What is play to you but work to everyone else? Or said differently, what do you love doing that many others would hate or get bored of quickly?
This isn’t an original self-query. I want to say I heard it years ago on one of Tim Ferriss’ episodes, but the exact one escapes me. Yet, recently, my friends and colleagues remind me of this more and more. In the ultimate shortage of labor, more than ever before, people are rethinking what career means to them and what a meaningful career means. I’ve had friends become full-time live streamers, NFT creators, inventors, fiction novelists, artisans… you name it, and I bet you someone that I know – hell someone you know – has dabbled or jumped head-first into it. It truly is the era of the Great Resignation.
Now this question isn’t a call to arms to leave whatever you’re doing. Rather a direction of clarity that may help you live a more enriching life. Something to pursue in your down time. Until you can find a way to get paid to do so – unless you happen to have 20-30 years of runway from previous riches. The same is true if you’re an aspiring founder. Work on your project part-time, until you are ready to take it full-time either with investment capital or revenue.
For me, the answer to the above question is:
Writing (to think)
Meeting, and more specifically, learning from passionately curious and curiously passionate people (what can I say, I’m a glutton for inspiration)
Becoming a world-class questioner (you’ve probably guessed this one from the DGQ series)
Collecting quotes and phrasings that resonate (a few of which are repeat offenders on my blog)
Helping people realize their dreams (something that was much easier when I only had 20 friends, but much harder when I’m adding zeros to the right)
Many of the above have become synonymous with my job description over the years. Did I predict I would fall into venture capital? No. Frankly, it was a result of serendipity and staying open-minded to suggestions from people I really respect.
While this may come off as virtue signaling, to me, I’m willing to, did lose, and continue to lose sleep over each and every one of the above activities. And if I know anything about myself, my goalposts are likely to change over time. Not drastically, but fine-tuned over time.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
Subscribe to more of my shenaniganery. Warning: Not all of it will be worth the subscription. But hey, it’s free. But even if you don’t, you can always come back at your own pace.
A founder recently asked me how investors would perceive her going through two different accelerator programs. Specifically, what would investors think if she took dilutive capital from two investors who care about ownership targets, yet have similar, if not the same, value adds to her business?
How each type of investor thinks about dilution
It’s a great question. Unsurprisingly, a nuanced one as well.
Honestly, a “messy” cap table or early dilution is an excuse investors give when they’re not sold on you or the business. Investors regress to the “why this”, or otherwise known as, traction, when you haven’t convinced them on “why you.”
Investors want to be excited about you. They want to brag about you to their partnership, colleagues and friends. But if you don’t give them a strong reason to, they’re going to regress to what they know will return them capital. Predictability. And that comes in the form of traction. But I digress.
If Max Levchin or Phil Libin or Elon Musk or Justin Kan – pick your favorite serial entrepreneur with unicorn exits under their belt – wanted to raise for a new startup, no matter what it is or how early, people are gonna jump on the opportunity to regardless of how saturated the cap table is.
Let’s stand in the shoes of an investor for a second. Of which there are three main kinds of early investors.
Angels
Non-lead VCs and syndicate leads
VCs who lead rounds
For individual angels, ownership targets don’t matter. They just want a piece of the action. In fact, multiple sources of signal and validation give them more confidence to invest. Especially if you’ve taken previous or current checks from your small handful of top tier VCs. These angels’ check sizes are negligible on the cap table, so they won’t end up crowding anyone else out.
On the other hand, notice how I bucketed non-lead VCs and syndicate leads into the same category. Why? These investors are writing bigger checks. They won’t price the round. And they move a lot faster if someone with a great track record is leading the round. Once again, ownership also doesn’t matter, but great co-investors do. As long as ownership targets don’t matter, the excuse of dilution is merely lip service. The story here is “I just need to get in the best deals, so I can raise my next fund from LPs.” Or “I need build my track record as an investor, so I can raise a fund one day.” I’m going to generalize here really quickly. While it doesn’t apply to every non-lead investor, it does apply to the vast majority. I dare say, 90% of them. These investors move on the combination of three levers:
Great traction
Great team,
And great co-investors – the last of which is often the most important.
The more of the above levers you have as a founder, the faster you’ll get a check from the above individuals and institutions. Why do great co-investors matter so much? Outside of branding and social rapport, their investors – their LPs – also want to invest in these top deals led by these funds, but often can’t invest into these top-tier funds since everyone wants to get into a16z or Sequoia. In fact, for many of these top-tier funds, there’s a massive waitlist of LPs.
Finally, lead VCs. Ownership does matter. Really, this is the only audience you need to worry about when it comes to the topic of early dilution. While you as a founder should be dilution-preserving, sometimes, taking the capital (and subsequently, the dilution) is the best option. Maybe you really need something from an accelerator or an early investor that would be hard to get for you yourself. At that point, their capital becomes optimization capital. Early checks can get you from A to B faster, with less burn potentially, and with less detours.
So, the question you have to figure out if you take subsequent capital injections is that each time you dilute the cap table, did you reach an important milestone? What’s worrying is if you keep diluting your cap table without making meaningful progress each time. Think in the framework of milestone-based financing. Raise what you need, while giving you and your team an appropriate margin of error.
