It occurred to me yesterday that I’ve been in the VC business for over 10 years. I’ve been writing checks for 8 years, and was lucky to get my start in the industry with the team at Spark Capital where I was able to witness some amazing early investments as part of that team.
As I start my second 10 years in venture capital, I want to both reflect on some recent learnings that have changed the way I approach the business. Below are 4 important lessons I feel like I’ve learned the second 5 years in VC that I didn’t really appreciate my first 5 years.
1. There is a big and important difference between being disciplined and being dogmatic.
Disciplined investors stay true to the things that are core to their business. They are disciplined about their time, their strategy, the way they engage with founders, and the way they fight to develop an independent point of view. But the best investors I find are not dogmatic. They make room for exceptions, and they are very sensitive to when things change in the market. They also continually revisit their beliefs and assumptions, and look at their own business with a blank sheet of paper. Being dogmatic looks like:
– Arbitrarily saying that VC’s must own a certain % (I remember people criticising USV early on because they “only” targeted 15% instead of the gold standard of 20%)
– Saying you only do a certain type of round
– Saying you will never do a deal in a certain location (eg: never do a deal in Florida. Except… Chewy)
– Saying that XYZ was tried before (It’s a fine data point, but never let your thinking end there. It’s the crutch of lazy thinking)
– Discounting entire market segments because they are too hard to make money (eg: music. Except… Spotify)
There are a few things that don’t change. But most things eventually will. And early stage investing is about finding outliers, which requires some flexibility to stretch beyond your rules to test your beliefs without going too crazy. That’s why this takes so much discipline.
2. Be optimistic about the future, but take care of customers today.
Like many investors, I’m most excited about companies that seek to do good. I think the best companies enable incredibly positive things in the world. Even though the good comes with the bad (with great power comes great responsibility 🕷 ), I think it pays to be optimistic about the future and what technology and entrepreneurs will accomplish.
BUT, it’s easy to translate this into being too optimistic about how customers will engage with your product or service. Some zealots may buy-in to what you are doing because they believe in the mission. But I’ve found that the best companies tend to accept that their customers are unlikely to change their behavior, even for a very good cause. They will only change their behavior if it serves them, and serves them quickly.
I made a number of mistakes early in my investing career because I fell so in love with the vision, I forgot that most customers don’t care about your long-term vision, they care about whether things work for them right now.
Ed Park at Devoted Health shared a story with me just yesterday that exemplified this. We’ll share this story in greater detail in the near future (stay tuned!). But Devoted has one of most ambitious visions for any startup anywhere. But he was quick to point out that what he really obsesses about is what their customers feel on the ground. Can a senior with a cough afford that bottle of medicine they need today? Doing what matters now is necessary to earn the right to do what matters in the future.
3. Seek high-slope founders with great FMF (Founder/Market fit) and FGTMF (Founder/GoToMarket fit).
When you are a junior person in a venture firm, it’s actually quite natural to try to gravitate towards proven founders. Whatever investments you bring to the table will be judged pretty harshly, so you want to have some air-cover with a founder who has “done it before”. But my learning is that “done it before” means a lot less than one would think. A lot of things change over time, and many founders that are successful in one context have a very hard time translating that to a different one.
You want to think about the strengths and weaknesses of a founder, and then plot those against the most important things that are needed in the early stages of the business they are working on, especially around go-to-market. If they match, that’s great. If they don’t, it’s worrisome.
It took quite a while for me to really internalize this. Often, the founders best suited for an endeavor may not be quite as “proven”, but is someone who is on a very steep slope in their lives and are great fits for the market and early GTM of the company they are building.
4. Early stage investing is much less efficient than you think, so trust yourself!
Early in my career, there was the sense that you needed to invest in companies that no one else saw. The belief is that the best founders and investment opportunities are quite obvious to any smart investor, so it’s imperative to have proprietary deal flow and relationships. While this helps, it turns out that the judgement of the crowd in early stage investing is pretty dumb. Many of the best investments are ones that most people passed on, and may even have seemed “shopped”.
Similarly, when a round is massively oversubscribed, it actually doesn’t say that much about the quality of the investment. As I said in a recent post, once a strong lead exists, every round ends up being massively oversubscribed. There are so many followers in this market.
One of the top 3 positions in our portfolio was a company that many dozens of investors passed on early on. This is the case for so many unicorns out there. As Albert Wenger said in perhaps my favorite tweet of 2018: “Social Proof is for Suckers”
I’m sure there are more big learnings, but this was meant to be a quick post. I’d be very curious to hear the learnings from other investors that have been doing this a while.
In particular, if you’ve been an investor for 20 years+, I’d be VERY grateful to hear what you feel like you learned during your second 10 years in VC that you didn’t appreciate during your first 10.