Career Archives

“Leveling Up”

I have been emailing Haystack founders a bit more often with some stream-of-conscious thoughts, and many of them have encouraged me to publish them publicly. Below, I was thinking about how relatively easy it is (in the Bay Area) to raise a seed round versus raising from larger institutional VCs, and how that’s connected to my own experienced of raising small VC funds with individual LPs but then what I had to do to make the transition to an institutional capital base. Here’s the original email, to what I add a few suggested concrete tips for company founders to consider when attempting to make this transition.


Hello Haystack founders,

This a post for seed-stage founders only. It is not for founders who have gone on to Series A or those founders who don’t seek institutional VC dollars. As always with these emails, please delete, disregard, or ignore if not relevant…

Lately, I see well over 50% of seed-stage founders are taking their subsequent fundraises far too casually. I don’t just mean when they gun for that elusive Series A. I mean even when they go for an extension round, or a bridge round, or an insider round, etc. No matter what size or level, while the first seed checks to roll in are relatively easy to secure in the Bay Area, the second check, no matter the source of the money, is a b**ch.

I know a bit about this from lots of indirect and direct experience. Indirectly, I have now helped well over 50 seed-stage founding teams get over to Series A. I feel I now know of the patterns across five years and the personality of investors who provide the second tranche of capital. Directly, I can imagine how it feels having (1) been part of startups that raised outside capital, and now (2) in raising my first institutional VC fund. We all know about how hard it is for a company to raise outside capital, so…

When I set out to raise Fund III back in the Summer of 2015, with two funds under my belt, an incredible roster of my own LPs, my own investments, and even real liquidity, I thought I would surely raise $20M from institutions. My previous funds were only $1M and $3.2M respectively, but this time around I was ready. LPs subscribed to my blog, were emailing me, meeting for coffee. A bunch of famous VCs were making introductions to their LPs. Even If I didn’t hit $20M, surely I would get close, right? I knew three months into fundraising it would be a bust, but legally I was able to “fundraise” for a whole year, so I kept the fund open as an excuse to meet LPs and learn why it wasn’t going to work. I ended up closing only on $8.2M after two tech execs had to back out after the Q1 SaaS-crash.

Fast-forward to last fall, I was on a mission to put those Fund III learnings to work and hopefully correct the mistakes of the past. I tried to leave no room for error. I wrote about the details of that experience here. I know I made new mistakes in raising IV which I will hopefully address when I raise V. But, the point I want to make here is that the switch from III to IV was not just a gradual progression — it was an entire *step-function* change in how I operated, how I prepared for meetings, how I pitched, how I handled a “no,” how I tried to persuade people, and how I cajoled folks toward a close. I strongly believe these principles apply directly to company founders attempting to graduate from their initial capital raise. Yes, for 10% of you it will be easy, and for 50% of folks, the next round won’t come at all, but for the 40% in the middle, the right level of preparation, precision, and tenacity will make a difference — and investors will notice this.

[I’m adding this paragraph for the public post at the suggestion of some founders… Specifically, here’s what I did operationally to level-up, in no particular order: I retained a designer to help me craft pitch materials; I was too close to the story to tell it myself properly. I created materials for each medium and meeting (all files were PDF, .xls, or a picture) — specifically, I had something short to email or share by text image, and longer decks to present in person, as well as an appendix of slides used to answer very specific questions. I engaged with two consultants to clean the data from my previous funds and integrate my data both with eShares and a professional back-office administration provider. I took copious notes from previous fundraises and tried to understand who could be a “qualified” candidate for me based on their actual investment behavior — not just relying on what people say or their “interest” in getting together. I took notes in every meeting and followed-up based on anything we agreed to follow-up on. In some cases, I asked them for what they needed help on and tried to deliver there — most are either hiring and of course looking for their own LPs. Most importantly, I clearly communicated my start and end times in every interaction or correspondence — what I learned is that everyone needs a few reminders and, if folks actually remember, most of them will respect your process and get back to you by the time you like. All of this is a way to anticipate future pushback and to exert some control over what is otherwise a random process.]

