From Coding to Early-Stage Investing

What I Learned About Assessing Early-Stage Startups as a Fellow at Rough Draft Ventures

As someone with a technical background, I am often asked about my thought process for analyzing early-stage startups.

In my senior year at Northeastern, I was excited to be selected as a Venture Fellow for Rough Draft Ventures (RDV), General Catalyst’s student program. Venture Fellows are ambassadors for RDV and entrepreneurs on campus, helping to identify and support student founders. Every other week, Venture Fellows hear pitches from top student founders and make recommendations for backing high potential companies. I thought I would share more information about how I found myself in the role, and what I have learned as a result.

My natural curiosity was a key enabler for catapulting me into the role…

While organizing TechTogether’s first hackathon (then known as SheHacks Boston) during my junior year of college, I sought out ways we could encourage hackers to find the business value in their projects and continue working on them after the event. During my research, I went down a rabbit-hole that all started with a simple question: How does one raise money to fund a project idea?

I immersed myself in The Review from First Round Capital, a16z from Andreessen Horowitz, Andrew Chen’s newsletter, and more. This is where I came across foreign terms like series A, term sheet, limited partner, and tech unicorn. Coincidentally, around this time I attended WeCode at Harvard and met a Venture Fellow at RDV. I had previously worked with RDV for SheHacks Boston but was curious about the venture fellow role, which provides exposure to assessing startups. I soon spoke with Natalie Bartlett who runs the Boston RDV team and the co-founder of RDV, Peter Boyce, and the next thing I knew, I was invited to join the team that upcoming school year.

There’s no better way to learn about a new field than by immersing yourself in it. I did just that at RDV. Every week, I would meet with student entrepreneurs around Boston, provide advice on scaling their ventures, and determine whether they were a good fit for pitching to our broader team. Throughout my time at RDV, not only did I learn about early-stage investing but about industries like finance, healthcare, construction, and more. For aspiring entrepreneurs, investors, or those even slightly curious about this space like I was a year ago, here are some learnings I am excited to share.

How does early-stage investing work?

Starting a company is not easy. Often, founders need both venture capital (VC) and non-financial resources to get off the ground. These resources were essential for the growth of some of the largest tech companies like Slack, Uber, and Zoom before they went public. Startups typically approach the fundraising process through rounds representing the stage at which the company is at. Pre-seed and Seed are typically the first rounds entrepreneurs raise to demonstrate proof of concept while Series A and Series B startups have already defined their product-market fit and are looking for more capital to scale quickly. Here is more information about the different rounds of funding.

In exchange for capital, investors receive equity in the company, with the hope of receiving returns on their investment. The best returns provide 10 times (10X) or more of what was initially invested. Venture capitalists realize the returns on investments when the company either goes public through an initial public offering (IPO) or is acquired by another company. Although venture capitalists are always on the search for companies that will bring them a 10X to 30X return, only 1 in 10 companies traditional do so¹. As you can tell, investing in early-stage companies is extremely risky.

Determining how successful a business might be is not black and white, especially at the Pre-seed and Seed stages. I learned to evaluate companies on three major factors: the founders, the product, and the market.

1. The Founders: The founding team is arguably the most important component of an early-stage startup. An entrepreneur could have incredible technical capabilities, for example, but if they cannot attract a stellar team, I would think twice before investing. Investors like to see co-founders since it shows them that the founder was able to convince at least one other person that the idea was worth pursuing. The founder should also have prior experience in their venture’s industry, demonstrate that they are avid learners, and be open to flexibility. When speaking with founders about their venture idea, I always ask myself whether they are people I would personally enjoy working with. Furthermore, founders who are coachable are more likely to win over investors at the early stage.
2. The Product: Would this product be an additional feature to an existing product or does it have the potential to become a stand-alone business? How defensible is the technology/product? To answer these questions, I need to understand how the founders will eventually attain the big vision for the product. I always ask the founders what pain points they are addressing and who is their target customer. Surprisingly, I have talked to quite a few founders who were not able to clearly identify the later. More importantly, how were they able to arrive at the solution and how will they continue to iterate the product? A good answer to this question is through customer interviews or releasing alpha and beta versions for product validation. This is also known as finding “product-market fit”, how well a product is able to satisfy the target market’s demand. It is important for the founders to be able to identify how customers are currently solving the problem and why the current method is an inconvenience. The founding team should be able to demonstrate the importance of how their product will eventually be a “must-have” for their customers instead of a “nice-to-have.” Even the most successful companies have had to pivot their idea a few times to establish a product-market fit.
3. The Market: I typically ask founders what the key characteristics are in the market their company is addressing, and how they plan to augment, disrupt, or even create a new sub-market. It’s also essential that the market is large enough to build an impactful company from a returns perspective. If it’s a new and emerging market, the founders should identify trends that show why it’s a new market. This could include demonstrating that other companies are succeeding in this landscape or a similar one. I also learn about the barriers of entry into this market and what background knowledge is necessary to be successful in this industry. If there are a lot of barriers to enter the target market, I ultimately assess the founders’ experiences to gauge how they will overcome these barriers.

