Both Sides Of The Table

How I Got the Monkey Off My Back – Today Was a Good Day

Posted by on Apr 4, 2014 in Both Sides Of The Table | 0 comments

I become a venture capitalist in September 2007 – exactly 6.5 years ago.

I spent my first year developing proprietary deal flow and learning the business and then the Sept 2008 / Lehman Bros collapse / financial meltdown happened.

As a result I didn’t write my first venture capital check until March 2009 – exactly 5 years ago. That company was Invoca, which just announced a $20 million fund raise led by Accel.

Invoca

I remain a huge supporter and am very proud of our accomplishments and hugely optimistic about our future.

5 years ago. It turns out it actually takes time to build a high-growth business with differentiated intellectual property and roll out large, enterprise-class marketing solutions. I remember a few years ago people (LPs mostly) used to ask me why I didn’t have any realized returns to show. At the time I pointed out:

“If I had realized exits almost certainly it would be because I invested in a company that failed. Lemons ripen early, great companies take time.”

Still. It was frustrating having to answer what I considered an obvious question to people who I thought would have known better.

In 2010 somebody posed the question on Quora, “Is Mark Suster a Successful Venture Capitalist?” I thought it was a fair question and I gave an honest answer at the time. I divided success into the phases of venture capital and 18 months into writing my first check here was my view (details on each in the link above).

1. Sourcing high-quality leads: 9/10
2. Working with early-stage teams:  coaching, mentoring, setting strategy, rolling up sleeves: 9/10
3. Helping companies get to next financing round successfully: I was just beginning this phase in Sept 2010 and said so.

Since then?

Not just the $20 million round at Invoca, the $70 million I helped us raise at Maker Studios, but I was intimately involved with the earliest funding round at DataSift and every subsequent round which has recently announced $42 million led by Insight Venture Partners and $70 million in total.

datasiftI’ve now been involved with many other successful foll0w-on financings. So I think it’s now fair to rate me at 9/10 on follow-on fundings.

4. Getting Exits / Driving LP Returns: This was always the knock on me. The monkey on my back. “Ok, so this guy can write a blog and source deals but can he make any money?” Yup. Heard that knock many times. And in an industry measured by a decade rather than a year it’s hard to refute so you mostly just move on in the conversation. This is what I wrote on that Quora answer from Sept 2010

“I think the best VCs help drive exits alongside their entrepreneurs.  I have done 6 VC investments – all within the past 20 months.  None have exited.  That’s normal.  If they did it would be because there wasn’t a huge outcome.  

 

But the truth is only time will tell whether I’m financially a successful VC and I’m comfortable in my skin saying that.  Any VC 3 years in saying otherwise would either be exaggerating, lucky or an extreme outlier.”

So it’s now March 2014 – 5 years since I started investing. How is my scorecard looking? Here is the first 3 months of 2014 …

2014

                                                                                                                                                                      .

1. AOL Acquires Gravity for $90 million

gravity

2. Apple – Burstly / TestFlight

burstly testflight

And now this just in …

3. Disney Acquires Maker Studios f0r $500 million and with earn-out potentially up to $950 million.

disney maker studios

This investment started with Dana Settle (Greycroft) and I each putting in $750,000 into a young company doing less than $1 million in sales and has blossomed into one of the fastest growing companies in Los Angeles if not the entire country. Because it’s video it is understood so poorly by the normal tech elite but the company has an amazing combination of content production, marketing, talent management and technology (tech team of nearly 60) and I can’t think of a better partner and home to develop this great company than Disney. I feel confident in saying that Maker will perform to any even higher level in the years to come as a result of this partnership.

And while of course the founders & management deserve all the credit for Maker’s success and will no doubt get their accolades in the press, from an investor perspective, Dana & I were hugely active in the company for years behind the scenes in recruiting, PR, product strategy, M&A, etc. And while the press always likes to mention the other big media investors who participated  in the investments (Time Warner, Canal+, Astro, Singtel, Elisabeth Murdoch, Robert Downey, Jr. – there were many), the reality is that Upfront & Greycroft were the largest shareholders in the company.

As a result of this activity I have now personally returned significantly more capital in my 5 years than I have invested. I have huge confidence in the companies that I’ve backed that are still active.