In closing
As a footnote, it’s also important to consider how much equity you as the founder will have left upon exit. If you’re going through large amounts of early dilution, you’re going to have very little upside unless you go through a massive exit. Unlike investors who invest in many businesses and have diversified their risk appetite, you, the founder, have put all your eggs in one basket. So if you care about the upside, you want to reduce dilution unless there is an absolute necessity to raise capital.
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I spent the majority of my 25th year of being alive in 2021. A year of Yes’s. A year of unexpected surprises created by increasing the surface area in which luck can stick. And by transitive property, I intentionally opened myself up for exploration. Some might call them distractions. For me, they were the scenic route. A route that may or may not change the final destination. But I will only know the robust or flawed nature of my initial destination if I take Highway 101.
And quite expectedly, I said “Yes” to projects that would push me past my “limits.” In foresight, scary. Might I say, fearfully challenging, plagued with self-doubt. Yet, just one question kept pushing me forward while I sought the comfort of being a blanket burrito.
What if this were easy?
Synonymously, if I were the world’s leading expert on this topic, how would I approach this? Not only tactically, but also emotionally. Or oftentimes, lack thereof.
In hindsight, I usually realize I had handicapped myself with training wheels all these years. I am nevertheless proud to say I would have surprised the me on the cusp of 25 years young more than twice given this past year.
This year will continue to be a year of Yes. And, I will undoubtedly continue to surprise myself. Shock will continue to be my currency of growth. Not from others, but by myself.
I have spent a lot of time thinking whether annual goals are the best forms of motivation for a myopic human like myself. I have given into short-term gratification more often than I can count. This past year, the near-term “Yes” is closely correlated with fried chicken and hojicha. Sorry, they are my Kryptonite. It’s unfortunate that my mom dipped me into the Styx holding both rather than just one of my heels.
If I hadn’t gone through my birthday resolutions of my 25th year I wouldn’t be here today. And it wouldn’t have led to the v26.0 software update as it stands.
My latest software update
As such, by 27, I will have spent at least twice a week getting into the flow state – inspired and courtesy of my colleague Edgar Brown. What is the flow state? As one of my good buddies describes it, “the flow state is a state you enter when you feel the most alive and creative. You’re 100% immersed in the activity you’re doing. It’s a completely egoless state. You don’t care – and frankly, forget – about what other people say. Yet after going through the flow state, your ego strengthens and becomes part of your identity.”
Of a similar vein, creativity is also very much a luxury I would like to indulge in more, shackled only by my minor, but noticeable discomfort with idle time. An unfortunate byproduct of my occupational hazard, otherwise known as “hustle porn” as Alexis Ohanian of Reddit fame so elegantly describes it. In year 26, I will have found profound solace in cold silence, where one would find comfort in the absence of speech, as opposed to hot silence – silence that is awkward. And in these weekly cold silent flow states, I hope to better identify my own signal amidst the noise.
In closing
Before this essay sounds any more like a wannabe doctorate dissertation, I hope that in writing this for the public eye, I can better hold myself accountable for my goals.
I hope there will be no consecutive offenders to my resolution list. Since it’ll mean that after a year, I still haven’t broken into the habit I want to build for myself. And it’s that delta between promise and reality that’ll have me going back to the drawing board again. And if you ever see that there are, this blog will keep me honest for failing on my promise to myself. While I imagine there will be repeat offenders by product of growth-inspired oscillations, I am at the end of the day a constant work-in-progress.
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I’m a big fan of self-deprecating humor, but this isn’t one of those moments. Rather it’s a learning moment. While the above question is a lagging indicator for personal growth, it nevertheless deserves to be measured. After all, as the great Peter Drucker would say, you cannot manage what you cannot measure.
The timeframe of evaluation
Why a month? Why not a week? Or not a year?
In the business world, there’s a concept called the rule of 72. Effectively, 72 divided by the growth rate is the time it takes to double. For instance, if you’re growing 30% month-over-month, 72 divided by 30 is 2.4. So, if you’re growing revenue at 30% every month, you’re going to double your revenue in roughly two and a half months.
It is equally as analogous for personal growth.
time it takes to shock yourself = 72 / rate of learning
Let’s say you’re a first-time founder, and you only knew 10 things about how to start a business. But every day, you learn one more thing – via podcasts, articles, blogs, classes, you name it. Give or take a 10% growth rate. You will double your knowledge in about a week. Hopefully enough to shock the you from a week prior. Or take another example, many self-help books ask you to commit to getting 1% better every day. Assuming you consistently do that, you would have doubled your experience in about 2.5 months.
That goes to say, the faster you want to grow, the shorter the timeframe should be for you to look back and reflect on your “stupidity.” For me, it is in my nature to be hungry for knowledge, and I really love learning about things I thought I knew and what I didn’t know. For now, as learning is a top priority for me, a month sounds like a reasonable timeframe to shock myself. I also use the term “stupidity” lightly and with notes of self-deprecating love.
