Career Archives

The Makings Of A Third Haystack Fund

When I started my first fund, a long-time VC I respect asked me a question which still remains unanswered: “What’s your view of the world?”

Damnit. That question really stumped me. Still does. Partly, I wanted to have a good answer to respond to this person’s question. Mostly, as the years have gone on, I still think about the question and yet don’t have a great answer.

More likely, it seems, I feel like the Joker in The Dark Knight, a dog chasing cars — I wouldn’t know what do with one if I caught one. Jokes aside, it’s a discord I’ve struggled with — it appears from the outside that investors have to picture a future world and find investments that fit within that lens. But, what do I know? I don’t know how the world will unfold. I can understand how concepts can shift over time, how we may move toward decentralized networks after years of centralization, or how our economy may shift from consumption-based to sharing networks, and so on.

Many investors over the past few years have invested in these concepts — myself included. While I don’t know how the future will unfold, what I do know is that I don’t know. I have no idea. The best I can do is (1) survey the current landscape and (2) find markets which I believe will open in dynamic ways over the next 3-5 years and then, (3) put my money where my beliefs are.

Like the dog chasing cars, I find that while I can be seduced by concepts, I do like momentum, I do like to spot things that have their own organic kinetic energy — those things could be people, it could be markets, or it could be an approach to a type of product or service. When everyone has a startup, momentum may turn out to be a good differentiator. Put this way, my role could be reduced to trying to find these pools and pockets of organic kinetic energy before other people, and helping those technologists and teams to harness and focus it to create even more value over time.


So, as 2015 comes to end…

I find myself thinking about all of this again. At the end of year here, I try to identify a startup which has truly broken out into the mainstream or large enterprise value. The past few years those companies have been Stripe, Snapchat, Slack, and for this year, one could argue the likes of Zenefits, among others, but I’ve been struck by another phenomena: That the very best big, public technology companies are operating and executing at breakneck speed. They’re growing, and they’re already big to begin with.

Consider that the following companies — Microsoft, Apple, Amazon, Google and Facebook — are all at or near all-time highs in the public markets. Massive new networks like Airbnb and Uber lurk in the private markets, all but public companies themselves, save for a few years, and surely they will reach even greater heights at network operators with limited overhead and no inventory on the books. Of the seven companies, most are still founder-led and most CEOs here are quite young, relatively speaking. Each of the seven companies possess some kind of current (or future potential for a) network effect, which if they hold true, could compound their growth in the future. It used to be that asking a startup “What if Big Company X does this?” wasn’t a fair question because startups could fundamentally attack incumbents — but now, asking “What if Facebook or Uber does this?” is a very fair and real question for investors to ponder. These companies have tremendous resources and talent, and they know how to execute.

My thinking here solidified over time as I read more posts from people I respect. In NYC, Arnold Waldstein wrote on his blog: “

The big platforms have a soft lock on our behaviors, a hard lock on our data and as creatures of habit, a solid spot in the premium brand positions on our phones….How often do you change your messaging, commerce, social, transportation, financial and entertainment apps on the first few screens on your phone? Mine are locked in…If this is idea is true (and I think it is), if the innovation pipeline has shifted its access point and the consumer their propensity to adopt new brands, we are definitely in a brand new world…Can they get us to install another app tied to our credit card when everyone already has Uber installed? Can they be that much better to give them a spot on our front screen in transportation row?…How does this dynamic change the core promise of the web that it is indeed possible for an individual to change the world?

Next up, Sarah Tavel writes on Medium, “Going After Dollars vs Minutes”:

Hunter Walk reminded me that in a zero-sum world of only so many minutes in a day, blank spaces to absorb those minutes must come from cannibalizing other minutes, either from online or offline. When the smartphone was new, it was a lot easier to steal offline minutes and bring them online. Now, these opportunities are harder to find. Of course, there is a constant flow minutes from one app to the next, but FBs/YouTubes continue to increase their share of the ever expanding pool of smartphone minutes.

Fred Wilson recently wrote on his blog about the winner-take-all dynamic in network effect businesses:

This is an issue for society to ponder. As I have spent time in Europe this past month, it’s easy to see that the search engine they use here is Google, the social graph they use is Facebook, and so on and so forth. If the US produces the networks that win most of the market, that’s an issue for the rest of the world. The Chinese have dealt with that issue by protecting their market. The rest of the world (mostly) has not.


So, here I am, with 2015 coming to an end…

I’ve started investing out of my third fund, and with each fund, I try to again be that hungry dog searching for cars. Again, while I have no monopoly on knowing what the future will bring, I am ultimately judged, in part, years later about how well I pick today. Since I don’t have a view of the world or a crystal ball, the best I can do here is survey the current landscape and pick markets that (1) I believe will be open, in a big way, over the next 3-5 years and (2) markets that I have a personal, genuine, intellectual interest in — #1 is important because if I pick the right markets, the gravitational effect of those markets can lift up great teams to new heights; #2 is important because founders intuitively sense when they meet an investor who is genuinely interested in their sector, has an informed point of view, and can demonstrate the ability to invest fueled by conviction for the long-term.

The net result of all of this thinking — a glimpse into my brain works and refries itself — is that I have, for the first time in my short investing career, identified a few key markets I want to invest in for my Fund 3. I’m excited about this because I’ve never come to this level of focus before. I wanted to write it down to broadcast to the founders out there who are in these sectors, but also because I wanted it to cement in my brain, because I know investors are like baseball hitters in that they can go through slumps. Just this past summer, I lamented to a friend that I felt like I lost my ability to pick. Fast-forward to today, I feel much more confident about what I’m looking for and why. Those areas are:

One, The Industrial Internet Of Things: There are a few flavors of startup I’m investing here in this category. Some are defined by building low-cost, low-power distributed sensor networks which help heavy industry capture, analyze, and act on new data; the revenue models here could be thought of as monthly “hardware as a service” (e.g. Filament). Some startups in the Industrial IoT sell design, collaboration, or machine OS software to help with new areas in 3-D printing (e.g. Tempo Automation, Material), surveillance (e.g. BetterView), vertical-specific solutions (e.g. Compology), security monitoring (e.g. AquaCloud), and more to come.

I got more excited by this space because (1) it combined some trends I am interested in (distributed networks, sensor intelligence, cloud computing, data moats); (2) the founders it attracted were not only whip-smart, but educated in an interdisciplinary manner across engineering and design; and (3) with over two-thirds of the world’s parts and infrastructure not connected to the Internet, it struck me as a potentially massive market with a customer base who is most-certainly willing to pay for the right solutions.

If you’re a founder or early-to-mid-stage VC/investor interested in this space, please contact me ASAP.

Two, Enterprise SaaS: This is the bread-and-butter of traditional VC, and who am I to buck convention here? When so much money is being pumped into moving atoms in the real world and out-executing the competition that goes 5-6 deep, investing in pure B2B software seems like a good idea. But, it’s too easy to say “I invest in SaaS” because, deep down, everyone does. How does one go deeper?