I’m already back to work. I am closing 3 new fundings in April (2 new, 1 follow-on).

At a minimum, I’m glad to have the “exit question” off my back in 2014. I helps me be even longer in the positions I am still in.

All I could think about this morning was this …

featured image from 500px

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One of My Most Frequent Pieces of Advice: Be Politely Persistent

Posted by on Mar 31, 2014 in Both Sides Of The Table | 0 comments

One of the hardest things for most entrepreneurs to know is how hard to push in situations where people tell you “no.”

But then again most entrepreneurs fail. There is that rare breed that doesn’t accept “no” for an answer. It is impossible advice to give because there is such a fine line between being persistent and being annoying and it’s something you probably can’t teach. I often describe “chutzpah” as being able to skate right up to the line of acceptability without crossing over it.

And being persistent I believe is the most important attribute for success in an entrepreneur (assuming of course that you have all the other requisite skills).

Years ago I started using the term “politely persistent” to remind people that you still need to be likable even if you have gumption.

I’d say less than 20% of of entrepreneurs fit into that bucket.

Of course at one end of the bucket are entrepreneurs who are persistent but just aren’t polite. Maybe they’ve hit a few set backs: They’ve struggled to raise money, they haven’t gotten press coverage or they haven’t gotten accepted to present at prestigious conferences. I’ve talked before about the need to get rid of “that negative chip on your shoulder” as it won’t help you in business.

It seeps out into conversations as frustration, anger, resentment, jealousy or worse. It ends up being a turn off to potential employees, investors, business partners and the press.

There are some people who don’t have a chip but also aren’t polite – just rude. They get pissed off if a senior executive at Google doesn’t take a meeting with them, if people are late to their meetings or if they have emails that are unreturned. And they take out that resentment against anybody else that may show signs of one of these past patterns. Their angst at “shaming you” into better behavior has the reverse effect on most people.

But my post isn’t for the haters. It’s for the overwhelming majority of entrepreneurs who are either too shy, too nervous, too polite or too worried about upsetting somebody to push the boundaries. The 70% of entrepreneurs that simply can’t get past an un-responded-to email.

I once went to a startup event where a VC told the audience that if a VC doesn’t respond to your email to move on to the next VC – that VC is clearly not interested. WTF? I called it “the worst startup advice I had ever heard somebody give.” (Yes, I could have been more polite on that day) What I actually said was (paraphrasing from memory):

“If you fold at the first un-responded to email what hope to you have at becoming an entrepreneur? Seriously, hang up your cleats now and go back to your corporate job.

 

Do you think the SVP of Marketing from Coca Cola is going to respond to your every email? Do you think that every conference organizer will promptly meet your needs? Will every customer who feels bombarded with sales requests want to take your call?

 

It’s your job to persist. It’s your job to be that one person who calls back periodically, finds a way to get introduced, shows up to an event to meet somebody, finds something unique to say to that person where you can stand out.

 

Be polite, but never accept a simple ‘no.’ “

In fact, NO is the one word that no entrepreneur should accept.

But how do you get past gate keepers? How do you get on elusive calendars or invited to speak at conference?

1. Well, for starters you need to be a great networker. I wrote an example of why this matters when meeting VCs but it’s true of all exec. Nothing beats a warm intro.
2. You need to know how to write good & action oriented emails.
3. You need to know how to make good phone calls and not be afraid to pick up the phone.
4. Understand reciprocity and how helping others earns you good karma points – and favors.
5. Be humble – nobody likes too much arrogance; but
6. Don’t be afraid to be a bit cheeky. You can take some risks. You won’t have success with everybody you approach but I’d rather see you show some juevos and / or some humor sometimes to stand out. Just don’t go overboard.
7. Be confident while being polite. I recently had a CEO email me to tell me he was “politely withdrawing his consideration for venture money if he didn’t hear back from me.” My first thought was, “huh?” I then searched my email and found it was the 3rd email. Of course I felt badly. And his email – while confident – was very respectful. We did a call immediately.
8. Find under-utilized lines of communication. In the early days of Facebook messaging Jason Nazar used to send me messages at 11pm when he knew I’d be online and undistracted. Rajat Suri used to send me Gchats. Or this guy Eric Damier who sends me funny text messages that make me laugh. He’s “over the top with a smile” and I can’t help wanting to hear from him.
9. Do they blog? Stating the obvious but if the person you want to meet blogs and if they engage in the comments section then this is the best way to build a relationship. Provide thoughtful comments. Engage lightly. Be “present” but don’t be “creepy.” For regular bloggers this is the single best way to engage.