The shock factor
But how do you measure personal growth? Something rather intangible. It isn’t a number like revenue or user acquisition. Some people might have a set of resolutions or goals that is tangible and quantitative – say read two books a month or exercise an hour four days a week. Great goals, but they are often based on the assumption that movement is progress. The two aren’t mutually exclusive, but neither are they synonymous. The former – movement – lacks retrospection.
There were, are, and will be days, weeks, and months, we may just be busy. Our schedule is packed. We’re a duck paddling furiously underwater. And we’re gasping for air. And while our body and mind are exhausted, our body and mind have not expanded. I know I’m not alone when I think to myself, “Wow, I did a lot, but I still feel like I’m not moving anywhere.”
Our brains are unfortunately also poor predictors of the future. We use past progress as indicators of future progress. But while history often rhymes, it does not repeat. Our predictions end up being guesstimates at best.
So I look into the past. I measure my own personal growth emotionally – by shock, very similar to how Tim Urban measures progress of the human race (which I included at the end of a previous essay). I don’t know what the future will hold and neither will I make many predictions of what the future will hold for me. If I knew, I’d have made a fortune on the stock market already, in startups, or on crypto already. What I can commit to is my relentless pursuit of taking risks, making mistakes, and trying things that scare the bejesus out of me. Since only by making new mistakes will I grow as a person. What I am equipped with now can be mapped out by the scar tissue I’ve accumulated.
Coming full circle, what’ll make me realize and appreciate my mistakes and failures more is knowing that as a greenhorn I was laughably stupid.
But if, in retrospect, David from a month ago sounds like quite the sensible person, my growth will have gone from exponential to linear. Or worse, flatlined.
For founders
And now that I’m thinking aloud – or rather, writing aloud (which may deserve its indictment into the #unfiltered series), this might be a great line of questions to ask founders as well.
As a founder, what was the last dumb thing you did? When was that?
And before that, what was the second most recent dumb thing you did?
And the third most recent?
There’s the commonly repeated saying in the venture world. Investors invest in lines, not dots. Two’s a line. Three’s a curve. I want to see how fast you’ve been growing and learning.
Why such a question?
If we’re in it for the long run, I wanna assess how candid and self-aware you are. Pitch meetings often depict a portrait of perfection. But founders, like all humans, aren’t perfect. For that matter, neither are investors.
Venture capital is impatient capital. We demand aggressive timelines, and honestly, quite toxic to most people in the world. Given that, if you’re going to learn how to hustle after investors invest, you’re going to have a tough time convincing investors. But if the hustle is already in your DNA, that bias to action lends much better to the venture model.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
Subscribe to more of my shenaniganery. Warning: Not all of it will be worth the subscription. But hey, it’s free. But even if you don’t, you can always come back at your own pace.
Straight off the bat, you might have realized that the 10th issue of the DGQ series – damn good questions – starts off with a non-question. And it is intentional by design. I often waste a number of calories constructing the perfect question. And in many ways, I get very, very close to what I deem as perfection. Exhibit A, B, and C.
But over the course of constructing the perfect question and its subsequent research, I often uncover the answer I am seeking… before I even ask it to the intended designee. I don’t mean for the odd question here and there amidst spontaneous conversation. But the predestined ones to be asked in:
Fireside chats
Intro conversations
Coffee chats with individuals where I’m punching above my weight class
Podcast interviews
Social experiments
First dates (possibly self-incriminating)
Accompanied by the excuse of creating conversation, I ask it despite the since-acquired knowledge. Sometimes to the wonder and amazement of the recipient, but more often than not to the boredom of myself. While the words that flutter out of my mouth may sound like a question, it ends up merely being a statement rearranged on a NY Times crossword puzzle.
In reframing questions for myself, I realized… If I knew all the answers to the questions I would ask, that’d make for quite a boring life. While boredom only surfaced a minority of the time, it occurred noticeably enough times. If I had a mirror to myself every time I asked a question, I imagine I would find myself asking the ones I have the answers to already with a furrowed brow.
Last year, in the relentless pursuit of being a better host for structured conversations, I over-optimized for shock and delightful surprise. Shock became my unfortunate currency for my personal delight. Rather than enlightenment, education, and inspiration. In the construction of the “perfect question,” while protecting my downside – in terms of embarrassment, I capped my upside.
So, this essay is a reminder to myself. Ask dumb questions. It’s okay. It’s only by reinventing yourself again and again through the ashes of unintentional ignorance can you rise like a phoenix.
I’m reminded of a quote by quite a contrarian philosopher, Karl Popper, but nevertheless quite appropriate here. “Good tests kill flawed theories; we remain alive to guess again.”
If you’re reading this essay, be prepared for a lot more dumb questions from me. Dumb, not garbled. Dumb and simple. I’ll continue to do my homework before conversations. But if I’ve found the answer already, I’m going to keep myself accountable to either find new questions or cancel the meeting. Cheers to the motif of exploration! And I’ll see you where I cannot foresee.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
Subscribe to more of my shenaniganery. Warning: Not all of it will be worth the subscription. But hey, it’s free. But even if you don’t, you can always come back at your own pace.