In retrospect, I approached Fund III far too casually. I now see this “casual” attitude in fundraising from many seeded founders, whether I’m invested in them or not. Perhaps hindsight is 20/20 and I needed to have a failed Fund IIi experience in order to make the fundraise for Fund IV work. I hope the “tough love” here is helpful. Do not underestimate even how hard a bridge round can be. You’ll likely have to fight for it & “level-up” — and that is a good thing.

Notes From The 2017 Cendana MicroVC Summit

Yesterday, I attended my fourth Cendana Micro VC Summit in San Francisco. As I’ve done in years past, I wanted to briefly summarize how I perceived the mood of both LPs (the money source) and GPs (those who allocate to founders) in today’s current environment. [For a look back on my notes from previous years, click on either 2014 or 2016.]

Briefly, and in no particular order, here’s what I thought about in finding patterns from the panels and chatter:

1/ LPs seem more resigned to the fact that exits will take longer, perhaps never materialize. Think about that. After years of being on stage asking for quicker exists, the data has come in and unless someone holds an LP position in a fund with an outlier exit, these are simply really hard to come by and manufacture right now. It will be interesting to see what this implies for the LP side. I suspect for many, after some reflection, the model may not work. That may not be a bad thing for the ecosystem, however, but could cause pain for those looking to keep raising institutional funds. We could expect some consolidation, too. (I’ll write separately on how the exit environment could affect micro VC behaviors in another post.)

2/ Seed is entirely its own asset class. I have felt this for years and finally yesterday it became clear to me. The return profile, the way to pick, the types of people — it’s not really micro VC, it feels entirely different.

3/ A cottage industry is forming around helping new fund managers build out franchise firms. Building on Point #2 above, we now see a range of service providers for fund formation, legal counsel, accounting and financing, back-office operations, diversity & inclusion consulting, and executive coaching for smaller funds who aspire to build into franchise firms.

4/ Traditional VC firms weren’t a topic of discussion. Building off of Point #2 above, seed really is its own asset class. I didn’t hear much talk about the bigger established funds at yesterday’s event. Usually, people like to name drop or cite funds as aspirational targets or funds they’d love to see their deals go to for reputational signal, but I heard none of that yesterday. Perhaps that’s because the gap between seed and the Big VCs is getting even bigger to the point where it isn’t on folks’ radar.

5/ No one can outrun the math. Earlier this week, I linked to an excellent interview Michael Dearing did with Harry Stebbings on The 20 Minute VC. In that chat, Dearing provided a great frame for the seed market, which he believes has “bifurcated” into two camps — the camp that relies on convertible notes and is not price sensitive may not have enough ownership in their winning companies to return principal capital back to their LPs. Moreover, I personally believe we will see a lot of good funds with great/smart managers have portfolio vintages from 2013-2015 that may not see even one company realization & exit above $100M in transaction value. That wouldn’t be a big deal if most micro VC funds were around $10M, but many of them are quite big in size. We can all keep running, but we can’t outrun the math.

I want to thank Michael and Graham from Cendana and Jim, Alex, and the entire SVB team for always putting on the event, for inviting me, and asking me to moderate a great panel. Each year at this I’m reminded of the fact that Michael and SVB were so early to see this category emerge, which now boasts nearly 570 “new managers,” defined as having fewer than three institutional funds under $150M. There are 163 firms with new managers raising $5.4B (with 58% of these raising under $30M; and 14% of new managers are female), dominated by the Bay Area with NYC and LA following. A quarter of new managers are spinouts from established VC funds, another quarter are serial founders, while the rest are mostly operational executives — most don’t have legit return data yet. (Source: SVB, Cendana)

The panel I moderated was with very experienced institutional seed fund managers (MHS, Homebrew, SoftTech, Forerunner) on how they progressed from institutional Fund I to Fund II. The key takeaways were for me from that panel are (1) the relationship-building between GPs and LPs should be thought of in years before a business relationship consummates; (2) sharing bad news and the ‘warts’ upfront helps build trust and also helps filter for LPs and GPs who they can trust to enter into business with; (3) stick to the strategy that you told LPs you’d execute on, as too many funds “veer” off strategy; and (4) as funds grow, the GP’s time and mindshare needs to be protected and scaled by investing in key fund operations.