But most of all. Above anything else. Be persistent. You must follow through. A hard “no” is better than no response.  And even a “no” should just be a suggestion to try harder.

Consider this story from the founders of Kayak quoted in this excellent article about the most respected venture capital firm in the business – Sequoia. They had a bad meeting with the founders of Kayak who felt that had something more to prove,

“The two were initially turned down [by Sequoia] before English returned uninvited a day later and convinced the firm to give Kayak a second look.”

This is the norm. Broken M&A transactions that get picked back up. Teams that didn’t hire you only to be impressed later by your performance and / or persistence. Deals that seemed lost but since you never gave up you ended up winning.

There are also the funny & positive ways to connect with the people you want. Take this great story about Sam Rosen who knew I was traveling from San Francisco to Mountain View to present at 500 Startups. He messaged me that he would love to give me a ride down, which I needed. He proceeded to pitch me his business on the drive down – but not too much. Just enough to leave an impression. A couple of years later I brought him on board as an EIR and after that I backed his next company MakeSpace.

If you have any interest here are two stories of how cheeky persistence change my life

1. How I got to move to Europe
2. How I got to work in Tokyo

[Update: When does “no” actually mean “no?” Because of course sometimes it does. Matt Szymczyk asks in the comments section and my friend Ralph Mack who is a very active angel investor and thinks a lot like I do asked me via email. Ralph put it best – that your “ask” has to be in someone’s “scope of interest.” If you’re pitching me a book idea, a film or even a biotech company it really is a firm NO because I don’t do those things.

Similarly, I try to be very clear with entrepreneurs when I really am not interested so that I don’t give them false hope. Equally I often tell people, “this could be something I’m interested in one day – just not now” or “you’re the kind of entrepreneur I might work with some day but not on this business” so that they have context.

I often  privately counsel entrepreneurs to ask these “qualifying” questions (in a polite but direct way of course!) to VCs. “I know you’re passing for now. Is this the kind of business you could one day see yourself funding? Or should I focus my energy in the future elsewhere.” You might not want to hear the real no but you’re better off hearing it than wasting time in the future. Most people avoid giving the direct answer but when asked usually will out of politeness.

Always remember the rule of sales … a firm no is better than a muddy maybe. Raising money is a sale. The golden rule of sales is “qualify, qualify, qualify.” If you’re not a fit then better that your resources go somewhere with a more likely hit rate.]

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Finding an Investor Who is in Love with You

Posted by on Feb 10, 2014 in Both Sides Of The Table | 0 comments

I often talk about what I’m looking for when I meet with an entrepreneur. Above all else I’m looking for a genuine passion for what the entrepreneur is doing. It’s even a direct quote in my Twitter bio.

In love with your business

Of course passion isn’t enough. You need a set of innate skills that differentiate you from the thousands of others who set out on your similar journey. You need a great concept in which you will build something that is truly unique and that will be valued by your customers. But without a passion for what you do I am dubious about your chances for success.

If I had to put a number on it I’d say 1 in 20 pitches – maybe 1 in 30 – are by an entrepreneur who comes across as truly passionate about her project. You can sense when it is a “mission” for this entrepreneur to succeed and she will continue the journey even if success isn’t easy or immediate. It is in her blood to see this journey through and try to launch her product or service to the world.

The other 29 pitches consistent of many smart people who “think they have an angle on making a buck” which I know is an unfair over-characterization of the situation but you can genuinely tell when somebody isn’t “all in.” One of my favorite entrepreneurs – one of the people with whom I most want to work – once came to me with business serving young moms. He was a 23-year-old at the time and as much as I wanted to believe he cared about how to get children to eat properly, poop on the potty or sleep through the night – it was a stretch. So we haven’t yet worked together but I’m still hoping. (he ditched that business years ago).