Back in my sophomore year of college, I was running to be the vice president of a business organization. Part of the requirement to run as one was to shadow at least two executives from previous generations who held the same role. Brownie points if you shadowed the broader executive team as well. The goal was to better prepare yourself by increasing the context you had about a new role.
I checked off those boxes with flying colors. In fact I ended up talking to more than 20 other executives and other key campus constituents we would be interfacing with. Along the way, I shared what I would do, not do, and do differently compared to previous roles. I also told them how I would forever change the organization and its impact on campus and students. Frankly, I felt like I was a on a roll. I was on top of the world.
Yet one winter night (it’s always the winter nights that get you), when I was on my haughty high horse, one person stopped me in my tracks. With one simple question. “What is your selfish motivation?”
“I’m going to change…”
“No, David… what is your selfish motivation?“
Flash-forward
Last week, one of my favorite hustlers reached out to me. She was planning to start a newsletter soon and wanted some advice from a fellow writer. After a few exchanges asynchronously, it became apparent that her biggest obstacle was keeping to a schedule. If you’re a frequenter here, you’ll have noticed I’ve already lost all semblance of a schedule other than publishing weekly. Some weeks I publish on Mondays. Others on Tuesdays. Some weeks see two essays. Others only one. But I have yet to lose my streak of publishing weekly. But I digress.
There’s a large graveyard filled with content creators who post ten or less times. Off the cuff, I dare say 90%. Prior to this blog, two of my other blogs were also no stranger to the obituary.
So, I posed the same question that stumped me all those years back. What is your selfish motivation?
What is your selfish motivation?
Most people, especially in the realm of entrepreneurship, job interviews, politics, and PR stunts, share their selfless motivations. Everyone’s a Samaritan. While there is some truth to it, everyone needs a really good selfish motivation.
On your best days, if your project is doing really well and you’re absolutely crushing it, your selfless motivation will be what you tell the latest press release, your cousins over the holidays – the story you pitch to others. The story you also tell yourself to give your job meaning. But on your worst days, when you want to give up, your selfish motivation is what’ll keep you going. When you’re at your worst, you won’t want to care for others. You care about yourself. What’ll keep you sane? If your selfish North Star isn’t strong enough, it’s easy to give up.
You need both. Your selfless motivation will help you reach for the stars. Your selfish motivation will prevent you from hitting rock bottom.
For example, for this blog, my selfless motivations are:
Democratizing access to resources and education to help people move the world’s economy forward,
Empowering founders to not fall through the same potholes I or other founders fell through – to make new mistakes not old, and
Empowering and inspiring others to live more enriching lives.
It’s what I tell others. My lofty goal that’ll make writing this blog meaningful to me.
On the other hand, my selfish motivations are:
I write to think. My thoughts are so much clearer on paper than if I just speak them. If I don’t write things down, I’m a mess.
I forget things easily. Short term memory loss. And my blog is a way for me to catalogue my own learnings.
I feel much more comfortable being vulnerable with strangers than with friends. So my blog helps me relieve much of my stress and anxiety.
I am neither as good as people say I am nor as bad as people say I am. This blog keeps me honest.
In closing
That same winter night was the day of the winter equinox. I don’t mean to dramatize my little anecdote, but I nevertheless I do find it provides a little flavor to the story.
“No, David… what is your selfish motivation?”
“I don’t follow.”
“I ask every officer candidate this question. There will be days that you will hate the job more than you will love it. And I need to know if you have it in you to weather those days.”
I don’t remember what I told him that night. I don’t think it was a particularly honest answer. Or maybe I was honest. But it wasn’t enough. I didn’t get his vote of confidence, but I did enough legwork to get the approval of others.
In the end, I got the position. And he was right. Times got tough. There were days I hated the job. And on those days, in particular, I didn’t do anything remotely close to “changing the organization and its impact on campus.”
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
Seemingly, everyone these days – from Twitter to podcasts to blogposts (including mine) – talk about buying and investing in startups. What are best practices for investment theses? How do I pick the best companies to invest in? Conversely, how do I get picked or get allocation into hot startups? But people rarely seem to be talking about selling positions. So, if you know me, I hit up two of the smartest people I know – one early-stage, the other growth-stage. Both of whom might be familiar faces on this blog. So I asked them:
How do you think about selling a position? How much does DPI matter for your investors?
The below insights include minor edits for clarity.
The notice that you’ve all seen a million times
None of this is investment advice. This content is for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Please consult your own adviser before making any investments.
Shawn Merani (Parade Ventures)
Shawn was instrumental in my early career growth in venture. When I met him years ago, he was still running Flight Ventures, where he wrote early checks into Dollar Shave Club and Cruise Automation and was one of the first syndicates on AngelList. There he led a network-based model of syndicate leads, which I’ve heard been described by others as a “venture partner program on steroids.” Now he’s the solo GP at Parade Ventures, a seed stage venture fund investing in enterprise-themed companies.
“I would preface all of this with the fact we have never fully exited a position before a traditional liquidity event, but more so, have managed our position given the duration of our ownership and to generate returns for our LPs and manage risk.
“We talk to founders all the time, and foster a relationship that grows. When I was writing check sizes for 1-5% of ownership, my engagement then is very different from my engagement with founders now, where we take more concentrated bets.