I go deeper by adding very specific filters. I am looking for SaaS teams who are creating new categories (e.g. Tesorio), who can build their own data moats (e.g. SecondMeasure), who bring machine intelligence to their offerings (e.g. OneConcern), who are not afraid of going after big enterprise or the low-hanging fruit inside governments (e.g. AquaCloud). If you’re a founder building a new SaaS product and fit into one of these buckets, I definitely want to meet you ASAP.

Three, New Consumer Technologies: Like any balanced portfolio, I cannot forget about consumer entirely. But, given what I’ve written above, given the strength and operational abilities of the incumbents, and given the shift from minutes to dollars, I have to focus my consumer tech investing a bit more. To that end, I am looking for startups that can (1) siphon off, intercept, or help redirect consumer spending on healthcare (e.g. Remedy); (2) bring technologies to mobile messenger platforms, which are major containers of mobile consumer activity worldwide; (3) build critical infrastructure for emergent consumer behaviors around virtual reality (e.g. AltspaceVR); and (4) simply bring together teams and designers who are talented and have a strong point of view of how they’d like to change (or challenge) consumer behavior.

I am happy and willing to take more risks here. I don’t want the fund to be an entire cookie-cutter of startups, and as the dog who chases cars, I won’t know well enough to know how something will turn out. As a result, I look for specific concepts or teams or people or ideas or whatever works. Lucky for me, being an early stage fund now that’s a bit bigger with some experience, but not asking for big ownership, I can build a more diverse portfolio based on a mix of what I see out in the market and what comes my way. I may be quicker to say “no” as I evolve my filters and focus, but it also means that when I say “yes,” I can put a little bit more meaning behind it, and hopefully, one day, have a better answer for that nagging question: “What’s your view of the world?’

The Post-Seed Conference, The Sequel

A year ago, the folks at Vator, Venture51, and Bullpen kicked off the inaugural “Post-Seed Conference” in San Francisco. The event was a hit. You can read about the 2014 version here.

Over the last year, we’ve seen a few big, public market corrections; we’ve seen increased tech reporting and online chatter about companies being given lofty valuations ahead of performance; and we’ve seen even more early-stage investors entering the market to invest directly in private startup as traditional venture firms write larger checks. More recently, we’ve all witnessed a significant slow-down in investing across the board. We’ve designed this event to surface and address all the issues that founders and early-stage VCs go through as a result of this new, crowded seed landscape.

This all makes for great timing for this year’s Post-Seed Conference on December 1st in San Francisco. Check out the great agenda here. In addition to in-depth fireside chats with Sequoia’s Alfred Lin, Vinod Khosla, John Doerr of Kleiner Perkins, and a16z’s Scott Kupor — we’ve put together a packed agenda with great angels, seed investors, and traditional VCs to talk straight about market conditions today. We also have two distinct panels composed of founders/CEOs who’ve personally traversed the path from angel and seed funding to the Post-Seed world.

If you’re interested in attending the event, please get in touch with me directly. This is mainly an invitation-only event, where we are covering the costs for folks in our networks who genuinely would like to attend, participate, share knowledge, and to learn. I have already given out lots of tickets, and I have a few more for friends and readers. While we are asking professional investors to pay a modest price to help defray some production costs, we are not charging seed-stage founders so long as their companies have received seed funding. Please send me a note if you’d like to come and can make it on Tuesday.

The Super Pro-Rata Signal

Here’s something I believe will become more prevalent as angel and seed funds which lead deals scale up and try to help their portfolio go to the next level: The increasing importance of a signal created by an existing investor who wants and/or takes a “super pro-rata” position in the next round of funding.

As a brief background, (1) a pro-rata right is sometimes granted to very early-stage investors as a reward (though not without controversy) to maintain their ownership position as a company matures and takes on more funding. This protects against dilution; and (2) many angel and seed rounds have quickly graduated from friends and families and credit card debt to taking funding from micro funds managing under $100M.

Back to the tip. My view is that as Series As continue to get harder to get done, and as more and more companies which have been funded are running out of runway, there will be another one to two huge waves of seed companies that just flop over — not even very light M&A, but rather droves being washed up ashore overnight. As this funnel tightens, and as there are too many companies for all Series A investors to properly track, I believe many of them will look for the super pro-rata signal in the majority of cases where the investment decision is not a unanimous, slam dunk term sheet.

If I’m on to something — and, fair warning, I could be wrong — one way a founder could leverage this dynamic is as follows:

  1. As you’re gearing up for Series A, go meet your lead and/or larger seed investors in person. Give them a proper update. Tell them about the past, present, and future.
  2. As the conversation evolves and hopefully goes well, invite them to not only take their pro-rata (most early-stage funds are set up with reserves to follow into a good portion of those who graduate to Series A), but ask them if they’ll take a super pro-rata position. This is an invitation for them to gain more ownership in your company.
  3. Now, assuming those early larger or lead investor will be either the source of an introduction to the larger VCs and/or will certain act as an important reference, your investor can talk all day long about how great you are and how great your company is, but nothing will likely speak louder than if he or she simply writes something like: “Not only did we take our pro-rata in the company; we offered super pro-rata, uncapped into the next round, to demonstrate how much we believe in the company.”

For the larger VC who sees this, it sends a very sharp, strong signal. It cuts through the noise and pegs the earlier investor to put their money where their mouths are. In a world where early-stage investors make intros to VCs ten times a day, this kind of intro will definitely stick out as high-signal.

However, there are some risks to this approach, but I would argue they’re healthy risks: The lead or larger investors may politely say “no,” which may force the founder to examine why. Or, the early-stage investors typically don’t follow-on (as part of their model), so there’s no real way to leverage this dynamic. However, if this works, and if you’re earliest backers want to invest in more in you and you can use that as part of the “proof” of why a Series A round is deserved, I feel strongly that it will put the founder in a great position to have his/her pitch taken seriously. The larger VC will likely interpret the signal as a specific type of social proof and, assuming they respect the earlier investors’ work and judgment, it will make them feel a bit more at ease that other investors will also have a strong, vested interest in the company’s long-term arc.

Finally, as a post-script, I don’t want this post to smack of “gaming fundraising.” I think of this move as uncovering a hidden dynamic into today’s environment that rewards founders with hidden gem companies and those who communicate well and build trust over the long-term.

AngelList and Y Combinator Continue To Shake The Trees

They say that “bad things come in threes.”

For those working in and/or observing the world of venture capital, this week provided some good fireworks, with two early stage powerhouses announcing power moves. It also happened to coincide with a week where investors in the Bay Area congregated at a small handful of well-timed annual events and fireside chats, often hosted by LPs (and very much off the record), so these moves became a big part of the backchannel conversation. In the press, on Twitter, and in many of these backchannel discussions, it is easy to see why an immediate reaction of a traditional investor could be one of disbelief or dismissal, or why someone in the press could tie this to the “disruption of venture capital.”

I’m writing this post to share my views on the news, and to make a slightly counter-intuitive point: The moves this week by AngelList and Y Combinator may not be great news for many VCs, but it is great for the VC “ecosystem” overall. These bottoms-up funds and movements show us all new examples of how atomized venture capital can work, how the next generation of founders may want to finance their businesses, and how software and networks can potentially provide more transparency and efficiency to each participant in the ecosystem of LPs, VCs, founders, and employers.

