My best advice for a new VC
Two things I heard, and one I had to learn.
This Spring marks three years for me on the dark side of the VC business, as an investor in startups rather than an operator of them. Reflecting back on the advice I got and what I’ve learned since, a few things seem worth passing on, including something I’d add to the list of good counsel I got from others.
“Don’t do a bad deal your first year.”
The first is “Don’t do a bad deal in your first year.” A bad deal right out of the gate not only hurts the fund, it consumes the time, focus, and confidence required to build the foundation of your “practice” as an investor… the network of relationships and institutional sources of deal flow that are the lifeblood of a successful VC. This was actually the single most common piece of advice I got, from savvy investors and trusted friends including my partner Bill Wiberg, friends Jamie Goldstein and James Nahirny. I took it seriously, to the point of not doing any deals that first year out of the gate (though to be clear this was not my intention.) My partners — to their credit, and my surprise — saw this as a sign of sober judgement rather than limited productivity.
“Pick a race, bet the jockey.”
The second best piece of advice I got was to focus on market selection first, to look for problems that genuinely offer the potential for a venture scale return, then to find the best teams chasing those opportunities. Eventually this distilled down to “Pick a race and bet the jockey,” a sticky formulation shared with me by the great Jit Saxena.
Jit told me the biggest mistake entrepreneurs made was not picking a market big enough to justify the massive effort required to build a business, and that big problems were always what he looked for first as an entrepreneur and an angel. “When you find one of those opportunities,” he said, “there’s usually more than one team chasing it.” In the long run the best of those teams is probably going to come out ahead, regardless of where they are when you first encounter them. Smart money bets the “jockey” (team) rather than the “horse” (initial product,) since you get paid for winning the race and not just the first lap. Smaht.
“Bring the right tools for the job.”
Which brings me to what I’d add to the list.
A lot’s been written about Founder-Market Fit, going back to David Lee and Chris Dixon in June, 2011. It’s generally interpreted as looking for alignment between an entrepreneur’s personal experience and the domain of the opportunity they’re chasing. I certainly agree an intimate understanding of a customer’s problem is a great place from which to start a business. That said, there are special entrepreneurs who start with something more like a generalized capability than specific industry experience, so there has to be something else in play when it comes to predicting success.
Elon Musk never worked at NASA, but he was a hell of an engineer, and he could raise money like nobody’s business. In the end those were the two most important things SpaceX needed to win, and he brought them to the table — along with reality-bending confidence — in abundance.
I’ve learned this is really important to making good startup investment decisions… to understand the two or three things a company will need to do better than everyone else to win, and to make sure those qualities are abundant in the people running the company.
For example… Jeff Glass has had wins in media, mobile services, and location data. So what made him the “jockey” to “bet on” in the emerging home equity sharing business? Well, he’s equally comfortable and effective selling across a kitchen table in Brooklyn and a conference table on Wall Street. He knows how to build and lead teams that scale, learned the importance of market timing from personal experience, and is brilliant at finding creative ways to align his business interests with those of established players in adjacent markets. Each of those things will be essential to Hometap’s success, and I’m pretty confident no one is going to out execute Jeff on those dimensions of the business.
Early days, but things are looking good so far.
When I make an investment now, question one is whether the problem is big enough to deliver a venture-scale outcome. If it is, I try to understand what “tools” the “job” of winning in that market are going to require, and then to assess which team in the space has the best of those tools. There are other questions to be asked and answered along the way, of course, but as I reflect on the deals I’ve done so far, this is the thread that holds them together.
That’s what I’m going with for now, here’s hoping they let me keep doing it.
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