“When it comes to selling, it’s about influence and information. The larger our ownership, the more information we have access to. And if a company is doing well, we don’t think about selling. In fact, it’s the exact opposite; we buy more. If things are working, we take our pro rata. In some cases, we take more than my ownership target. And founders are willing since we’ve been helping them from the beginning. We know when there’s going to be a 3-4x uptick every 12-18 months. Compounding is powerful.
“Our investors back the fund because they trust us. They don’t talk to the founders as often as we do. They trust our decision when we say we should buy more or keep our shares. There are two ways to talk about DPI:
1. Making money for your current investors, and 2. Telling the story.
“Selling is really a case-by-case scenario, and it really depends on my relationship with the founder. All the equity in which I sold so far has been before Parade. But if we know the company is doing well, we buy more. There are also holding periods to consider under QSBS, which has huge tax benefits.”
For those that are unfamiliar with the terminology, DPI means distributions to paid-in capital. Effectively, how much money you actually return to your investors versus “paper returns”. QSBS, or qualified small business stock, tax exemption allows investors in qualified businesses to avoid 100% of the capital gains tax incurred if they hold their stock for more than 5 years.
Ratan Singh (Fort Ross Ventures)
I posed the same question to someone I’ve been a huge fan of the day I met him – Ratan Singh, Partner at Fort Ross Ventures. He’s an investor in some of the most recognizable businesses today, including the likes of Rescale and Clearcover, as well as holds board seats at Blueshift and Ridecell. You may remember Ratan from a previous essay about speed as a competitive advantage for investors. And you’ll likely see him a lot more on this blog. He summed it up best in our chat when he said, “There are two reasons why an investor needs to care about DPI: time horizon and fund strategy.” Both of which are variables, not constants, between early- and growth-stage investments.
“The true metric at the end of the day is DPI. DPI is turning in money to your investors. And there are two reasons why an investor needs to care about DPI: time horizon and fund strategy.
“Let’s start with time horizon. For a seed stage fund, as you get close to the end of your fund cycle, that’s when DPI matters. What type of vintage is the fund in? In 2021, it’s going to be the 2010 and 2011 funds.
“For the majority of the time, you want to ride your winners. At the end of your time horizon, ask for a one- to two-year extension. Usually LPs want more money or their shares distributed. They’ve already waited 10 years. Two more won’t make a difference, especially if you have some big fund returners in the making.
“For fund strategy, did you meet the objectives for your LPs already? If you have, and you want to sell some of your winnable deals in your portfolio to help raise your Fund II because those are the same LPs that would re-up in your next fund, then you might consider selling.
“The worst reason to sell is that you want to take the wins you currently have since you think the market is overvalued. ‘I’m at the peak.’ Or ‘I want to take chips off the table because there’s something bad that will happen, but that is very hard to predict.’
“There were a bunch of funds at the beginning of this year that sold their entire positions. They were desperate to lock in a win. They sold because they thought the market was at the top. And, they were wrong. I’m against it. Selling early doesn’t fully realize the strategy you have put forth. For us, at the growth stage, we shoot for 48 months to an exit. If it takes longer, did we underwrite it wrong? But even if it does, the case may be that the company is growing a little slower than expected.
“At the early stage, all funds will say 2 to 3x cash-on-cash in the LP presentation. Most funds return 1 to 1.5x, on average, with most funds total DPI at 1.2 to 1.5x, which barely returns the fund. Before your time horizon, everyone likes to cite unrealized gains and mark ups because TVPI’s all they have.
“DPI matters most for funds in the top quartile – the top returners, funds with more than $500 million, or nowadays, $1 billion mega-funds. For the bottom majority of funds, early DPI won’t matter. They would be limiting their upside.
Author’s Note: Notice that 65% of financings lost money for their investors. Source: Correlation Ventures
“The new interesting commentary is that – where the job is getting harder – a lot of crossover funds are making binary bets. Finding the one deal that’s the next Salesforce – the next industry-defining company. And putting a lot of capital to find that one or two companies. Tiger and Coatue, still maintain that 10-12% IRR, but spend a lot to find the company that’ll be the next Databricks. Every generation has their industry-defining companies. And, they’re willing to lose it all to find that one.
“You usually don’t see this at the growth stage. It’s bad for innovation. Everyone is trying to find investments that are scaling. 1000 investments in the past year became unicorns. And there are 3000+ unicorns. Yet, the top five to seven companies are still undercapitalized.”
In closing
As we closed the selling part of our conversation, Ratan shared a great quote from an Economist article:
“Flush with cash amid a deal frenzy, what is the industry to do? One option would be to liquidate portfolios, that is, to sell more assets than it buys, in effect trying to cash in some chips when prices are high. As yet, however, this does not seem to be happening. Take the figures for three big managers, Blackstone, Carlyle and KKR. So far this year for every $1 of assets, in aggregate, that they have sold, they have bought $1.30. Although Carlyle is being more cautious than the other two firms, these figures indicate that the industry overall thinks the good times will roll on.”