How To Transform A VC Fund Capital Base From Individuals To Institutional LPs

Lots of people have raised small VC funds. There are more startups, and there’s more LP capital from various sources to meet that demand. After the rise of institutional seed funds in the late 2000’s, we’ve obviously witnessed a pure explosion of new (mostly seed) fund formation, with seemingly no end in sight. Many of those 400+ microVC funds (sub $100M) are also trying not only get bigger, but also trying to convert their LP capital base from mostly individuals to mostly traditionally institutional capital. It’s a heavy lift to make that conversion. While I would never give advice on how to do this, as I’m still learning and each individual case is very different (each fund manager is his/her own special snowflake!), I can share a bit about how I prepared myself for it, how I launched my campaign, and how it all closed. My hope is that this post serves as a helpful guidepost for other managers and that it can save someone time in the future. Much of this below benefits from me looking back with hindsight… there’s lots in here that I wish I had known just a year ago!

At a high level, I break this process into three distinct phases: (1) Pre-Marketing Preparations; (2) The Actual Campaign; and (3) The Closing Mechanics.

Phase 1: Pre-Marketing Preparations

Timing: I built my LP list and began putting the word out two months before hitting the market. Now looking back, i wish I pre-marketed a full six months in advance. Institutional LPs need lots of time to meet folks, to digest initial meetings, to socialize things with their network, and to fill their pipeline. I could even argue that six months is too short. During these meetings, it’s nice to socialize your plans, target size, and strategy. LPs will offer great feedback which can be refined and folded into your final official campaign.

Materials: i prepared a master slide deck (with the help of a designer that I paid REAL money to), which I sliced into a very short “email deck” and a slightly longer “presentation deck.” In retrospect, I only needed the shorter deck (to get the meeting, and for LPs to circulate to their colleagues and peers). I sent everything via PDF, with no exception. What mattered most in the materials was explaining the manager’s background & differentiation (what makes you stand out?, the strategy (where to invest the fund), the portfolio construction (how to invest the fund), deal sourcing (where do you get your leads from). I’ll go into more details on this in future posts.

Key Service Providers: I signed up with very well-known and vetted legal counsel in fund formation, fund administration (back office), and banking. For me, finally being able to go with the top class players forced me to play a better game.

LPA Documents: I asked legal counsel to make my fund docs “plain vanilla,” very simple and in-line with the market. I am not a proven manager. I was shocked to hear how many people play games with the LPA when they haven’t returned real capital.

Data Room: I built a data room on Box with a paid subscription. The folders in my Box data room covered the following topics: References (co-investors, follow-on VCs, previous LPs, and portfolio CEOs); Press Mentions; Notable Blog Posts; Raw Investment Data; Service Providers; Marketing Materials; Previous LP Reports; Audit Paperwork; Official Fund Documentation. The file formats in my Box data room were only PDF, .xls, .jpg, and .png.

Lead Qualification & Tools: The pre-marketing campaign is a good time to find out who isn’t a fit. I had a friend who is an LP just tell me even before seeing the deck or anything that it wouldn’t be a fit. He actually helped me a ton in my process. Similarly, I was able to get into the pipeline of other LPs as I hit the market. I managed my contacts and flow through Pipedrive.

Skin In The Game: LPs will look for any new manager to commit a raw dollar amount commensurate with their liquid net worth. To be safe, I would suspect 2% GP commit would be table stakes, and many folks have to finance that. For folks who have the nest egg, wise to expect to put the appropriate skin in the game.

Phase 2: The Actual Campaign

I will just briefly share what I did. I think it is different for everyone. If anything, I would be conservative in how long you think it will take — and then add another 3-6 months to that conservative projection.

At a high-level, I made three initial decisions that, again in retrospect, made (I believe) a big difference — however, it didn’t feel that way until the very end. Specifically, I picked a tight target size range and I stuck with it — I never once entertained going one dollar over the high-end of my target. Two, I told everyone that I’d be “in market” for six months, and that’s it. No special closes. No opening the fund for even the most royal LPs after it was closed. Third, I told everyone that whatever I had at the end of six months would be my fund size and I would fight the war with the army I had, even if it was well below my target. I don’t know why I stuck to this all the way through, but it is what I believed in and I basically ran out of gas as the sixth month came to an end, so it was good to know I was going to stop then.