It is important to realize that there is not one clear indicator when making an investment decision. The best investors rely on experience with prior investments and learn from current market trends.

How does one get involved in this field?

I never thought about getting involved in early-stage investing while in college (I didn’t even know what the term “VC” meant two years ago). After my year at RDV, I realize that it is so important for students to understand this space. It’s never too early or too late to get involved in early-stage investing. Based on my personal experience, there are three ways to get started: read, get involved on campus, and network with professionals in the field.

My biggest piece of advice for those interested in early-stage investing is to read, read, READ! Before I joined RDV, I would read blogs on Medium, to teach myself what term sheets and funding rounds were. I also recommend becoming an expert in one particular field that you are passionate about. Whether you are interested in biology, journalism, or anything in between, having a deep understanding of an area will make you very valuable to any VC firm.

Here are some resources I found useful when I was first getting started:

1. Both Sides of the Table by Mark Suster
2. Rough Draft Ventures Blog
3. The Review by First Round Capital
4. How Do You Get a Job in VC by Sarah Downey
5. How Venture Capital Works by Alejandro Cremades
6. The Meeting That Showed Me the Truth About VC by Tomer Dean
7. All Raise by Aileen Lee
8. 12 Things I Learned From Marc Andreessen by Tren Griffin and Marc Andreesssen
9. Venture Capital Funds — How the Math Works

Furthermore, colleges have many resources for learning more about entrepreneurship and investing. Join your school’s entrepreneurship club and if it does not have one, find out how to start your own! Many entrepreneurship clubs and accelerators on-campus conduct panels and workshops surrounding VC which is a great way to get an introduction to this space. Bring up your interests in VC to professors and club leaders and take initiative in organizing talks or panels if your school does not have one already. If you are lucky enough to go to school in a city like Boston, there are conferences like Harvard Business School’s annual Venture Capital and Private Equity Conference. In addition, take a class if your school offers one. This past year, I took Business Planning for Tech Ventures at Northeastern University where I learned about the process that goes into making investment decisions and how to apply this knowledge to my own venture idea.

For a more hands-on experience in VC, internships are the way to go. There are also student-run programs like RDV and Dorm Room Fund (DRF) that give a unique look into life as a venture capitalist. RDV was an incredible experience where I had the opportunity to both source and be involved in the final funding decision. People who are very early on in their career might not be able to do the latter as it is typically reserved for more experienced partners. Having the opportunity to help determine which companies would be in RDV’s portfolio has taught me a lot about the decision-making process venture capitalists go through when making investments. In addition, I also had the opportunity to learn from students at other universities that had vast expertise in economics, blockchain, supply-chain management and more. Playing the investor role for a year allowed me to realize the importance of educating students about investing and its role in creating the most powerful tech companies today. It is my hope that funding resources become more accessible and I believe the first step in doing so is through education.

How has my experience affected my career aspirations?

Before my time at RDV, my goal was to work at a large tech company like Google or Facebook as a software engineer. Although working at a company like Google would be an amazing experience, my time in the entrepreneurship ecosystem has given me an itch for something more. There is so much innovation in the start-up world where you have the opportunity to make a large impact early on in your career. Whether it’s starting your own company or joining a startup, take a risk and you will learn so much!

For me personally, I realized that I wanted to learn more about the business as a whole while improving my technical skills. I want to have a direct impact on customers and the company’s business and learn more about what makes a successful company. My experience at RDV has allowed me to see the drive, passion, and determination founders have, and it has inspired me to consider starting my own company in the future. Even though I am focused on engineering right now, the skills I have learned at RDV help me see building a product through the eyes of an investor. I still have so much to learn about VC and entrepreneurship, but my experience at RDV is definitely a part of the foundation for my career.

Let me know if you have any questions about my journey in getting started in early-stage investing. I wrote this article to share my experience and make learning about investing less intimidating for students. It is so important that the barrier of entry into early-stage investing is lowered for gender-marginalized groups, people of color, people from different socio-economic backgrounds, and more. For there to be equity in funding resources given out, there needs to be diversity among the individuals making funding decisions.

[1] Dean, T. (2017, June 01). The meeting that showed me the truth about VCs. Retrieved from https://techcrunch.com/2017/06/01/the-meeting-that-showed-me-the-truth-about-vcs/