In fairness, as the saying goes, the high risk, high reward. Data does show that the funds with the greatest track records have more deals that lose money than those make them more money than they invested.
Interestingly enough, there’s also a huge differential between the world’s most valuable and most funded startups. According to Founder Collective, “the most valuable companies raised half as much capital and produced nearly 4X the value!” All of which echo Ratan’s words. “The top five to seven companies are still undercapitalized.”
The public often looks towards invested capital as a proxy of startup performance. But the data suggests that isn’t the case. In the words of the team at Founder Collective, “capital has no insights.” One of my favorite lines from Ashmeet Sidana of Engineering Capitalframes it is still: “A company’s success makes a VC’s reputation; a VC’s success does not make a company’s reputation.”
But when DPI boils down to selling on multiples at the end of the day, I often reference Samir Kaji‘s tweet on the return hurdles expected of different stages of investors. As you might guess, the return expectations of each type of fund varies based on fund strategy.
Since it was asked, return hurdles for LPs are for different types of funds:
Nano-Fund (<$20MM)- 5-7X+ Traditional Seed Fund – 3-5X+ Series A: 3X+ Growth – 2-2.5X+ Crossover/late growth – IRR driven – 10-12%+
As all things in the world, exiting is just as nuanced and complicated as entering. Hopefully, the above insights will be another set of tools for your toolkit.
If this essay has inspired more questions, here are some further reading materials, courtesy of Ratan:
Thank you Shawn and Ratan for reading over early drafts.
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The Japanese art of finding beauty in imperfection. More specifically, the art of mending broken pottery. Kintsugi finds an object’s value and beauty is a result of its imperfections, rather than the lack thereof.
Much like the year prior, and like for most, 2021 was a year of imperfections. What could have gone wrong went wrong. And what could have been weighed heavily on many people’s minds. It’s been a trying year for almost everyone. From Delta to Omicron, from the insurrection in January to military withdrawal from Afghanistan, from forest fires to the increase in crime in the Bay Area. Despite still wrestling with the constraints imposed by the pandemic and the broader socio-political-economic world, 2021 was the worst and best year I could have ever hoped for. The beauty was not that these events happened, but that these events led us to form deeper relationships, greater awareness for macro issues, and a general movement forward to change what hasn’t and will not work in tomorrow’s world. Simply put, I’ve never been more bullish on being human.
This year was the year of saying “Yes.” In contrast to my track record of regressing to “No.” And so far, I’m on a roll. That also means that I’m busier than ever. Nevertheless, because of my intentionality behind finding serendipitous moments in my life, I’ve had the pleasure of finding myself in a constant state of inspiration. To quote one of my good friends, who’ll appear in a blogpost soon enough: “Inspiration is the disciplined pursuit of unrelated [and unexpected] inputs.”
I wrote almost 90,000 words this year, excluding this blogpost, which for better or for worse, means I wrote just enough to fill the average nonfiction book and a half. In terms of the number of blogposts and words I’ve written, I’ve slipped in comparison to last year. Last year, I minted over 100 essays. And this year, I’m 20% shyer in quantity on both fronts. Yet, while recency bias may play a role, I’ve never been prouder of the content I’ve put out. Fundamentally, what I learned is that I have to take longer per blogpost.
My writing journey pre-2021
In 2019 and 2020, I took pride in minting a blogpost in under 24 hours at best. 48 hours at worst. I would start writing each piece during the night, right after my shower. Go to sleep. And finish editing the next morning before publishing.
Under those circumstances, while there were a number of pieces that I am still proud to have written to this date, there were many that would have been orders of magnitude better if I just let it sit for a few days longer. If I just let the content marinate a bit longer.
… In 2021
This year, unintentionally, I did just that. It started with a steep ramp up in my day-to-day schedule, rendering me unable to commit large chunks of time to sit down, write and edit. On average, each piece took 5-7 days before it went from conception to presentation. Of course, a small handful took 2-4 weeks. Equally so, there were a few on the other end of the spectrum that took less than 24 hours. But the more time I gave myself to think about each piece, the more robust each piece became. So, my process evolved as a function of my schedule.
Today, at least twice a week, I still allocate two hours to sit down, write and edit. I still find my creativity at its height right before I hit the haystack. And I still make the bulk of my edits in the morning. But I also give myself time to be bored. Time to just think with no intended purpose or goal, when I take long drives or in the shower or during a morning exercise routine. And as long as there seems to be a strong correlation between time to be bored and my creative output, I’ll continue this process in the foreseeable future.
Rolling Funds and the Emerging Fund Manager – A deeper dive to AngelList’s Rolling Funds and what that means for the emerging manager. Since then, I have learned some new insights on that front, which I’ll include in a future blogpost. That said, as an addendum to this blogpost, while much easier to raise capital from accredited investors, do beware of vintage quarters, especially for LPs. If you miss out on a quarter where the GP makes an incredible investment, you miss out on the carry there.
Should you get an MBA as a founder? – Admittedly, this one’s ranking came as a surprise to me, but in hindsight, I know many founders, and professionals in general, wrestle with the pros and cons of advancement education as a means of career development.