I put my rear on an airplane. A lot. I flew over 40,000 miles (all in the U.S.). I spent 28 nights away from home, two of them as red-eyes. I probably talked with and had initial calls/meetings with over 200 different institutional LPs. Naturally, most didn’t go to a second live meeting, but more than enough did. I did not wait until an LP was going to be in the Bay Area to see them — they’re usually only here for a night or two, at the most, and they have to see their current managers. I went to see them on their turf, every single time. I took notes in every meeting. I have a pretty good sense now of what LPs are in specific VC funds. Note-taking is important to remember follow-ups, to understand their network and relationship, and to send them things that interest them in their business. As they get more interested in you, they will come meet you in neutral locations or on your turf, and those signals are important markers to pay attention to.

The entire decision often rests on the quality of your references. It is very hard to quickly gin up references. You either have stellar references or you don’t. Even your biggest supporters will share your weaknesses and area for improvement with prospective LPs. Even though I’ve now raised four different funds, I couldn’t believe how much referencing went on this time. There is nowhere to hide. However you’ve treated others and behaved, it will be surfaced — for better or worse. LPs are looking at the history

It sounds corny, but I befriended a good deal of LPs who passed on me very quickly but were so nice and helpful (as people) that i sent them tips on new interesting funds and managers, some of which even led to them making an LP investment. Once you accept that most LPs are decent people and that they’re going to say “no,” it becomes easier to simply have a conversation with them. Some of them are really far away from our world of startups and VC funds; yet, some of them are incredibly deep into it and know way much more than even popular fund managers do. Sure, there will be some that you meet that you hope to never see again, but it’s a very small minority.

I held two official closes. The first close was half-way through the campaign, and most of my insiders re-upped and some super-sized. Looking back, I thought I would have more of the fund done by then — but, no, not even close. In the second-half of the campaign, I turned on the jets and just focused on the institutions. Seven business days before I was set to give it up and go with what I had, I finally got a string of institutional LP commits, like dominoes falling. It was really random. If you follow NBA history, it was like the Pacers-Knicks game where Reggie Miller hit all those three-pointers at the end. It felt like that. I got lucky, but it was really close.

Phase 3: The Closing Mechanics

I only can share some high-level learnings here:

1/ Good legal counsel matters. It is an art to line up these different LPs at the same time and on the same terms.
2/ No one but you has the deep urgency to close. You have to be fierce in pursuit of the close. Some people will get annoyed with it, but you have to close it out.
3/ Expect a major curveball. I can’t say what it will be, but expect to be taken by surprise and roll with it.

[Big disclaimerI cannot emphasize enough how many people you will need to help you and advocate for you to get over the finish line. I have been in awe of what others have done for me. All the reference calls, extra nudges over text, and pounding the table even in cases when it didn’t work out. I will go through this process and thank folks properly in the coming weeks.]

I hope this helps folks out there. I hope you’ll notice this isn’t as detailed as it could be. I think the process can be pretty simple and straightforward. Set up the materials properly, be human in the meetings, follow-up with precision, and drive people to a decision and close. Lots of folks have been asking me recently “How did you do it?” so I thought it would be only fair for me to share it more broadly and expand on key areas over the next few weeks. Good luck out there!

Brief Thoughts On VC Fund Management

If you’re a new or relatively-new VC, you simply must download or stream this new 20 Minute VC interview of Michael Dearing of Harrison Metal (download here). Harry Stebbings does a great job with this one. There are two key reasons to spend the time to listen to this — One, Michael is obviously known to be one of the Valley’s pure outstanding investors, and two, as he rarely opines so publicly, the wisdom he shares toward the end of this podcast with respect to fund management is gold. While a new investor can raise capital, build a network, and pick companies with somewhat relative ease, the art of managing a fund, portfolio, and multiple funds and companies across rounds and markets is very difficult to just pick up. Instead, fund management takes time, requires making mistakes, needs mentorship and guidance, and so forth. For me personally, it is both a topic I’m obsessed about and also struggle to learn. There isn’t much of a shortcut in that process, but I think this short podcast actually provides a little sliver of a shortcut.

