What I’ve Learned in My First Month as a VC

After 13 years at startups—the last four at Twitter—I’ve made the transition into venture capital as a partner at Redpoint Ventures. It has been just over a month since I began spending my days on Sand Hill Road and in that short time, I’ve learned quickly about working in a tight, seasoned partnership as well as having listened to some of the smartest, most interesting startup pitches.

Thus far, my transition from an operating role into an investing and advisory role has been a rapid, intense education. Some parts of the job are as I expected but others have been surprising. Before it all becomes a big blur, I thought I’d share some of the most interesting and unexpected lessons I’ve learned —so far:

Putting Optimism Aside

I’ve long known that there is an incredible amount of innovation out there, but in just one month at Redpoint, I’ve been amazed just how many incredible founders and ideas have come through the door. Redpoint is lucky to attract some of the best, brightest, and diverse entrepreneurial minds in tech, and I’ve been really impressed with the quality and acumen of pitches we’ve seen. I could easily make a case for investing in most of the deals we see.

That said, I won’t last very long if I give into my instinct to write a check based on every amazing, inspiring idea that I’m pitched. The fact is, an overwhelming majority of venture backed startups fail. So, I’m learning to temper my eagerness and drill down below the surface.

I’ve been asking a number of veteran investors what their framework is for making decisions and combining that with some of my own experience to come up with a workable thought process for evaluating deals. Here are the main questions I ask myself when considering a deal:

1. What is the problem in the world they are solving? I’ve already heard too many teams give bios about themselves and then jump into a really cool technology or beautifully designed product. Instead, I look for them to articulate a problem in the world and work backwards to the solution. Don’t start by showing a pretty solution and find a problem to try to attach it to.
2. Why are they the team to do it? Arguably this could be combined with the first one because they are so intrinsically linked. You hear a lot of investors talk about investing in people. Of course that makes complete sense. But I like to think it’s more critical to invest in a combined people+problem manner. The best UX designers aren’t the right team to solve a core data science problem and vice versa. The better question is: Are they a great absolute team, uniquely skilled at solving the problem they are focused on solving?
3. What’s the general size of the market and what macro trends might lead to that market growing? Some people put more importance on there being a large existing market than I do. I have seen over and over again that a seemingly small market can grow dramatically over time as user behavior shifts. So I’m less concerned if it’s a small market to start if we can paint a picture that shows it growing into a big market.
4. Can you show early product+market fit? A critical part of success is market timing. There are many case studies of great teams focused on the right problem in a big market that still failed because the product they introduced was ahead of its time. When we’re dealing with such compressed timelines and limited information, it’s important to see early indicators of product+market fit.

Placing Bets

I knew trying to pick the startups that will have huge wins would be hard, but I didn’t know it would be this hard. I’ve been astonished by the relatively small amount of data we have on which to base our investment decisions.

Here’s how it goes: you meet with founding teams a handful of times at most. You get a smattering of stats and financial predictions that may or may not be based on reasonable assumptions. You listen to a narrative about where consumer or corporate behavior is expected to trend. You do whatever due diligence you can. And then, you decide on whether or not you want to work closely, through the highs and lows, with someone for the next seven-plus years of your lives. That’s right. Seven years in on average how long it takes to really know if an idea has worked the way you hoped it would.

Looking back, I marvel at how anyone was able to foresee the merits of today’s biggest tech wins when they were little more than interesting concepts. When Google launched most people thought the race for search was over. Microsoft and Yahoo were dominant at the time. Or how about Amazon: Could you really foresee that an online bookseller would eventually build core web infrastructure? Or look at Netflix. When it launched, the concept was to mail DVDs to people’s homes when there was a Blockbuster on every corner. But somehow, my partner Tim Haley was able to see the bigger picture imagined by Reed Hastings and became an early investor.

This is where you hear people talk about pattern matching. You get very few dots in space and you need to quickly be able to match those to patterns you have seen before in order to be confident in pushing your chips in. The more you see, hopefully the better you become, but that clearly isn’t absolutely true or the most experienced venture capitalists would statistically be the most successful.

I think the reality is that while pattern matching is critical, you also can’t become too locked into a specific set of patterns as they too change over time. Consumer behavior has changed, platforms have changed, the cost of doing a startup has changed, the profile of an ideal founder has changed. So if you stay locked into the patterns of old you’ll miss the next Evan Williams or Drew Houston. Best to balance staying agile with a solid knowledge base to have the best chance of discovering The Next Big Idea™.

Having, and Maintaining, Conviction

There are a million reasons to not fund any business that walks through the door. Couple that with the limited amount of information we have while reviewing potential deals, and you could easily be talked out of any investment. In fact — a big part of my partnership’s job is to do just that — keep me intellectually honest and challenge me on every deal by pointing out many of the reasons of why something might not work.

In this environment, I’ve learned that the most important thing I can do as an investor is to listen to all the why nots, and work hard to find a business that delivers the special something I can hold conviction to — no matter what. This means honing my skills to listen closely and focus above the noise to find what really matters — why this team above all others?

Having worked at a number of startups, and especially at Twitter, I’ve seen this from a different vantage point — the tough moments every young company faces, and when you realize what will get you through them, and work to hold onto it. Sometimes it’s the team that is the critical success factor, sometimes it is the product alone — that you believe can win no matter what. Whatever that ingredient is, it’s what drives the company to success. And, now I find myself looking closer than ever to discover the next team, product and idea that I can back, not just with financing, but a commitment to do whatever it takes to make it succeed.