The moves by AngelList and Y Combinator shake the trees. These are good things.

The week started off with a bang.

On Monday, AngelList made a few announcements, the biggest of which was the creation of a new dedicated seed fund (“CSC Upshot”) backed primarily by The China Science & Merchants Investment Management Group, or “CSC.” The power in this move is that (1) demonstrates the ability of AngelList’s to empower institutional LPs to invest directly on the platform without having to back a traditional fund in the traditional VC model; and (2) now early-stage investors with access to entrepreneurs can theoretically scale up their total check size with a larger fund helping round out a syndicate.

First, we should acknowledge that LPs having more direct access to startups (as a mechanism to save on fees and/or gain more access) won’t necessarily work across the board. Second, there is a potentially perverse incentive in how Syndicates are currently structured with deal-by-deal carry (versus the pooled risk in a fund) that could lead to more syndicates being formed because there’s no natural governor to modulate it. All that said, I am not worried about those risks because (1) AngelList has implemented numerous controls to protect against this behavior; and (2)  I view this as the first of many small steps in how venture capital is being reorganized and restructured (read Ben Thompson’s excellent breakdown on the similarities between AWS and AngelList), and it will take a long time to shake all the trees. These visible experiments help the industry step in that direction.

Second, a platform like AngelList is set up to help make the business of being an LP more efficient. By using software to automate many aspects of reporting, analyzing metrics, and streamlining back office administration, LPs can cut down on the cost of the capital they deploy while also gaining access to more real-time, standardized information about their portfolio, perhaps relative to what they have today. From the point of view of Syndicate Leads, AngelList in general and this new CSC Upshot fund specifically gives those with the early-stage eye and/or relationships the opportunity to invest with more leverage, to build an independent track record, and to leave behind the hassle of filling out rounds and fund administration to software and networks rather than costly human labor and way too much email.

The week also ended with a bang.

By Friday, news had leaked (though everyone in venture already knew about it) that Y Combinator was going to announce a $700m growth fund, “Continuity.” YC has always had a somewhat adversarial relationship with traditional venture, and this move to compete for growth rounds in the ecosystem is definitely a power play move. To date, YC has grown its network and brand by investing a little money but mostly their time and know-how to earn equity in a basket of companies it can pre-select from. In the YC model (to farm black swans), they can leverage their own network of founders, software, and global brand to attract about 250 or so companies a year, out of which they just need one or two to hit. It’s gravy if it’s more. At the same time, they are liberated from trappings that hold many VC firms back — YC can have a high failure rate, YC can invest in many companies in the same category (whereas VC firms cannot), and YC remains an “investor of record” with its brand in the winners.

This is where a challenge sets in, and where an opportunity emerged.

As a company progresses out of the YC accelerator, it can attract angel funds, seed capital, venture capital, and eventually growth capital or, lately, late-stage pre-IPO capital. Traditionally, YC wasn’t either able or interested to participate in the future financings of their companies, leaving an opportunity to traditional VCs. YC helped solve a discovery problem for VCs in a time when the cost of starting up decreased and the amount of new companies formed and new markets opened up increased (and continues to).

The critical components of the new “Continuity” growth fund are worth examining. First, the fund size: At $700M, the fund can follow the traditional Series A and/or Series B rounds where companies are valued around $500M, give or take. Second, the fund may lead (as it appears to be doing with YC alum Checkr) or it may follow-on where the terms are set by another lead. Third, $700M is likely just the beginning for an inaugural fund. I’ve heard from multiple sources who were directly considering an LP investment that the initial target was around $1.5B, and while the headlines grabbed that superstars like Mike Bloomberg and institutions like Stanford were offering some of the initial capital as an uncapped note into a priced round post-Demo Day, what isn’t reported is that some of the world’s largest institutions, sovereign wealth funds, and families were in play for the fund. Expect them to participate in Continuity II.

Let’s use Checkr as an example of how this near full-stack venture financing approach works in the world of YC. Checkr is likely funded by friends and families and founder money. They’re accepted into YC, and likely exchange 4-7% of common stock in exchange for joining the YC network. They also receive $100k-$150k in money (essentially grant money, but converts at a later round). Upon Demo Day, they receive Series A investment from well-branded Valley VC firms, and now with good metrics in a good space, get a lead investment from Continuity. YC has mentioned they won’t go after Series As and Bs to avoid signaling issues of not funding some of their companies, but let’s see what happens in practice.

Checkr is a very good company. Most Series B and growth investors may not have known the opportunity existed to invest in Checkr, and now with Continuity out in the market, it forces even more intense competition for these deals. Hypothetically, if Continuity came right out and offered Checkr a $300M post-money term sheet, it acts as a price floor for other traditional VC firms to beat either on price or by offering a more compelling partnership and/or services and/or network. If Checkr doesn’t like the other offers, it gets patient capital from a known quantity. It stays in the family.When you break apart the funding trajectory, YC can now create a disruptive price distortion in early stage (buying equity cheaply) and now late (by moving fast on asymmetric information on its own children). And, if we look into the future with a wider funnel of YC Research, YC Fellowships, the regular YC accelerator, and now YC Continuity, the funnel will get tighter and better for YC to be at one of the best seats in the world to see who and what our future will bring.


They say “bad things come in threes.” So, for someone in VC, what’s the third thing? I would argue, instead, that “good things in come in threes,” and that, counterintuitively, the news itself this past week from AngelList and YC are great forces to stimulate and maintain more health in the great venture capital ecosystem. That ecosystem is not just limited to VCs — it includes LPs, founding teams, and even employees. It is the third good thing.

It’s obvious that founders want many aspects of venture capital to change. Throughout history, most lenders of capital are not viewed favorably. But, spend some time with LPs and line-level employees at companies, and they too recognize that these bottoms-up movements like AngelList and YC, powered by new networks and software, inject a new level of transparency and efficiency into what was otherwise a very opaque business and business model.

Most of the immediate response, Twitter reaction, and backchannel chatter in reaction to this news was to point to how venture capital is being disrupted. Sure, it is in some respects, but why not also view these moves as opportunities? For instance, on AngelList, an individual investor who may have not been able to have a career in traditional investor could go directly to LPs and founders and make a name for him/herself, with a track record that can be verified by a ledger. Or, for example, with respect to YC’s Continuity, it may force traditional venture capital firms to focus their business on Series As and Series Bs where company building occurs. Firms which can credibly show a commitment to and track record of building teams, customer bases, and new market penetration can emerge to show real value outside what Continuity may bring, though of course they can grow that fund into a platform, as well.

When I write “shake the trees” it is a reference to the fact that the venture industry moves very slowly. When an institutional LP commits to a VC fund, they’re effectively committing for 3-4 funds (when those vehicles tend to get “sweet” and reap rewards), and perhaps even more funds for fear of missing a cycle and being cast aside forever by that fund. As a result, LPs don’t have great insight into all the funds they’ve invested in, don’t have much visibility into GP recruiting and hiring, and so forth. A platform like AngelList gives LPs worldwide a greater pool from which to evaluate potential investing talent. In the case of Continuity, it places more pressure on Series A and Series B funds which are tied to YC with a history of investment to forge greater partnerships with YC founders, though it’s worth noting that one can find amazing companies and drive returns in venture without ever touching a YC company or working through AngelList. It’s early days, however, so the future may be different, of course.