There is lots of other great stuff in the interview, I won’t summarize it all here because you should hear it. The topics which stood out to me as they relate to fund management are:

1/ Price Sensitivity: There’s been a lot of talk in the angel & pre-seed space that effectively price shouldn’t matter if you think an opportunity will be huge. Yet, so early, it’s very hard to know, and in today’s environment with angels, syndicates, new LP types, and more, it’s significantly easier to raise a seed round in the Bay Area. Dearing has a different spin on this — calling pricing the way a manager manage their risk. In his view, price is just one consideration, which should always be managed against the investor’s conviction in a business, demonstrated progress, and/or management team.

2/ Recycling: Many LPs will say they prefer their managers to recycle funds (see Brad Feld’s blog for more on this, particularly on recycling management fees) as a way to help the LP put all of their dollars to work. In theory, it makes sense, but in practice, the manager needs a relatively quick exit to make it work. With that liquidity, the manager then elects to reinvest that capital. Dearing has a different operating principle, citing that he would rather get the liquid funds back in the hands of LPs quickly versus taking ownership over the decision on how to deploy the funds.

3/ Today’s Bay Area Seed Market: Most market observers know that, at least in the Bay Area, it’s beyond crowded. Dearing’s point of view here helps frame the divide. He essentially says the seed market has bifurcated: There’s a wing of the party which consists of professional managers with professional LPs who are mostly all pricing deals reasonably and careful around risk vs reward… and, there is the convertible debt wing of the party which is basically “undisciplined” with a “tulip auction vibe” and “toxic.” It is hard to argue with either Dearing’s expertise and this description.

4/ Reserve Allocations: This is a big topic of debate when VCs raise funds from LPs. I will write on this topic more later this year. Essentially, managers want to reserve some amount of capital against each investment they make for a variety of options, although those dollars aren’t always allocated equally. To do a proper reserve model, it requires many disparate assumptions about the overall market, the market for acquisitions versus downstream VC funding, and whether there are better uses for each dollar in question. Like most parts of fund management, what is often done in spreadsheets turns out to be more art than science when played out in real life.

Who Startups Truly Compete With — Each Other

When a founding team is raising institutional money — either an institutional seed or Series A/B round — those founding teams may have a slide in their pitch deck which shows the competition in their market or sector. This is often referred to as “the competition slide.” Yet, while many investors do want to know what other incumbents and upstarts are competing in the space, oftentimes the startups pitching miscalculate who their real competition in that moment is. For instance, say an education marketplace company is about to pitch a firm for their Series A. That team may assume they’re competing for investment dollars against other education marketplaces who seek money. It’s slightly true, yes, but what is often more true on the ground is that startup is actually competing with every other single investment opportunity an investor sees on a daily or weekly basis.

I’ll illustrate with an example. September and October are historically months where many GPs at firms will strike for a Series A investment. A GP may have capacity for only one deal. So in that two-month period, that GP will tee up intros, take referrals from the summer, build up his/her own list, and start meeting teams, talking to customers, and seeing how different investment opportunities develop. While that GP may be taking a deep dive in a specific vertical, my observation is that’s rarely the case — instead, they’re spending time with folks they are naturally drawn to and those who have been given strong referrals and recommendations. As each week passes, they’ll go over their notes, think about the “shape” of an investment ($5M to own 10% vs another deal where $10M gets me 20% ownership, etc.) and refining the list down to a few candidates. Rarely are those final candidates from the same specific sector.

So, yes, that education startup does somewhat compete for its business with other education marketplaces, but in the early-stage throes of getting financed, that education startup is often competing with a diversified hodgepodge or cohort of startups who are also seeking funding at the same time from the same investment firms. The “competition slide” is important, but at same time, the investor is building his/her “cohort slide” — and that presents the real competition.

Quickly Unpacking Nestle’s Majority Investment In Blue Bottle Coffee

Earlier this week, it was reported that Bay Area coffee roaster and coffee icon Blue Bottle received a massive investment from Nestle Corporation, giving it a majority stake in the company and, by some accounts, valuing it at or even above $700M (reports differ here but let’s assume it’s large).