Passion.

It seems obvious. But what about the reverse? Are your investors truly passionate about what you do? Is he willing to go the the mat with you in good times and bad simply because he believes against all rational views that your mission will work in the end?

Does your investor eat, sleep, breath your industry or product? Does she live your journey?

I only say that because after years as a VC I can always tell when my peer group invested in something because “it seemed like it would make money” versus when they invested out of passion. And in all honesty over the years I’ve experienced a bit of both myself.

On reflection of the role that I want to play as a VC it is clearly in the camp of passion. I really want to start my journeys only with people with whom I want to work closely with for the next 5-7 years or more. I only want to work on projects in which I believe can produce truly amazing change in an industry or in the world.

I’m a VC. So of course I want (need) to make money for my investors (LPs). But the two can of course go hand-in-hand.

I have watched the likes of Chris Dixon, Marc Andreessen and Fred Wilson talk openly and passionately about BitCoin. If I were an entrepreneur in that space I think I would seek them out as a starting point because their interest seems authentic.

I follow Jason Lemkin closely (he’s a long-time friend) and he speaks frequently and passionately about SaaS businesses having built a successful one himself. His blog is even called SaaStr (a bit too close to Suster if you ask me ;-)). My partner Steven Dietz is an auto enthusiast and more than just an admirer of amazing cars he has worked around the auto industry for 20 years and backed a couple of billion-dollar startups in the category. Whenever somebody has a car startup I send it straight his way. I haven’t met any VC better connected and more thoughtful in this space.

As I reflect upon the journey’s I’ve taken as a VC since 2007 I realize that the ones I was best at – and that I enjoyed the most – are ones that began by falling in love. I know that sounds corny but it’s true.

I fall in love with entrepreneurs. Maybe it’s 2-3 times per year but not much more. Something in their strong sense of purpose for what they’re pursuing and my belief both in them and their concept stands out.  This is certainly the case when I met Nick Halstead, the founder of DataSift which is why I invested in their A round despite the company being based in England (a long way from home).

I fell in love with Yoni Bloch and Interlude who have produced the most stunning interactive videos I have seen. In this case I fell in love after he had already gotten married to well-known investors ;-)

I have placed a much bigger emphasis on falling in love as a criterion for my making an investment. I think this is especially true since I’m on a-round investor (some b’s but mostly a’s or seed) and I will be joining at the stage where a concept is not yet proven and where it may be 3 years until we see real traction. I want to wake up in the morning on weekends thinking about the company, the product, their positioning.

It’s what happens to me at ePoxy since I’m very public about investing in technology companies in the video sector and they have one of the most elegant products to help with video distribution that I’ve ever seen and one of the most talented product teams I’ve worked with in LA. Since I work with video a lot I have the chance to be both a product pontificator and an avid user of the technology.

I have fallen in love twice recently. One with a company that produces games and educational products for children that we will announce in the next few months. And one with another video company that will be moving to LA as part of my A-round investment that will close in March. These are both new journeys and I can’t wait to see how they develop.

I know the difference in myself and also in the tone & interest level of fellow VCs when they’re in love versus when they’re just doing their job. As an entrepreneur I think it’s far more important to seek out investors who love you (no matter what) than it is, for example, to maximize valuation or find the perfect VC brand. Much like investors have to feel there is more than just passion in you – of course you need to find investors who have both extreme competence as well as passion for what you do.

I write this because I know how difficult it can be to find a potential investor and to decide with whom you’d like to try to work. You may not have a choice – many don’t. But if you do – or if you’re simply deciding which VCs to put in super-human effort to targeting as potential investors, I would encourage you to think about their core beliefs and interests.

The Lehrers for content and commerce. Po Beabody with content businesses. Roger Ehrenberg with big data and also financial technology companies. Greg Bettinelli with commerce businesses. True Ventures with hardware startups. Bill Gurley with marketplaces. I know none of these people want to be defined by a certain category but my point is – finding investor passion as a key criterion.

And make sure when your investor agrees to write you a check you feel like somebody beautiful on the altar – not somebody being married for his or her money.