I’ll end this post by admitting that even me, as a very small, new investor, will face increased competition through these structures. Already, I missed participating in a seed investment in LA which went right through a Syndicate on AngelList (the founder didn’t want the overhead of meeting too many people), and then the founder went right past YC into getting a healthy Series A from a branded SF/Valley VC fund. That deal, which I found relatively early, in a sector where I have real experience and a portfolio to back it up, just passed me by. Whatever expertise or value I thought I had didn’t matter as much to the founder. The founder, in this case, wanted to minimize the noise fundraising can bring, he wanted to manage the lines on his cap table, and he used the networks and tools available to him to do so. Initially, feeling the sting of being late, my first reaction was to think his move to Syndicate 100% would backfire — but it didn’t. And, he was kind enough to invite me to his A round, which I ultimately decided not to participate in, though I appreciate the gesture. It’s a new world to adjust to, and I welcome the changes, because it’s those forces which motivate me to continue to refine the precision and speed with which I’d like to operate.

These are not bad things. These are all good things. And, I’m excited to see more of it, as it will force every investor to be sharper and more focused.


Reflecting On The First 100 Investments

As I begin Haystack III, I wanted to write down and share the reflections I’ve had on seed investing to date. However, please note (1) I’m still learning; (2) I’ll make new mistakes; and (3) these reflections are for me, and not generally applicable to others — there are 101 ways to invest effectively and different things work for different people. And, ultimately, (4) it is a privilege for me to be even just a small investor, and it’s a privilege I take seriously, and am grateful for all the investors in my fund and founders I’ve gotten to work with — they have all taken a chance on me, and that is a very humbling set of circumstances to keep in mind.

With that, here’s what I’ve been reflecting on with 100 investments now in the portfolio, three years in. I don’t have a technology or investment background, so I wanted to invest in a lot of companies quickly as a way to speed up my learning, but I know in the back of my mind, there are no shortcuts and will be more learnings in the years to come. [I want to dig into some my stats (as I’ve shared on Twitter before), but I’ll do this in another post, as here I want to focus more on what I’m taking away as I move into Fund III.] Finally, I’ve had a tough time organizing my reflections in specific categories, so this may ramble a bit. Apologies in advance.

1/ Out Of Market, Out Of Mind
I made a small handful of “out of market” seed investments, some in LA, one in Canada, a few in NYC, one in Boston, and one in Europe. While I’ve been active with them, it is hard to keep in touch and requires a lot of extra work and communication. For Fund III, I’ve elected to keep my focus to invest locally in the Bay Area. I’m sure it will be tested over the course of this fund, and lo and behold, I met an entrepreneur with operations in Israel and parts of West Africa that I would love to work with, but I am not sure about the geographic divide. At the Series A level, I can see how a VC firm would invest out of market, but at the seed stage, I believe the financing risk is too high generally. I sense some people will take offense to this stance, and I hope local seed markets flow to other geographies. I know I’ll miss out on great opportunities, but for this fund, I’m OK with it, which brings me to the next section…

2/ I Can’t See Everything, And That’s OK
At the seed stage, there’s just no way to see every good opportunity. Company creation is so pervasive, I am not sure how wide one’s coverage at seed could be. By adopting more process constraints (like focusing on local investments, etc.), I’m implicitly saying it will OK to not see a company in another market or in a hot category, etc. It’s OK.

3/ Existential Risk Rules The Day
“Only the paranoid survive.” Or, any similar phrase will do the trick. Seed-stage companies biggest risk isn’t competition or a large company — it’s surviving, and often that comes down to securing future financing venture capital. Every seed stage company, whether they admit or not, strives to “reach Series A,” but we know most don’t make it, so we have an explosion of bridge rounds, or second seed rounds, or seed extensions…whatever you want to call them. While a select few companies will have VCs chasing them or boast insane metrics, the rest have to really fight it out, and it often requires a level of risk, sacrifice, and paranoia among the team to get the deal done, which brings me to the next section….

4/ Founder-Market Fit And Startup-Founder Fit
I have learned that I like to find some connection between what a founder is working on today and what they’ve experienced in the past. It could be a loose connection, but I strive to understand what those connections are and how deep they may be. It could be how they’ve been trained, or where they’ve spent their careers, or it could be personal like where or how they grew up. Additionally, I try to evaluate through conversation and reference checks the level of dedication one has to startup life — Do they have the willingness to take real risks, even if it’s reputational risk? Are they willing to sacrifice in pursuit of their goals? Do they exude a mix of confidence about their abilities and competitiveness to fend off all the copycats that will emerge in today’s startup culture, alongside a healthy paranoia that drives them to understand the next round of financing will be an uphill battle? Speaking of uphill battles…

5/ The Seed Round Doesn’t Really Count Anymore
Receiving an offer to invest early in the life of a company generally doesn’t mean much. Yes, it’s very hard to raise money, but there are so many seed stage financings every day, why announce them or view it as some kind of validation? It is not. Securing a seed round means a team has convinced others to believe in their potential. That is something to be proud of as the recipient, yes, but perhaps more of an internal high-five to one’s self versus broadcasting it to the world. I think what really matters are: Do friends and former colleagues want to work at your new company? Do customers find you and bring business your way? Does your product or service change the behavior of your users or customers in meaningful ways? Do any or all of these exist in your company to the point where a professional investor fights to invest in your company, to join your board, and to work with you on a long-term project? Those are the things that count in the long-term.

6/ What Does “Value-Add” Mean At The Seed Stage?
I’m a very small investor on the cap table. The biggest area seed stage companies ask for help with is, unfortunately, one area I can’t really help much on: Recruiting. Now, I have certainly sent a few ex-colleagues to startups in my portfolio and try to do more when I can, but as a percentage it’s pretty small. I’ve also helped “close” many candidates who are looking to join portfolio companies, which is definitely more effective for me. After a while, one kind of glosses over the standard requests like “Hey, if you know any good iOS engineers, send ‘em our way — we are hiring!” I didn’t want to turn into a recruiter (though I think it’s a very valuable skill), and I believe the talent fragmentation in today’s SF/Valley startup scene is so pronounced that being effective at this may be a waste of effort. Instead, I choose to focus on mitigating the risk in Point #3 above, and from that lens, everything flows.

7/ Being Helpful Via Push Versus Pull
With a larger portfolio and being so early, I initially decided to be available and approachable when someone needed any kind of help or just someone to talk to. To encourage this to happen more casually, I set a calendar alert to BCC email all the founders together on the 1st of the month with a short note to tell them what I was up to, to share where I was speaking, to share generalized opportunities I came across, and to add my phone number. From those more casual emails, conversations would emerge. And as those conversations progressed, I would start to ask about burn rate and runway, and if I gathered that the founder was potentially underestimating how much runway they really had, I would offer to work together on it. Many took me up on this offer. Some didn’t. There will be a higher number of things that don’t work at seed, so I focus on (1) trying to pick well prior to selecting an investment and (2) being in a position to help if it’s welcomed, but then not pushing beyond that. It is not my company.