That’s a *lot* of caffeine!

Here are my quick takeaways from the deal (assuming this all converts and an acquisition happens in full). This is one of those posts I write where I will cite and link to a bunch of my previous work on the topic. The posts are short so I’ll just link instead of quoting text:

1/ Retail M&A Is Still Hot: We’ve seen Walmart buy for $3B+, Unilever buy Dollar Shave Club for $1B, and most recently, Amazon buy Whole Foods for over $13B. And now we have a big coffee deal in the retail sector and CPG sector, which seems to be the sector that is undergoing the most volatile change right now, one that I dub Climate Change In The Retail Sector.

2/ Frequent Consumer Interactions Are Rare And Therefore Valuable: Consumer attention in the age of iPhones and Instagram is the most finite resource these days. So, when loyal coffee drinkers in urban centers wait for 20 minutes for an individually-brewed cup of coffee, and those drinkers come by once, twice, or even three times per day, the frequency of consumer interactions are likely valued by the acquirer (in this case, Nestle) more than a simple model of forward-looking revenues.

3/ Continual Beverage Consolidation: Every quarter, a favorite microbrewery is scooped up by a larger beverage conglomerate. Something similar has happened in coffee with Intelligentsia and others. Now with Blue Bottle, Nestle has a powerful new channel to expose loyal customers to other brands in its diverse portfolio of over 8,000 brands worldwide. (I was re-reading this post from a number of years ago after Blue Bottle starting raising venture capital in the first place.)

4/ Software And Deep Tech Aren’t The Only Ways To Quickly Create Massive Value: I sort of touched on this in my post on Jet’s acquisition. There’s a tendency among some in tech and startups to look down on tech VCs investing in a consumer coffee company. Nevertheless, respected tech VCs have invested in Blue Bottle (True, Morgan Stanley), Philz Coffee (Summit), Sudden Coffee (Founder Collective & others) and Bulletproof (which received an investment from Trinity, which originally invested in Starbucks over 30 years ago!). It’s another reminder that deep technology and pure software startups aren’t the only company vehicles for creating value and reaching a homerun exit.

The Market Ignores Inputs

About a decade ago, when I was finishing grad school and picking up various consulting engagements to keep afloat, I was reminded recently of one of those engagements. In the pursuit of as many leads as I could find, I accepted a statistical modeling assignment that, in retrospect, was a bit out of my league. I figured that I would figure it out. I asked all the right questions and clarified information with the client upfront. He went away for a month and I had to finish it in three months. It wasn’t for a lot of money, but I needed it, and I was excited to finally have this professor as a client after chasing him for a year.

As I was digging into the work, it became increasingly apparent that I was out over my skis. I asked a few friends for guidance, tried to learn the specific modeling technique on my own, and was committed to delivering the finished product to the client. Fast-forward to the due date, I sent him the zip file, and got this response a few days later:

I know you worked hard on the inputs, but I need the right outputs.”

I sent an invoice with the work but, and his office paid it, but in retrospect, they shouldn’t have. I was reminded of this episode recently for two reasons: (1) as I see many of the founders I work with put all of their energy into various inputs and struggle to sell the outputs as progress; and (2) I see the same dynamic (but slightly different) on the investor side, where it’s easy to write checks and look busy and “work hard” or take lots of meetings or any other inputs and the outputs are somewhat out of the investor’s control and take years to materialize.

Ultimately, the market doesn’t show emotion and could very well repeat the words of that professor 10 years ago: “I know you worked hard on the inputs, but I need the right outputs.”

Founders and investors, ultimately, only control the inputs. Which market or product decision did the founder make at the onset? How did that investor choose to spend his/her time every week? I could go on and on, and while the work ethic and precision of the inputs should be celebrated when done well, the inputs ultimately don’t get judged — it’s the outputs that matter. Perhaps that is not fair. It is easy to get a company or fund off the ground these days, but eventually, the belief in inputs shifts to a demand for outputs.

Seeing Through The Hangover “Fog” From 2014-2015

Earlier this week (on Monday the 11th), I wrote the following note to every CEO/founder I’ve invested in. I didn’t intend to write to write for it public consumption, but a bunch of them said it should be made public. So, I cleaned it up a bit and, well, here you go.