#unfiltered #57 True Vulnerability Is Messy – I’ve hosted a number of social experiments as well as vulnerability circles, but it wasn’t till my conversation with my good friend, Sam, that I realized what true vulnerability meant. Not the kind that’s been romanticized by Silicon Valley and the wider media.
My Top Founder Interview Questions That Fly Under The Radar – Investors rarely share their rolodex of questions with founders. And understandably with good reason. But I’ve never been one to optimize for ‘gotcha’ moments. If you’re building a business that the world needs, the last thing you should be worried about is what kind of curveball questions investors can ask you. In this piece, I share my top 9 questions (outside of the usual few every investor asks) and my rationale behind each.
How to Find Product-Market Fit From Your Pricing Strategy – The broader business world has always found PMF through some cousin of the NPS score and/or usage metrics. While those are still extremely pertinent, I find it illuminating to view PMF through leading indicators like pricing, rather than lagging indicators, like usage.
14 Reasons For Me Not to Source This Deal – One of my more tongue-in-cheek posts about founder red flags. I imagine a large contributor to its current ranking is due to the fact that my buddy, DC, reposted this on his blog as well.
#unfiltered #56 How Thirteen Technology and Thought Leaders Break Down Self-Doubt – One of my favorite blogposts I wrote this year, written during one of my most emotionally-turmoiled times. These 13 were my North Stars, when I found it hard to see the night sky. Hopefully, they might serve as yours in some capacity as well.
All-Time Most Popular
All the essays I’ve ever written, ranked by most views:
10 Letters of Thanks to 10 People who Changed my Life – Every year, during the holiday season, I write a plethora of letters of thanks to the people who changed my life in my short years of being alive so far. I wrote this piece back in 2019 sharing what I wrote word-for-word publicly for the first time. I never expected this essay alone to account for a plurality of your views. This is the only one of my now 200 blogposts that draws in readership almost every day since its inception. In 2021 alone, this one blogpost accounts for over a third of this blog’s viewership. The power law is truly incredible.
My Cold Email “Template” – I’ve had the fortune of meeting some of the most respectable people in the world and in their respective industries. Many of whom I met through a cold email. In this essay, I share my playbook as to how I did and do so.
The Third Leg of the Race – An oldie, but a goodie. This notion is as true now as it was when I wrote it last year. The third leg of the race is always the hardest, but it’s the one that’ll decide if you win or lose.
My most memorable pieces in 2021
Because of this blog, I’ve had the chance to share my voice and thoughts, yet also pick the brains of some of the most brilliant people in the world. So I hesitate to even rank my favorites ’cause almost every blogpost I write has a special place in my heart. Nevertheless, if I had to pick and if I’m being honest, there are a handful that would go on my personal Mount Rushmore this year. In no particular order…
The Investor Purity Test – People in venture capital often take themselves as well as their work too seriously. And not that they shouldn’t, but everyone deserves a little satire about their job. Ours is no exception. So I created a mini quiz to see how pure you are from the woes of early-stage capitalism. Have fun!
#unfiltered #61 How To Host A Fireside Chat 101 – After hosting a series of fireside chats, panels, and podcast episodes (the latter yet to released), I share what I’ve learned in this essay. It includes not only how I think about asking questions during the chat, but also how I prepare for the conversation.
Startup Growth Metrics that will Hocus Pocus an Investor Term Sheet – I always tell founders to lead with the metric that will “wow” an investor in every cold email and/or warm intro. Earlier this year, I broke down just what kinds of metrics and their respective benchmarks that will wow an investor.
Creativity is a Luxury – Back in May, I sat down with one of the most creative people I know – DJ Welch. And asked him how he regularly found inspiration. To this day, I still re-read this blogpost to help me out of a writer’s block when I’m in one.
#unfiltered #53 A Different Way To Count – Most people count their lives by the years that pass. But, what if our unit of measurement wasn’t years, but the number of presidents we live to see or the number of vacations we get to have with our significant other? You might see life quite differently.
#unfiltered #51 The Fickle Jar – I have a lot of ideas. Most of which are either completely silly, ludicrous or require time I am willing to prioritize. I’ve known anecdotally that very few actually make it past the Mendoza line. Nevertheless, thanks to my friend, I now have a visual way of tracking my promiscuity between ideas.
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This isn’t a new question. I’m sure most of you have heard of this question before. But recently, I realized how powerful this question is when you need an answer or answers for this time of the year.
You guessed it. It’s the season of giving. And holy frick, finding gifts to give during Secret Santa and to your loved ones is often much more of a dilemma than it should be. I know I’m not alone in that sentiment since the above question transpired as a result of the shared camaraderie my friends and I felt in choosing gifts. The more gifts you are expected to give, the more anxiety you exponentially feel.
So without giving away too much and to keep the element of surprise, I found this question immensely useful.
If your house were burning down right now, minus your phone and laptop, if you could only carry just one more item, what would be that item you would save from the fire?
You can always increase the quantity of items someone can save from the fire.
Some people give practical answers, which ends up being a rough proxy that they will appreciate more functional gifts.