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What I Would Look for When Choosing a VC – Knowing What I Know Now?

Posted by on Jan 23, 2014 in Both Sides Of The Table | 0 comments

Picking a VC is hard. You don’t really have much to go on to decide who would make a good fit. Reputation of firm? Of partner? Deals done in your industry? It’s a bit of all of these.

Chimpanzee

I had an enjoyable conversation this morning with a young team straight out of college this morning and they were calling to ask advice on how to approach fund raising (angels vs. VCs, how to select a VC, etc.) and I realized that without years of experience it is tough to answer this question.

So I thought I’d write about out with what I would look for in a VC knowing what I know now and why.

Brains?
Most VCs are book smart. It’s insanely competitive to get into our industry so most have degrees from institutions like Stanford, Harvard, Wharton and University of Chicago (blatant plug ;-). Smart is simply not a differentiator. In fact, book smart can be a negative. The last thing you want is a know-it-all telling you what to do when they are at 50,000 and haven’t had to deal with your exact circumstances.

I call them “VCs Seagulls.” (you know … fly in, shit on you and then fly away). VCs should be more of a coach than proscriptively telling you what to do. I’ve seen too many companies go off track by a VC hell bent on the team pursuing the VCs strategy which at times is about chasing the next shiny object.

You want a VC who will spar with you but then STFU and let you get on with things. Smart? Sure. But don’t over index on brains. In the end it will be up to you to figure out what to do. If you’re looking for somebody else to tell you the answers you’re in the wrong business.

Past Success?
You could look for a VC who has huge wins under his or her belt and therefore has a formula for success. The problem with this is that past successes aren’t always relevant to future ones as the methods and environment of the past may no longer apply. Think of web vs. mobile. Traditional software vs. SaaS. SEO marketing vs. social marketing.

The other problem with extreme success is that for some VCs it makes them disinterested in middling outcomes, things that take a long time to incubate or solving thorny problems when a company doesn’t immediately move up and to the right. To be clear – I’m not saying huge successes make a VC less likely to be helpful to you – I’m just saying it’s not a guaranteed predictor.

Connections?
Of course it is super helpful if a VC can drop you in to important people for business development, recruiting, PR, sales and eventually M&A. In fact, I’d say that “ability to connect you” is one of the things that VCs sell the strongest in the courting process with you. In my experience 90% of VCs fall short on their promises of how helpful or not they can be with intros. If you find the 10% that have the Rolodex and work it hard on your behalf then these people should be on your short list. I would call their portfolio companies and ask how helpful or not they’ve been.

I think connections are important but for the most part I think you’ll find that you end up making your own success and an outcome of success will be much more tightly correlated with your work effort than the intros you got.

Industry or Operating Experience?
Now you’re talking. I’ve sat on ad tech boards with board members who clearly knew little about impressions, fill rates, CTRs, RTB, eCPMs or the difficulties & opportunities of embedded mobile SDKs vs. HTML5. It felt like there was a wavelength with management and somebody wasn’t on it. I’ve been involved with SaaS companies with VCs who don’t understand demand generation, lead qualification, sales coverage ratios, sales forecasting or frankly when deals should be inside sales vs. outside sales.

I would think it would be a big fucking nightmare to have a VC on my board who simply doesn’t get what I do and yet my perception is this happens often. I know many VCs who don’t have operating experience and frankly some of them are fantastic. Simply put – I’d be in search of a VC who had an intuitive sense of my product, my customers, my organizational issues, my competitors, etc.

EQ and Team Leadership?
Nail on the head. This is what I would look for above all else. I wrote about this a long time ago and if you didn’t read it I highly recommend it. In my opinion the primary role of a VC is chief psychologist. Frankly, this is even the most important attribute in deal selection for a VC. When you look at a deal so much of what you’re trying to understand are the skills, resiliency, work ethic, motivation and team dynamics of the founders. Nothing blows up great opportunities faster than founders who are constantly fighting. And let’s be clear – in almost every company there is executive management fighting. Google. Twitter. Facebook. FourSquare. SnapChat. Everywhere.