8/ Investing Pre-Product Or Pre-Launch
Unless I know the founders previously on a personal level or it is someone who has successfully started companies in the past, there are way too many good investment opportunities on my desk for me to consider investing in someone’s concept or dream. In fact, I’m shocked how many people waste time trying to pitch someone about their concept when there are live products in the wild for investors to play with and test. It does feel a bit like people view this very early stage investing as a newfield area to go after, but to me it looks more like grant funding — now, there’s nothing wrong with grants, assuming those grants are made on some type of asymmetric information and/or prior evidence of application of talent.

9/ Leading Rounds Versus Catalyzing Rounds
Being a small investor, I cannot lead a round by investing the most money. However, on occasion, I have been one of the earliest investor in a seed round and then worked to catalyze the round by sharing it with a network of investors who enjoy co-investing with me from time to time. In these cases, so long as the founder is OK with it, I can have a bit more influence on the overall terms (what I think the clearing price will be) before sharing it with the wider network. This has been very successful to date — for both investors and founders I work with. Keeping in line with my views on the threat of existential risk, I focus on catalyzing rounds to make sure they get done versus trying to lead them with the small, inexperienced checkbook I wield. And, as seed rounds are never really closed and therefore this is rarely true urgency around closing a seed round, it is entirely manufactured without real teeth as founders may need bridge capital later on in the company’s life.

10/ The Good And Bad With Party Rounds
I have no clue, statistically speaking, if party rounds impact the trajectory of a company. It is intuitive to think that they do, given that more investors with a smaller share won’t care as much about the company, but then you can see some companies on AngelList which have over a 100 direct investors (not through a Syndicate), and it makes you wonder. Clearly for a founder, managing more lines on the cap table can be a pain, but ultimately, if every seed stage company faces existential risk, and if there are too many investors such that no one has meaningful enough ownership to care for and fight for the company in hard times, that composition may impact how the company fares. Philosophy aside, most rounds I see are split between having 1-2 leads with a few individuals and pure party rounds where the founder just scraps to get it done. For now, I’ve decided to focus on making the sure the round can close if I have conviction versus trying to make sure there’s a lead, though some cases definitely require a lead.

11/ Seed Investors Not Updated Often
I struggled with this initially, because one assumes people will update you. But, most don’t. I’ve learned to accept it for now, and if someone contacts me later for help, I may ask them for more context and an update in order to properly help. Some of the best-performing companies rarely or ever sent an update, despite the investor feeling he/she may want one.

12/ Conflict In Seed
Big VC firms can’t really invest in more than one company in a category, but some get away with it. Incubators and accelerators definitely can, and they take advantage of it. At seed, things are so early and people change course often, a seed investor with a larger portfolio can sometimes fall into a conflict. This has happened to me. On some occasions, there is a direct conflict and I don’t engage; sometimes it’s possible, so I try to ask current founders if it’s OK for me to talk to another company; and the tricky part is that sometimes I don’t see it at all, only to find later that a founder views a company as competitive. Things are so uncertain at the seed stage, I just try to be as honest as possible, but I am going to make mistakes here and have, though I’m not sure what I can do about it given how the market is evolving. At the end of the day, everyone is in conflict with everyone else.

13/ Seed Is From Venus, Series A Is From Mars
Oftentimes, all of this activity gets lumped into “venture capital.” It is not quite accurate. The lessons I’m trying to learn don’t all apply to Series A, which is much more of a zero sum game where investors have to enforce discipline on the system, where they can’t invest in more than one company in a category. (At seed, there is a bit more room to invest in a category, as I described above.) So, I’m hoping people don’t take this post as a proxy for what large VCs do — it is not. Seed is very different and this post can’t be extrapolated to other stages of investment.

14/ On Relationships With LPs
I wrote a series about posts this past summer on StrictlyVC about my experience in meeting, getting to know, and taking investment from LPs. You can read those here. Ultimately, traditional investors in VC funds like to write bigger checks than small funds can provide room for, and increasingly, many of them are looking to make follow-on or even direct investments in the portfolio companies of their managers. This is especially true at seed, where access to companies proves to be most difficult for larger investors to stomach. I learn more about the market, about LPs, and about myself each time I go out to raise — this time around, there were two surprising things: (1) Some LPs first move in diligence was to verify that I actually had a fund and that the fund held previous investments — I had no idea they would do this, but it makes sense; and (2) that no matter how well you think you can pick them as an investor, people will always question your deal flow and judgment. People will question how repeatable your previous record is, and they’ll want to dig into how you get deal flow, which is likely the same way everyone else gets into the flow of deals. As the manager of a small fund, for better or worse, I’ve chosen to meet as many LPs as I can and go into each conversation assuming what I’m doing is too small for them and to focus on building a relationship with them. I’m hoping that over the long-term, with time, that I can build organic trust with a small group of partners.

15/ Investment Pace Matters
This is a learned skill. When I started, I was bad with this, and it got worse being a one-person shop. I got a LOT of feedback on that, and I listened to it — the main change I made is that I have found someone to manage my back-office accounting who is very strict about setting a pace and sticking to it. For Fund III, to start, I can do two wires per month, and he has to have all the docs in place before initiating the wires — then I go into the account and approve them. It’s still my decision, but that little extra process helps with the pace. At seed, the temptation is to make lots of investments because no one is sure what will happen, but from an institutional LP point of view, LPs definitely look over your track record and try to measure and predict how selective an investor can be. Pace is a big part of that equation. Still, two a month for Fund II is still pretty high, but a slow down for me relative to prior funds.

16/ Deal Flow, The Mother’s Milk
Everyone wants to know “How does one get their deal flow?” It’s all the same, everyone is connected to everyone (for the most part), and if you’re seen as a good actor and valuable in some small way, people often share their deals and/or people make introductions. When there’s lots to choose from at seed, picking the right companies becomes more of a challenge, and those who have picked well may do so out of luck, out of process, or some combination. It’s very hard to say.

17/ The Biggest Mistakes I’ve Made: Weighting Concepts Over Market Timing
The most common mistake I’ve made to date (there will be more!) is being seduced by a concept and weighting that over even little signs of momentum in the company or sector. From afar, it’s easy assume investing like this as “people who invest in the future,” but for it to be effective (e.g. to return investments), the size of the market and the market timing are critical, especially when there are hundreds to choose from at any given time. Now when I’m evaluating an investment, I’ll try to find the overlap in a venn diagram of three circles: (1) Is the market huge and evolving in dynamic ways over the next 3-5 years? (2) Is the product or service being offered in that market compelling and defensible in some way (could be based on tech and/or people)? and (3) Do the founders, either veteran or first-timers, have a combination of skill and willingness to sacrifice to make a run at building a company? If the answer is “yes” to all three, then I dig in more for references and socialize it with my close network to get feedback.

18/ Counterintuitive Advice That Backfired
This is easy. I seeded a company earlier this year that started to pick up traction, much to my surprise. The founders immediately turned around and said they wanted to raise a Big A, but summer was approaching, so I shot back with “raise from big funds in the Fall, it’s hard to get a competitive process going in the summer.” Well, that was definitely the wrong advice I gave them, and I pushed it pretty hard. They completely ignored it, and they got their round done before Labor Day, and given how the market reacted then and thereafter, they were absolutely right. Lesson learned.