I’ve been thinking about writing the following note below to a handful of folks in the Haystack portfolio, and as I was writing it, it occurred to me that more should read it. It is not an easy note to write, and I want to strike the right tone. I am hoping this is taken in the spirit of sharing a point of view.

As some of you know, on Mondays for the past three (3) years, I sit on Sand Hill Road and see all the deal flow as it emerges from Seed to Series A, B, C, and growth — recaps, acquisitions, wind downs, and everything in between across different firms, partners, and networks. I also work really closely with startups I’ve invested in across three funds over almost five years through their Series A fundings (and sometimes even at the Series B). This work spans across nearly every big VC firm you can name, spare a few. I write this from that vantage point.

Just as it was relatively easy for me personally to raise and deploy small funds, so too has it been easy for companies raising seed capital. But, after 2015, the shape of what institutional VCs want has shifted quite dramatically, and I seem to enter into the same conversation with founders on a monthly basis about this. It’s hard because those founders are living it and by nature feel they’re the exception — I see this across hundreds of companies.

I only see Series As and Series Bs happening when one or more of the following conditions are met: (a) An elite executive team (bonus if they know the VC already). “the team test“; (b) Highly demonstrable month-over-month or even quarter-by-quarter growth in key metrics. “the metrics test“; and/or (c) A well-reasoned, detailed roadmap and vision for taking the company from Point A to Point B. “the communications test” — Most seed-stage companies don’t have these (yet). I advise anyone serious about raising Institutional VC to ponder these conditions.

That being said, one doesn’t “have to” raise Institutional VC — there is no rule or convention around it. There are other ways to finance a business. Companies can elect to prioritize their own profitability. They can explore a strategic sale of the business. They can pivot. I realize these are all difficult choices, but the main reason I wanted to write this difficult email is to underscore a key point about maintaining a high level of intellectual honesty — while the seed rounds were relatively easy, the next rounds of funding are (as some of you already know) pretty brutal. So, if for whatever reason, you really want to score that big VC round, put all of your energy into one or more of those bullets above, at whatever cost you’re willing to live with.

My only tactical recommendation is to get into the habit of briefly updating your investors by email and simply focus on A, B, and C in those updates. At minimum, your investors will be able to track the story, jump in to help, and perhaps save you some time, heartache, heartburn, or all of the above.

I would not recommend anyone assume the next round is going to materialize, even from insiders. Many big VCs won’t say this publicly, but behind closed doors, they view the majority of the seed-stage as little league. Yes, they pay attention to what certain seed-stage companies and a few investors do — but on the whole, they’re highly skeptical of current market conditions and expect seeded startups with a few million and time runway to have already positioned their company to shine in terms of (a), (b), and (c). And, they will happily wait a year or two until they find that company before deploying $5M+ checks.

I felt compelled to write this to everyone because it has been weighing on my mind as there is more and more VC money in the market, as the stock market is rising, and as everyone seems to be “doing great!” I also want you to succeed individually and for your co-founders, colleagues, and staff to do well and have a great experience in the end.

Three Founder Traits That Help Score Series As

I’ve written here quite often — perhaps too much — about what early-stage founders need to think about when graduating from seed stage to institutional Series A stage. I won’t go into that here, but another aspect of this journey has been highlighted in my mind that I want to surface and share on this blog: The Series A process is a “business role play” game where the VC is evaluating each interaction with a founder as proxy for how that founder would interact in different business environments — recruiting a top candidate, generating a high-value lead, closing a big sale, and so forth.

Yes, there are companies that score a quick Series A because its metrics are out of control and/or the team is known/proven. But, most cases out there aren’t so cut and dry; in reality, most Series A investments are basically “bets on the founder and team” even if there’s a bit of data here and there. We have seen countless Series A’s raised on spiky growth and then the company crumbles to the ground.

So, what happens when a great Series A happens in a company that’s not “growing like gangbusters” and is more of a speculative investment? What traits does the key founder (who is running the process) exhibit that makes this deal happen?