Politics are a part of human nature and thus a part of all startups. The sooner you accept that you can lose your neurosis that somehow your company is dysfunctional and everybody else’s runs smoothly. As I like to say “Startups are all naked in the mirror” (we see our own flaws but see everybody else in their Sunday best.)

I think of VCs as coaches. You’ve got the team on the field and ability to trade players or draft players when need be. But successful coaches find a way to get the most out of all the existing players on the field and avoid too much unnecessary trading. You might pick up a great three-point shooter but have no idea how that players attitude is going to leak into locker-room drama.

I see some VCs who are quick to chuck aside a founding CEO who hits a bump in the road. That’s disheartening. I see some who either don’t realize they need to step in and mediate when issues arise or know that it needs to be done but lack the skill or the will to do so.

So common are founder tensions that my intervening is a weekly occurrence and it’s so common that if I ever write about it I’m sure that instantly every company I’ve invested in and every company in which I’ve been an informal advisor thinks I must be writing about them. It’s not you. It’s all of you.

Whenever you create a team of super motivated people doing anything you’re going to have egos, rivalries, extreme performance, mistakes, slumps, alcohol, depression, anger, failures, insecurities, differences of opinions and control issues.

It’s my job to know what makes you tick. It’s my job to know who’s performing and who’s not. It’s my job to read the tea leaves on internal rivalries, power struggles, blockers, etc.

I do a lot of listening. And asking. And probing. I try to triangulate and get multiple people’s points-of-view. I try to bring solutions when appropriate. I try to adjudicate fairly when asked. I’m not afraid to help make difficult decisions. And I’m not trying to be everybody’s buddy or be loved. It’s my job to be respected by acting honorably and fairly and occasionally doing difficult things.

Knowing whom to back within an organization that is feuding and when to back them is one of the hardest things about our job. Just like CEOs, we need to take in lots of different opinions and data sources and triangulate. And in the end we must trust our own judgment.

VCs with high EQ get this. VCs with high IQ but low EQ often do not.

Helpfulness / Availability
There are times you just need help getting shit done. A VC isn’t an extended member of your team but they can be very helpful in spot situations. I’ve watched VCs help with valuation support (spreadsheets, comps) on next round financing, participate in M&A meetings, interview senior job candidates – even help terminate tricky senior hires. I’ve seen other VCs who seem to never have time to get their hands dirty.

I’ll let you decide which you’d want.

Commitment
Startups are hard. And so is venture capital. Neither class of people should give up easily. Sadly I think VCs often quit to early. If I were looking at which VCs to choose I would reference strongly for which ones are supportive in good times and bad. The worst thing that can happen to you is to have a VC who loses confidence and mentally checks out.

Fred Wilson wrote perfectly about sticking with struggling investments.

So finally, how do you know if your VC will stick by you in good times or bad? How do you know if they’ll intervene in a positive way in conflict? How can you tell if they really are good at intros and follow through on what they say they’re going to do.

The best way – of course – is to reference check. Here’s how you reference check a VC (link to post with longer version)

  • look at their portfolio list
  • subtract out the super, crazy successful companies. a) they have no time for you & b) everybody who has a super successful out-of-the-gate company loves their VC because there was no conflict.
  • call the companies that are doing well but not yet household names. Ask about the criteria above.
  • more importantly, call the companies that struggled. You’ll learn most about VCs when you find out how they handled themselves in tough situations. Make sure to call 3-4 members of the management team to avoid one person’s bias

Summary: Team Leadership skills, operating knowhow and industry knowledge are all tremendously important. Most entrepreneurs I encounter seem to make their decisions more on perceived brand, past successes and ability to intro. These decisions are always nuanced – make sure your thought process is as well.

Photo Credit Jerry Motter on 500px

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Why VCs Should Stop Trying to be Perfect

Posted by on Jan 19, 2014 in Both Sides Of The Table | 0 comments

In my recent post “Why Am I So Lucky? Why You Need to Be Sure You’re Not the Sucker” I talked about how VCs (or other investors) get deals sent to them and how to interpret a referral.

DSC_0254

I tried to make a simple point: People have motives when they send you a deal. Sometimes those motives are positive (they really want the chance to work with you, they think you have unique skills) and sometimes they are less positive (their first-tier of “go to” referrals passed on the deal, they don’t want to write another check themselves, etc.).