19/ Reputation, Not Money, Is The Currency
It’s easy to observe the ecosystem and assume all investors have tons of money. Well, many of them do, and even those that don’t write big checks. It’s a great job, no doubt. But, if everyone has money, and all that money is the same color and has the same worth, what differentiates it? Reputation. Reputation, it turns out, is the only real currency most investors have. In a competitive environment, reputation lets an investor see a deal he/she shouldn’t have, or lets an investor convince a founder to work with him/her, or lets an investor be a little extra persuasive when trying to coach a founder. It’s easy to assume investors are conferred power by virtue of having money, but the money isn’t always there and can go away for the next fund — reputation is the real currency, one that takes years to earn and can be washed away in an instant.

The Story Behind My Investment In OneConcern

I am very proud the announce the first investment of Haystack III: OneConcern.

I met the founders through another friend at a fund, he was looking at the company and knew that I liked software plays that sold to national, state, and municipal governments. Most investors don’t like those sales channels, but I do. Why? Because I believe over time the budgets for certain things (health, emergency, climate) will balloon to meet societal needs while many others will fade and erode because we simply won’t have the money in the tax base to get it done. Those essential tasks then will have to be left to technology and software, and in my investing, I’ve found that once an entrepreneur figures out how to sell into governments and builds the right stuff, it is one of the best channels out there because words spread through different networks and it’s harder for a new entrant to cut in.

Anyway, I met the CEO at the request of my other investor friend, and I was immediately captivated by his personal story and academic background. The CEO, a structural engineer from Asia who came to Stanford to study the science behind earthquakes and other natural disasters. This is a tangent, but I enjoy studying the history of earthquakes and learning about how societies have dealt with them. I troll Wikipedia to give my brain a break and read up on these things, so when I met the CEO, I was actually excited to talk about big earthquakes and data, etc. What I came to understand from that meeting, however, was even deeper.

A few years ago, during the major floods in Pakistan, Ahmad (the CEO) was home visiting his family and was caught in the floods. He escaped to the attic of his family’s house and lived on or near the roof for over a week until he was rescued by authorities. I always ask a founder about how past experiences may shape future activities, but I never expected a machine learning engineer focused on building software to help states mitigate disaster response systems say that he himself was caught in a major natural disaster.

If you want to learn more about the company, OneConcern, you can read about them here on New Scientist and here on their website.

While I always try to spend time “in diligence” and vetting a company, I realize now in retrospect I probably spent too much time doing that with OneConcern. The beauty of investing at the seed stage is that I can work with tons of other investors to support companies who start out and have ambitions to grow bigger. Yet, much of the early stages — myself included — have become professionalized, often to the point of placing unrealistic expectations on new companies, new technologies, and new founders, when in fact it should just be about the identification of earnest talent and the relentless support of that talent. I may have conducted my proper diligence, but some things don’t need diligence; a product like OneConcern and an entrepreneurial story like Ahmad’s must be supported — it must be willed into the world, and just like I am trying to do with the creation of Haystack and my own family funds, it will be willed into world no matter what. The solution must exist, and the network of other investors will support it to see it through with their own sweat and passion. That is inspiring to watch unfold and be a part of, indeed.

An Evolving Relationship Between MicroVCs and LPs

This past summer, I wrote some columns on StrictlyVC on the relationship between LPs and VCs, and I realized I never cross-posted them here, so here goes. I reposted them here with subheadings. This may not be of interest to the regular reader, but really intended for venture investors and those who are limited partners in VC funds. Would welcome any feedback or commentary on the notes below, thanks!

Part I: LPs Investing Directly Into Startups

In the few years I’ve been able to meet and learn from limited partners or LPs (those who invest in VC funds), I have noticed an increasing desire to co-invest alongside their general partners. This makes perfect sense. If I was an LP, I’d want to co-invest, as well. Yet, in the process of doing this over the past few years, I’ve found myself repeating some warnings to LPs who have grown eager to do co-invest at the very early stages of seed.

Typically, I cite three key warnings:

One, oftentimes the founders want to meet all potential investors who will be on their cap table. Even though a VC can offer syndication to the founder, that founder may not welcome the introduction and prefer to control the process him/herself. LPs can certainly ask for insight into a GP’s processes, policies, and histories around creating co-investment opportunities, but they cannot be guaranteed. Furthermore, what if a GP has two or three LPs interested in co-investing but there’s room for only one or two. How is the GP supposed to decide?

Two, when there is a real co-investment opportunity for an LP, sometimes the LP doesn’t have the proper resources at hand (domain knowledge, or network, etc.) to independently vet and diligence the specific deal in a few days. If the LP is a family office, they may have enjoy the latitude to quickly stress-test their network and then make a yes/no call; if the LP is a fund of funds managing other institutions’ money, they may have an incentive to seek these types of deals out given their fund economics, regardless of engaging in proper diligence.

And, three, whenever someone is the recipient of an investment opportunity, one should ask: “Why I am so lucky?” In a competitive deal, I often have to fight just to wedge in, and I am not always successful. These are the investments LPs would love to participate in directly as a co-investor, but such opportunities rarely surface. Yes, there are companies that go unnoticed for months or years before breaking out and becoming a sensation, but those aren’t a monthly occurrence.

Again, if I was an LP, I would want to co-invest. After all, LPs are looking for outsize returns, just like the rest of us. More, if an LP doesn’t get in at seed, the bigger VC firms won’t create room for the LP down the road. Still, I’d welcome more conversation and debate around this topic, both from GPs and LPs alike, so that we can all learn more about best practices learned and minefields to avoid. Dangling the opportunity to co-invest may help ink a commitment, but in practice, all that glitters may not be gold.

Part II: The High Cost Of Small Checks

Naively, one of the most profound lessons I had to learn in attempting to raise funds from limited partners is that most institutions prefer to write large checks. By “large,” I mean commitments to VC funds that are equal to at least or oftentimes two to three times more than what a typical decent startup may raise in its lifetime. It is all rational. The time, attention, diligence, legal burdens, and administrative headaches of doling out smaller checks to more funds reduces a larger institutions’ ability to concentrate and, frankly, creates a roster of more egos to manage over a long period of time.

An LP friend and mentor of mine summed it up perfectly to me: “Semil, I like you, but you gotta understand, my friends don’t get out of bed unless they’re writing a $25 million check.”

To those who haven’t raised funds or been around fund formation, it can all seem inefficient. For the rash of micro VC funds that have formed (mine included), we collectively confuse, vex, and overwhelm traditional institutions, including because of our higher pace of investing, heavily reduced levels of ownership, lack of toothy pro-rata rights, and a host of other issues.

Luckily for micro VCs, it doesn’t really take that much money to get going. My first fund was $1 million. It was really hard to raise. Some people have access to wealthy folks, family offices, or corporations, but it isn’t a slam dunk to raise a small fund. The second fund was considerably bigger (relative to the first), yet was still too small for institutions. The third fund will be even bigger — perhaps just at the size where the larger institutions like to build a relationship and track, much like a large VC firm who drops a $100,000 check into a company with the hopes of monitoring its progress.

