will take time.

This entrepreneur is likely on the cusp of breakout success. I wonder how many other smaller entrepreneurs with “spotter” abilities exist and what solutions are out there to serve the needs of this group.

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Weekly Reflection: Week One Hundred Forty-Eight

This is my one-hundred-forty-eighth weekly reflection. Here are my takeaways from this week:

  • Missing piece – I spent time this week with a rising entrepreneur. He shared what’s holding back his business, and it’s something I’ve heard from other entrepreneurs. He's able to find attractive deals but doesn't know how to structure deals to attract investor capital. I think there’s an opportunity to provide it to him and other founders to help unlock more value.
  • Sentiment – I chatted with investors and entrepreneurs in various sectors (not just tech) this month. There’s a noticeable, albeit slight, uptick in investor and entrepreneur sentiment this month. Tuesday marks the end of the month. I’m curious to see if this slightly positive sentiment continues in February.  
  • I still get things wrong – I made a decision that didn’t pan out the way I planned. It was a mistake. This week was a reminder of a couple of things: (1) I still make mistakes regularly, and (2) I should spend time reflecting on what I learned from a mistake, not dwelling on the fact that I made one.  

Week one hundred forty-eight was a great week. Looking forward to next week!

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I Learn Best by Having Skin in the Game

Over the last few years, I’ve had the opportunity to invest directly in start-ups as an angel investor, invest in venture capital funds as a limited partner, invest directly into start-ups as a Partner at a venture capital firm, and help organizations do their due diligence on direct investments into start-ups with strategic value.

I’ve learned a ton from all of it—but I’ve learned the most from investments when my personal capital has been on the line. This includes investments in funds and start-ups.

I learn best by doing, and in investing, “doing” means investing my own capital.

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More GP Stakes in VC?

A venture capital investor shared this article with me. I won’t go into all the specifics of it, but it says that private equity fund managers are selling pieces of their firms to raise cash. Instead of investing by becoming a limited partner in the firm’s latest fund, some investors are seeking to buy part of the firm to gain exposure to the firm’s current and future investments.  

This isn’t new in private equity. Neuberger Berman started a division in 2010 to focus exclusively on this strategy. That division, Dyal Capital Partners, merged with Owl Rock Capital Group in 2021 to form publicly traded Blue Owl Capital Inc. Blue Owl just announced the closing of Dyal Capital Partners V, a $12.9 billion fund focused on taking ownership stakes in approximately 20 private equity firms.

I’ve been closely watching the world of buying stakes in private equity firms for a few years, and I have some thoughts:

  • It was only a matter of time before this trend reached larger venture capital firms. It’s starting to happen more now, as evidenced by Thrive Capital’s recent news.
  • This approach could provide emerging venture capital fund managers with the runway needed to continually execute on their strategies.
  • Venture capital fund managers early in their firm’s life cycle see selling part of their firm as having a negative connotation. This leads to many VC firm founders having a bootstrap entrepreneur mentality and the industry being a cottage industry (there are other reasons for this too).
  • As more established VC firm founders realize liquidity by selling parts of their firms, more founders of smaller firms will be open to taking capital in exchange for equity so they can grow their firms.
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Personal Growth

I chatted with a founder recently about personal growth and about great founders constantly leveling up as their company grows. He asked a good question: how do I recognize personal growth opportunities?

It’s simple for me—I’ve got one when I’m faced with an important task or challenge that I really don’t want to do. I’ve generally got a list of various things that I need to get done. The one that makes me cringe or that I dread doing is the one that’s likely to lead to personal growth. It’s not 100%, but it happens more often than not when I get that feeling.

I’ve learned to lean into the things I dread with the hope that I’ll grow from them.

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Decade-long Commitment a Turnoff?

It’s often seven or more years before a start-up has a material liquidity event such as an IPO or acquisition. Founders should be comfortable with a journey of that length if they want to pursue entrepreneurship.

I recently had a chat with a venture investor who considered starting his own venture capital firm. One of the main reasons he hasn’t is the realization that it will commit him long-term. It will likely take twelve to twenty-four months to raise the fund. Funds usually have a ten-year life cycle, so once he begins investing that capital into start-ups, he’s committed to managing the fund for a minimum of ten years. That’s an eleven-year-plus commitment he’s not willing to make. Instead of writing larger checks from a VC fund, he plans to write small angel checks. He’s putting more of his own capital at risk, but he wants to preserve flexibility over the next decade.

This investor has deep domain experience and a strong network in a particular sector. Any early-stage founder he works with will get a tremendous amount of help and is more likely to achieve product–market fit.

Listening to this got me thinking. I wonder how many seed-stage venture investors (current or aspiring) who could help companies find product-market fit avoid starting a venture capital fund because of the decade-long commitment.

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CalPERS Commits $1B to Emerging Managers

The California Public Employees’ Retirement System (CalPERS) recently announced a $1 billion commitment to back emerging private equity managers. The goal is to foster more innovation and entrepreneurship in the investment industry by backing the next generation of managers. CalPERS, with around $440 billion of assets as of June 2022, is a juggernaut in the investment industry and can drive change.

The announcement references private equity, but this is a big deal for the venture capital industry. Venture capital is a subset of private equity and should receive some of these dollars.

Many studies have shown that emerging managers generate alpha, and the CIO of CalPERS recognizes this. This quote from her stood out to me:

Its not about a diversity play. . . . It’s about generating alpha in a more thoughtful way, and leveraging partners we will work hand in glove with.

Can’t wait to see the impact that CalPERS’s commitment has on early-stage venture capital.

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