As I said in the post, I really appreciate referrals and I take meetings introduced to me from a wide variety of people. I simply wanted to make the point that if a deal referral seems “too good to be true” it probably is. If the deal is from out of your geography and/or out of your focus area or a deal is being referred by a well-know investor who normally co-invests with similar syndicates – at least ask yourself, “Why am I so lucky to be getting this call.”

Finally, I mentioned the case of an angel investor friend of mine who had a very senior industry professional contact him on LinkedIn to try and raise $500,000. My friend is very accomplished (much more than I) but he is relatively unknown in certain tech & digital media crowds. I advised him to start that conversation with a bit of skepticism.

Many people understood this thesis but some took it to mean more than I had intended. What I didn’t say was I was looking for my deals to all come through well-known investors, be “club deals,” or have positive signals.

In fact, I have a long history of saying the opposite.

Since so many people assumed that, “I don’t want to be a sucker” meant “I only want to do deals with smart co-investors let me be clear.”

I don’t give a shit what other investors think about a deal or market. How else could I have invested in Maker Studios when every investor told me that content businesses were bad investments and that YouTube wasn’t a viable business channel or Invoca when everybody told me that phone calls were dead?

I seek out great entrepreneurs. End of story. I try to know people that others don’t yet know. I avoid Demo Days like the plague and have publicly said so. Why trod over the deals everybody else it looking at, at the same time they’re looking at it? By the time it’s hit demo day I’m too late.

I look for passionate entrepreneurs who have a love for the industry they’re serving. I look for whacky ideas that seem implausible or cause me to say, “Huh. I never thought of it that way.”

I looked at drones before anybody wrote any checks into or said anything publicly about drones. I regret not having invested in the company I met because it was exactly what I was looking for in a team and market.

I’ve spent the last couple of years trolling in ideas in healthcare information systems (back end, ugly, complicated) more than “quantified self” which I believe in but believe I have less proprietary knowledge or relationships and is now a crowded space.

We did a seed deal this week that would surprise you. It’s in an area that has no hardware and no software and definitely isn’t a company you’d read about on TechCrunch. I would talk about it (I don’t care if you think the idea is stupid) but frankly I don’t want to because I don’t want to encourage competition in this field of investment. I’m certain we’ll talk about it soon enough. The founder wants to change the world and has a Phd in a science where I believe he just might.

My friend Rob Go wrote the following comment on my last blog post

I think the great investors avoid being the sucker, but don’t worry about looking foolish because of independent thought either.

I couldn’t agree more. I don’t care if people think my investments or foolish because time and returns will be the true arbitrator. More to the point, I don’t mind if a few of my investments actually end up becoming foolish. If I don’t have a few of those it means I’m not trying hard enough. Fred Wilson said it best in his post about loss ratios in VC.

My investment philosophy:

  • Invest in moonshots more than incrementalism
  • Avoid the herd
  • Be willing to invest in things that uncool or unpopular if you find an entrepreneur whom you believe in and who has a thesis for how to disrupt a big market
  • Find complicated markets where 3 Phd’s who just graduated from Stanford or MIT couldn’t easily copy or think of the idea because it takes some domain knowledge, real-world relationships or know how
  • Don’t worry about what others think of your investments (other than LPs who need to be persuaded that you have a logical investment strategy)
  • Be willing to lean in, talk about your portfolio and investment ideas and be willing to be challenged.

I remember being a strategy consultant where you had to pretend to know everything and be right all the time. I hated that job and that feeling. I think the VC industry tends to pressure new entrants to feel like strategy consultants did. Too smart. All knowing. Infallible. I am none of these. VCs don’t need to be perfect.

I don’t pretend anymore. I know what I know. I’m willing to learn what I don’t. I’m willing to take chances on ideas that might seem hard or strange. I don’t care if others scratch their heads.

I’m not afraid of failure. How can we back entrepreneurs and espouse willingness to fail if we ourselves aren’t?

In short – I am looking to find differentiation. And that will never come by following the crowd.

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Why Am I So Lucky?