As other non-traditional LPs (companies, high net-worths, and even funds) have stepped in, it’s created a boon for entrepreneurs. People with the right networks and halfway decent concepts can raise as little as $1 million in a month, even in a category where every early-stage investor knows there are four or five nearly identical competitors working on the same thing. Many of these attempts won’t go on to raise traditional venture capital, and the institutional LPs know that.

So, while there’s a high cost of writing so many small checks, we will have to wait a few years still to see just how costly it is. On the other hand, the cost of starting up may, in fact, decrease during any kind of correction as talent becomes less fragmented and major cost drivers (rent, salaries, benefits) decrease. Founders who are in demand and who are dilution-sensitive may want only specific people on their cap table, and they may want $100,000 to start, not $10 million or even $1 million.

We are a few years away from that, but this is where I see the trend headed — that being nimble enough to be invited to the cap table is what will define individual investors and firms. Those definitions can’t really be bought with money, and that’s what will make the next wave of micro VC investing so interesting — that is the high cost of small checks.

Part III: Stay Small, Or Grow Funds?

The growth in micro VC funds is now well-documented. While there are many reasons to explain why this trend took hold, the more interesting question to ask is: What will happen to those funds which survive?

Grow the Team

A natural desire of any entrepreneurial endeavor — including starting a fund — is to keep growing it. In the context of small funds, traditional LPs will naturally hope this new crop of managers who emerge will grow a franchise, will add people to the team, and ultimately manage more money. Eventually, some of these franchises can grow to manage quite a bit of money per fund per GP and can, in effect, become a new type of Series A firm. This is the theory. It remains to be seen if more than just a few can make this transition, as the models at seed versus Series A are obviously quite different.

Stay the Course as Lone Wolf

While it may sound traditional to turn a good micro VC fund into a more traditional venture franchise, creating a strong general partnership is not a simple, check-the-box activity. Noting the difficulty, some micro VCs have opted to stay as solo operators longer than LPs had imagined. Some, of course, continue to outperform and earn the right to manage more money per fund (if they choose to). In this instance, the LPs aren’t able to invest more and more of their funds into the GP. In the same way a large VC fund may look for opportunities to increase their ownership in a great company in their portfolio in order to make its own economics work, a large LP will often have a similar desire.

Differentiate and Evolve

Just as investors may have “app fatigue” or “food delivery service” fatigue, LPs pitched by micro VC funds have their own flavor of fatigue. As a way to cut through the noise, many of them drill into what differentiates a GP they’re considering an investment in. This can nudge micro VCs to differentiate on the basis of sector (hardware, Bitcoin, etc.), or geography (focusing in emergent areas outside the Valley especially), or stage (pre-seed vs seed, etc.), and more. And the success of Y Combinator and the potential for more steady budgets for an accelerator or incubator could encourage more to let go of the traditional fund model altogether.

I know these choices because I have been faced with them. The LPs rightly ask these questions and conduct references to determine which way the micro VC wants to go. But the truth is that, just like most at seed don’t know how well a company will do at the very early stages, most of them also don’t know what the optimal path to take is. This can lead to an awkward discussion, where LPs may want or need to hear certain things to “check the box” in their processes versus having the raw discussion about what is working and what doesn’t. The truth is that most people don’t know, and in this market, which is changing year to year, the main value in these smaller funds is that their inherent nimbleness by virtue of being small gives them the right level of flexibility to adapt to a dynamic, ever-changing environment.


My cautionary post-script for any later-stage investor (click here to read it). This applies to traditional VC funds or LPs who like to be on the cap table.

The Story Behind My Investment In Datos IO

I am not an enterprise IT person, but I have made a few investments in the space and will definitely do more. As a small investor, the formation of these types of companies is quite different than what the broader startup/tech population is exposed to for SaaS and consumer-facing businesses. Often in enterprise IT and infrastructure startups, there are real barriers to starting up — the founders need to be of a certain caliber, there likely needs to be some tech breakthrough or promise of one. the dollar requirements out of the gate are much steeper, and the question of sales (distribution) can make or break the deal.

As a result, these investments form with very different characteristics. It is not uncommon for an elite team of new founders to raise $5m+ just on a slide deck, pre-product. The likelihood of returns generally in this space are much higher than consumer, but the breakouts aren’t as common or high-flying, though we are on the verge of seeing a company like Nutanix go public soon and hit valuation numbers that very few companies see.

As I started Fund II about 18 months ago, I was introduced to the founders of Datos IO by one of my LPs. In fact, this LP has sent me tons of deal flow that I wouldn’t have ever seen. That’s only half of what’s cool about this; of course, I am not qualified to evaluate these businesses on a technical level, so how do I go about getting conviction to invest in companies like

One of my biggest lessons — one of many, so far — is that everyone assumes “investor diligence” is done (if at all) in a somewhat similar manner. In reality, investors perform diligence and arrive at their own point of conviction through a variety of methods. Some make market maps; some call all references and customers; some hire technical savants to help them birddog the technology’s worth; some just wing it. In this case, I conducted “network diligence” by talking to three of my close friends who are all deeply thoughtful about enterprise IT and infrastructure, and I walked through this opportunity with them.

After testing my network and spending lots of time with the two founders, I was able to gain conviction in the caliber of the team and technology. And, so far, that process worked just fine as Datos IO went on to earn many term sheets from some of the world’s best technology investors, ultimately selecting Lightspeed as its Series A lead, a firm with a string of hits in infrastructure. A better understanding of the company’s offerings verifies what Datos’ investors already know: That the company, which solves recovery issues for distributed databases, is graduating pilot customers to real customers quickly, by providing a consistent view of the data across their infrastructure for recovery needs.

This example provides another reason why I feel investing is such a great fit for me personally. Being a small investor and with a network to help around the edge, I can learn much more about the enterprise IT sector in a shorter period of time. Though my knowledge in this domain will never be on par with those who focus in this area, for now I enjoy having the flexibility to explore new sectors and make investments broadly. In part, it helps me write pieces like this called “The Enterprise, In Lay Terms,” which has turned into one of the most-visited posts on my site. For 30 years, scale-up relational databases ruled the client-server world, where companies like Veritas provided data management tools. Today, distributed applications (IoT, Mobile, Social, Cloud) call for a new data-centric world where five of Top 10 databases are open-source. The stellar team of researchers and operators at Datos IO have not only built and developed this new technology and architecture, but they’ve put in the hands of large corporations who are lining up to harness their technologies. That is no small feat, and I am proud to be a very, very small part of the team’s journey.

Missing This Week’s On-Demand Conference In NYC

Tomorrow is the second installment of The On Demand Conference, this one taking place in Manhattan. My co-conspirators Pascal from Checkr, Misha from Tradecraft, and the entire Tradecraft team have put together an incredible agenda, event, speaker lineup, and topic list. Sadly, I am not able to make this trip, but I can’t wait to hear about it from friends and colleagues who will be attending. If you haven’t already, check out the Line Up and all the great Agenda Topics that will be discussed.