I believe there are three (3) core traits founders exhibit which can increase the likelihood that an institutional Series A can actually happen. Those traits are:

(1) Openness Around Information: Lately, I’ve seen a considerable number of founders be very cagey about sharing very basic information about their businesses. It’s the founders right to be selective about what is shared with whom, but on some level, if one is asking for a $5M+ commitment and don’t have a ton of offers, and if one is making it hard for the investor to get the basic information, it is a huge turnoff and the VC has 10+ other deals they can pursue with more clear information.

(2) Transparent In Conversation: Lately, I’ve seen founders who are not willing to be brutally upfront about how their business started, the twists and turns along the way, and how they got it from Point A to Point B. Of course, all of these real stories are messy. And, many VCs want to hear the more pretty vision for the future. Yet, in diligence, they will ask about the past, and I have seen quite a number of founders really get tripped up on sharing the journey. As a result, they become less transparent, even opaque, and as a result, the VC doesn’t feel a personal connection to the founder and can end up passing simply because they don’t have enough information to understand the journey the founder has been on.

(3) Diligent Follow-Up: This is the one that kills me because it’s basic Business 101. It blows my mind that a great VC who is looking at a business can ask for 2-3 follow-up items from a founder and literally the founder won’t follow-up. Maybe they forgot, they didn’t write it down, or they’re really busy parallel-processing. Whatever the excuse, this behavior leaves stale breadcrumbs for the VC to chew on — “if he/she isn’t following-up with me, are they on top of their stuff for other matters?”

I know VCs themselves aren’t perfect and can at times be cagey, can not be transparent, and don’t follow-up, but this is about those cases on the margin where it’s not a slam dunk deal and the founder is asking for money and a commitment. In those cases, which are the majority of cases, these three (3) traits are absolute table stakes for a founder to have a chance to be successful in the fundraise. Any slips here, and you’re likely out of luck.

“Finishing The Work”

These days, it’s easy to start a company — and it’s hard to build one. And, we know 90% of new ventures don’t ultimately work out. We all focus on the growth and momentum, the outliers and the high-fliers, and for good reason — those outcomes end up “covering” the rest of the table. When things don’t work out, investors know it’s coming, but no one can say anything. It’s not our story to tell. And despite what we read in Medium post-mortems, there is not a uniformity of action and integrity when the founders of a failed newco wind things down. A dream passes away and across one’s mind while one signs paperwork and answers the same questions over and over again.

I wanted to highlight that, in these moments, not everyone acts out the finale of the play. Sometimes, folks can’t bear to go through the motions. In some cases, one can understand. But, there are some who wind down their dreams with class and grace. They did this specific work not because they have to or are obligated — they actually wanted to finish the work.

“Finishing the work” is part of the journey. Recently, I have had a front-row seat to founders I worked closely with who all have impeccable credentials, resumes, drive, professional backgrounds. They didn’t raise too much money. They didn’t seek unreasonable PR coverage. They didn’t go to parties or show up at random meetups. Their products and services reached their intended target customers, just not with the velocity and scale required to warrant more serious funding. That is not to suggest value wasn’t created — it was, and a few of them were able to obtain acquisition offers from well-known companies.

Watching these founders — in this case, folks I considered friends — finish their work was painful to just observe. It took a lot of time. They weighed the considerations of all stakeholders and felt personally responsible for families of their colleagues. It is hard to concentrate on other matters, and finding a “home” within a larger company is no cakewalk. It can be pretty brutal, actually, and often it’s just not that urgent for the larger company. Some of you who’ve gone through it know — but we will see many, many more go through this as the bloated funding rounds of 2014-15 reach their final dollars and runway.

I only know my portfolio. Many have “finished the work” quite valiantly. Some have disappeared, and I do understand why. Most recently, I wanted to single out friends Victor Echevarria, Tad Milbourn, and Alanna Gregory as founders and CEOs who unapologetically came up short of their vision but finished the work they started with grace. Each of them, for months, initiated new meetings, lobbied for employees, communicated with investors, never once complaining. They will be different people after this part of the journey, no doubt about that, and they will have built new muscle to arm themselves for the next journey.

I’ll end by repeating a line from above, with emphasis: “They did this specific work not because they have to or are obligated — they actually wanted to finish the work.” Thank you.

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

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