Some people give answers with sentimental value. These individuals will enjoy gifts that have a backstory to them. The gifts don’t have to be expensive, but they carry significant value if they:
They come from the heart. Or…
They cost you an arm and a leg to get. Your gifts were the product of a journey where you went above and beyond.
Either way, the gift needs to be accompanied with a heartfelt card.
Hopefully, if you’re stuck without ideas this holiday season, this short blogpost might offer some inspiration.
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. It’s an inside scoop of what goes on in my noggin’. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. I’ll let you decide which it falls under.
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As you know from this blog, I spend a lot of time writing from my head. Startup, this. Venture capital, that. But comparatively little from my heart. This blog, Cup of Zhou, is not going to be the next Stratechery. Or a 20-minute VC. Or a Not Boring. For each one of the afore-mentioned, I have a tremendous respect for. Ben at Stratechery, Harry at 20VC, and Packy at Not Boring all do something I can not. And they do it really, really well. This blog is just nothing more and nothing less than me. It’s not a publicity stunt. And sure as hell, a terrible branding platform. In fact, I’m willing to shoot myself in the foot again and again, as long as I can be true to myself here.
Four people last week reached out to me. Two founders. A friend from college. And another from high school. They told me that life was tough. Things weren’t working out. And rejection sucks. They’re right. Whether your goal is to change the world or have an enduring marriage, life is rarely easy. You’re going to get that left hook more often than you’d like. And rejection fucking sucks. To those who said it gets better over time, it doesn’t. At least for me. You may get desensitized to each blow, but there will always be jabs and uppercuts that will sting more than the rest.
While I find comfort in writing my thoughts here, most people don’t have a safe space to be candid. As COVID is slowing its pace, at least in the Bay where we’ve reached a level of herd immunity, a while back, I decided to start a new series of in-person dinners where people will feel safe being vulnerable.
In hopes that this will help those hosting such circles outside of the Bay, here’s what I learned.
With both online and offline, I played around with a combination of social experiments and social observations. The former, I would lead and guide conversation through centering exercises and intentional “stage time.” The latter of which I would bring everyone together, but spend less time steering the conversation. Both were structured and all attendees were informed of the ground rules, theme for the night, and homework, oftentimes a personal story to share with the group, necessary to bring thoughtful conversation to the table.
Eyes are the windows to the soul
In group settings, shyer attendees would allocate more of their eye contact when speaking towards people they were familiar with. And given that I bring strangers (to each other) together, shyer attendees make eye contact with me – the one person they do know – more often than with others. But as they find more comfort in their fellow attendees, they slowly allocate more attention to them.
I often found that the best remedy for this was in two parts:
Make eye contact with them while speaking,
Mention their name intentionally a few more times than I do with other more confident guests, and
Once they sustain eye contact with you when you’re openly speaking to them, redirect their attention to another attendee by then mentioning an adjacent topic that the other attendee brought up, and making eye contact with the other attendee.
Give people a path to retreat for them to stay.
Vulnerability and true authenticity is tough. For some people, it’s easier to do with strangers. For others, it’s much harder to open up to people who you’ve never met before. Nevertheless, I like to err on the side of caution. Even after I send out personal invites to each person via DM or text, where I give them the context of what they’re about to embark on, I still preface the email that includes all the details, specifically the ground rules of authenticity, open-mindedness, and candor, with: Are you willing to be vulnerable?
Then right below that question:
If your answer is “no“, I completely understand, and I won’t force you to come. Just let me know if you’re opting out, as I need an updated headcount for our reservation.
But if it’s “yes“, … [read on]
And in that same email, everyone is BCC’ed. The guest list on the calendar invite is also not visible to each guest.
Guests have multiple opportunities to opt-out. And they should if they’re uncomfortable with the setting, since the people who do come are the ones who will truly find value in having a vulnerability circle.
Being time sensitive doesn’t matter
I initially thought that people really cared that each session was going to last 2 hours and everyone only had 15 minutes of “stage time”. And the implicit promise that I would be cognizant of everyone’s times mattered. And while it still does to a reasonable degree, it hasn’t seemed to be a priority for folks especially in my social observations. The only times it does matter are:
The energy in the conversation is waning and people start noticing hot silence, as opposed to cold silence.
Borrowing the terminology of “hot” and “cold” from Jerry Colonna, hot silence is what most people deem as awkward silence. A silence where people intentionally seek to fill the void. On the other hand, cold silence is where people are comfortable with or seek comfort in the absence of speech. Either that it lets ideas and thoughts ruminate or there is a space for tranquility that one might find calming.
Someone has another commitment right after the event.
People who don’t enjoy the conversations, topics, or people.
Luckily, this last one has yet to happen since I curate each person who comes to these circles myself. But, given how many more circles I will host in the future, it’s something I’m aware might happen.
Conversely, many of the ongoing conversations former attendees are still having with each other have come from circles that have gone overtime. This is something I’ll continue to have my pulse on to see if anything deviates from this thesis.
In closing
These vulnerability circles are only the first of many more to come. And of course, future circles will come in different variations. The ones I have planned for early next year thematically revolve around the absence and the dulling of particular senses, in order to heighten other ones. And you betcha I’ll have much more to write about then.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
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