Posted by on Jan 17, 2014 in Both Sides Of The Table, Business, Sales | 0 comments

I’m a cynic by nature. And I think it pays to be so. I sometimes wish I were an unbridled, happy-go-lucky, assume-the-best-in-everybody sort of chappy. Sadly, I’m not.

so lucky

You know the old Groucho Marx saying, “I would never join a club that would accept me as a member.” I always loved that line. So whenever I get a deal sent my way that is from out of town and seems amazing but seems almost too good to be true, my first thought is always, “Why am I so lucky?”

It’s a standard line I use at our partners meetings.

It’s not that I lack confidence. I’m usually accused of the opposite. It’s just that I never want to be The Sucker at the Table.

I got a call a few years ago from a well-known investor up North. It was the first time he had ever called me. Their firm is one of those that you think of when you think of Silicon Valley. I didn’t remember getting the calls on all of his super big, high profile deals.

Why am I so lucky?

I got three calls from another big name, big check VC. I looked at all three deals. It’s super hard not to want to spend more time with these companies. After all, you’d get to work with HIM.

Still. I’m not sucker. The only thing worse than not being in a clubby deal where you might get to build a close personal relationship with somebody you deeply respect is being the sucker of that person you deeply respect.

I reviewed a deal for a friend of mine tonight. He’s an incredibly smart investor and somebody that I actually consider to be a mentor to myself. He’s wise, thoughtful and has made money across so many different industries it’s humbling. He wanted to know what I thought of his technology deal. For all the things he’s likely known for, he probably hasn’t yet built a strong relationship as an early stage venture investor (he invests often in later-stage deals where he is very respected).

My email back to him was a version of

“This is a very accomplished executive in his industry across more than 20 years. He has a team of 4 other such executives. Don’t you think if they were so hot and so senior that everybody in town would know them? Don’t you find it a little bit odd that he’s reaching out to a relative stranger through LinkedIn asking for $500,000?

Why are you so lucky to get the call and discover this deal?

Dealflow doesn’t just come without hard work. So I recommended that if he wanted to do more early-stage investing he should establish a direct relationship with many other VCs who might do deals alongside him and he could benefit from their existing dealflow and they would benefit from the breadth of his skills.

I outlined here my views on “proprietary dealflow.”

Semil Shah wrote in this absolutely spot on post

“… for any good investment, from Series A on, there is at least one firm to compete with. Competition is fierce.

VCs will spend over a year networking just to position around one founder or one deal, and if they lose it, it’s gone.”

That’s precisely it. I work on relationships for years and wait patiently for the opportunity to potentially work together. Sometimes it comes. But it doesn’t come easy. Not from a random phone call. Not from LinkedIn.

I read the pitch they had sent my friend. But barely. It almost didn’t matter. It didn’t pass the smell test.

My advice?

Always assume the worst. Always question the motives of those sending you dealfow – regardless of how nice they are or well meaning. I’m not saying all dealflow is bad or all referrers are hucksters. I’m just saying that you need to look at it through the lens of the motive. I always ask when somebody sends me a deal, for example, are you already a shareholder in the company?

Get out your inner Larry David scrutiny.

larry david

I got an email recently from a VC who had invested in a company a small amount in a seed round. He was calling me about the A round. His fund is > $500 million and I guaranfuckingtee he ain’t calling me if that company is crushing it. I don’t blame him – that’s his job. But why am I so lucky that you’ll let me in?

Of course I ask more politely that than. But I always ask. Deadpan. Serious. “I don’t understand. You have a big fund. I’ve seen you write a $10 million check before. Why would you be looking for outside investors at this point? And why would it make sense to bring me on board?”

Then I listen. Is it plausible? Are they authentic?

I offered to fund the seed round of a guy I’ve known for years. He opted for two big VC funds up North who split $1.5 million. They have some of the best names in the Valley. Fair enough. Can’t win every deal. He called me 15 months later excited to show me his metrics and wanted to talk about his A round.

Meh. The signal was way too loud. I’m no fool.

My response? “I’d love to work  with you one day. Please call me early when you start your next company. And I hope it’s right after this one is a huge success.”

It wasn’t. He never raised follow on money. Not from either of his two famous VCs. Nor from me.

Never be the sucker.

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