The on-demand startup world has gone through some downs since the last conference. I’ve written about those here. In my conversations with Pascal and other investors about this, there’s no doubt that the bar goes higher and higher now for companies to earn venture investment. While the consumer demand for these services still remains, how that demand is fulfilled is now under question — and that’s a good thing.

In particular for New York City, with its own great startup scene, this is a good venue for this discussion given the competition and density. It will be interesting to see if one coast has figured out tricks the other coast can learn from, and vice versa. On a personal note, I will be sad to miss tonight’s smaller drinks event for the speakers and moderators, will miss hanging out with Shai, Steve, Matt, the Button folks, and many other friends I’d love to have seen, and I was really looking forward to opening tomorrow’s session in a fireside chat with Albert from USV, but Misha is stepping in and is also interested in many of the same issues touching the on-demand space. (In particular, make sure to read Albert’s post today about the connection between on-demand services, automation, and guaranteed basic income.)

Wishing everyone the best of luck with tonight and tomorrow’s big show, and a huge thanks to Pascal, Misha,  for their support. They make this stuff happen with the greatest care and attention to detail.

“A Constant Struggle For Recognition”

A lot of people aren’t going to like this post given the timing, but the story has been forgotten, so I watched the NFL biography video on Tom Brady again yesterday. It chronicles his life from little league baseball, to picking up football when he was a high school freshmen, his hyper-competitive years in college football, his near-miss in the 2000 NFL draft, and his professional career highlights. In watching this video again, a number of themes emerge that reminded me of how entrepreneurial talent is built and evaluated, with all the smart people in the room. Those themes from the video are:

(1) The Cost Of Split-Focus: When Brady was an upperclassman at Michigan, then head coach Lloyd Carr also landed one of the highest-profile recruits from nearby Ann Arbor, two-sport star Drew Henson, who was also drafted by the New York Yankees. Henson wanted to play football and baseball for the Wolverines, and in order to develop Henson, who had more upside than Brady, Carr told both he would split their time in games to see who was performing better and then lock in the choice for the 2nd half of each game. Brady could’ve transferred to been a shoe-in starter at another school, but he opted to stay and stick it out. As it turned out, Brady would then come in to clean up the messes left by the other quarterback, building up a proficiency in bringing his team back from being down in score. While Brady fought for his role and constantly felt his job was on the line every week, Henson rested on his natural abilities and kept his options open to pursue baseball concurrently. The parallels exist today in the startup world, with startup CEOs creating investment firms and investors incubating companies, or companies who have co-CEOs, or CEOs who have multiple CEO jobs.

(2) Pro-Rata Recommendations: Despite the very nice things said about Brady by Carr in this video, one of the NFL coaches in the video who had a chance to draft Brady remarked that during the combines and when teams were evaluating him, none of the Michigan coaches pounded the table for him. A similar behavior happens in startup investing. The entrepreneur has existing investors, and a new potential investor will often press existing investors to stand up and pound the table for why the deal should happen. In pressing this way, the new potential investor can read between the lines to uncover new information and to better understand why this may be a great, non-obvious investment to make. At the same time, existing investors who want to have long-term relationships with downstream investors (or, here, NFL coaches) have an incentive to be brutally honest so their word doesn’t lose value over time. Even though Carr praised Brady’s work ethic and ability to handle pressure, in the moment, he experienced FOMO with Henson’s potential looming and opted to have both quarterbacks compete against each other to see who the best was. This, in turn, made Brady paranoid to think, “maybe nobody wants you.”

(3) The Cost Of Focusing On “The Measurables”: The process of evaluating and drafting football talent has been made into a science. One of those scientists, Mel Kiper Jr., remarked that after 32 years of evaluating almost 600 college quarterbacks, Tom Brady ranked #576 in two tests of general athleticism: vertical leap, and the 40-yard dash. The video makes sure to track all of the careers of the other five quarterbacks who were selected in the 2000 draft, and it demonstrates, after 15 years, that careers are long, that oftentimes hot draft picks with the measurables are even more likely to flame out. This happens in startups and investing, people get buried in and blinded by all the data, because they can be measured. This is why we here of stories of people struggling to get funding for so long, and why building a case for investment in the early-stages around numbers often isn’t as strong as doing so with a carefully-crafted narrative about the future.

(4) Everyone Needs A Break: Brady’s window of opportunity opened in 2001, after the starting quarterback he would replace signed a $100m contract. Brady slipped in, became the starter, and took the job from his predecessor, and because it took so long for his break to come, his paranoia has driven him since. Despite his success, he likely truly believes he is expendable, that someone who is younger, fitter, faster, and stronger coming through the ranks can go and take his job tomorrow. Paranoia built over years doesn’t just fade away with success — it may in fact get stronger. Brady went through many years of what is described in the film as a “constant struggle for recognition,” and only received it as the 2001 season developed and only because the star quarterback ahead of him was knocked out of a game. I have seen many folks in the ecosystem get their “break” only after 5+ years of doing exactly the same thing before the crowd noticed “hey, this person is actually awesome!”

(5) Flawed Evaluation Processes: This is the most powerful part of the video. It’s legend now to think 198 players were drafted ahead of Brady. In the video, they keep coming back to the notes in his player file, that he didn’t have a strong arm, that he couldn’t improvise on the field, that he couldn’t jump. Those were all measurable “metrics” other talent evaluators could focus on and benchmark against others. One needs data to stack rank. This happens to startups, too…with all the seed-funded companies and copycats out there, the data separates them, and it’s hard to blame investors for doing this. Yet, investors also have to be mindful that it is the people who make the data, and not the other way around. A huge component of investing is careful evaluation and tracking of an individual protagonist’s story, how they got here, and from where, to learn more about what drives them to do what they do. That is why stories emerge of the Airbnb founders who ate shit for two years, or how Travis founded three somewhat similar companies before emerging from his parents’ basement to jump into Uber, or why it took Pinterest so many rounds of early-stage dilutive funding to get their flywheel going. All of these deals were under most investors’ noses, but they likely were looking for more proof. Now investors lament seeing these things and passing, just like NFL coaches in this video realize how they evaluated talent back in 2000 led them to their decisions at the time.

The most interesting quote about this particular evaluation process comes from former San Francisco 49er coach Steve Mariucci:

We all knew Tom very well. He was right in our backyard. He probably always wanted to be a 49er…but we didn’t open up his chest and look at his heart, I don’t think anybody did. And what kind of spine he has, and the resiliency…all the things that are making him great right now.

The prevailing sentiment around Brady today is either he is a cheater or he was unfairly framed. Without getting into that debate here, I was reminded that in today’s media scrutiny of Brady, many folks forget just how paranoid Brady had to become to survive and keep his job, starting from high school. Earlier this week, the author of one of my favorite daily newsletters, Dave Pell, who pens Nextdraft, wrote a funny headline: “BREAKING: Shockingly Attractive Rich White Superstar Quarterback Finally Gets a Break.” Brady is successful now (and a target), everyone wants to cut down the market leader — but he wasn’t always the winner, and what’s likely to drive him is more rooted in years of failure, rejection, and a constant struggle for recognition.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2015 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus