52 Tiny Venture Lessons
52 Tiny Venture Lessons
A miniature investing curriculum
🌟 Hey there! This is a subscriber-only edition of our premium newsletter designed to make you a better investor, founder, and technologist. Members get access to the strategies, tactics, and wisdom of exceptional investors and founders. Become a member today.
Friends,
It has been over four years since I decided to go full-time on The Generalist. In that time, we’ve been lucky to profile some of the world’s best-performing venture capital firms, sometimes spending months understanding how they work and what makes them tick. We’ve also had the chance to publish detailed correspondence with legendary investors like Vinod Khosla, Reid Hoffman, and Ho Nam and interview dozens of other exceptional practitioners from funds around the world.
Over the past few weeks, I reflected on those conversations and distilled my takeaways. This is the result: 52 Tiny Venture Lessons, each no more than a few sentences long. Where possible, I’ve tried to attribute the lesson to the person I learned it from. This doesn’t mean that they necessarily “invented” the wisdom in question but that they introduced me to it. Naturally, not all come from just one person – they’re the result of hundreds of conversations that have run together, first-hand experience, or dedicated research.
Some of these lessons may sound obvious, others absurd. They cover big-picture issues like defining a viable investing strategy and small details like responding to founder emails. They are inevitably conversing with each other – conflicting, adding, tweaking. That means that the advice in one place might directly contravene the advice in another. This is the nature of the beast. There is no right way to win at venture capital, meaning different strategies suit different circumstances. I think of each of these lessons as a carefully calibrated lens snapped onto the front of a camera. Apply too many, and you’ll see nothing at all. But pick the right combination, add and remove one, and then another, and you’ll be able to see a situation from different distances and in different detail.
Anomalous outcomes come from anomalous people. Do not expect non-linear results to come from linear people. You must become adept at ignoring conventional signifiers of success and filtering for stranger signals. Neurodivergence and intense childhoods are often more predictive than a stellar GPA (h/t Hummingbird).
You cannot win by playing someone else’s game. The best VCs build a game that is uniquely their own and cannot be well-copied or emulated. Trying to do so probably means you’re on the wrong track.
Build the game you can win. The corollary to the above is that to succeed; you must build a game that you are singularly suited to play. That may be investing in the alumni of a startup you worked at or early-stage founders in a sector in which you have expertise. Find an unfair advantage and tilt the board to exploit it. (H/t Sarah Guo via Gili Raanan)
Fundraising is a B2B sales process. You might close LPs in a single meeting, but often, multiple touchpoints are required. It can help to think of the process as a B2B sales cycle and build back-end tracking processes to reflect as much. Reach out, follow up, re-engage – and push toward a close.
Always qualify the lead. If there’s an attractive LP that you’re not sure you’re a fit for, avoid preemptively disqualifying them. It can be easy to do so, especially with intimidating institutions, as you think: There’s little chance they’ll back a fund like mine. Don’t live in a hypothetical – qualify the lead.
Look for “animals.” Great founders are ferociously productive. It does not feel strange or silly to refer to them as an “animal.” Look for people you could describe with a straight face in this way. (H/t Paul Graham)
Startups are cults. Every startup is a tiny kingdom, operating under a particular set of rules and norms. They are, in a sense, a “cult,” beholden to a hierarchical structure and governed by an irrational belief. (H/t Peter Thiel)
A polarizing culture is a competitive advantage. If you are in the business of cults, you must make sure yours is unique. It is foolish to preach the same gospel as a hundred other upstarts and expect to attract special attention or devotion. If you want to stand out and quickly identify your believers, say something so radically different that it drives some people away. (H/t Traba)
The market is the only thing that matters. A stellar market can propel a competent but unspectacular team to phenomenal success. However, an outstanding team in a moribund market is a recipe for failure. (H/t Marc Andreessen).
The best founders find the best markets. This is the corollary of the point above. The market a founder starts in is not the one they have to finish with. The best people find the best markets. It may take them time and more than one try. But if you find a truly remarkable person planting seeds in a fallow field, do not rule them out. There is every chance they’ll find their way to fertile ground before long.
Beware of startups that preach work-life balance. Building something out of nothing does not come from balanced minds. It takes heroically hard work, long hours, and irrational levels of commitment from founders and early employees. If a young company champions its equilibrium, raise an eyebrow. It may signify a team keen to “play startup” more than one desperate to win.
A venture investor’s greatest sin is one of omission. The worst thing a VC can do is miss an outlier business. You should beat yourself up for these mistakes, dissect them from every angle, and conduct a post-mortem. Why did you pass on Uber at the Series A? What was the rationale that talked you out of Square at the seed? Spend more time on these misses than on the deals you backed that never took off.
Every great investor has big misses. Once you have exhausted your analysis and conducted sufficient self-flagellation, you must simply sigh and shrug your shoulders. Every investor has their misses. If you don’t, you’re either fibbing or are not seeing enough good deals.
Missing a deal isn’t the end of the story. Stay close to startups you wish you’d invested in. If you prove your worth, they may invite you to invest ahead of the next round or in a future financing. Even if that doesn’t transpire, you’ll have a relationship with a promising entrepreneur who may deliver useful introductions or start another business.
Make decisions painfully slowly. Every investment decision is a classic “one-way door.” Once committed, you cannot reverse course – at least not without permanent, catastrophic damage to your reputation. Even when the process pushes you to act quickly…pause. Consider. Check your motivations. Do so to the point that it hurts, and you desperately want to make a final decision, simply to end your mini-purgatory. Then hold on a little longer.
Be the first to conviction. Once you’ve confirmed your conviction, do not hesitate. Being the first person to commit to a founder can mean much. It signals your seriousness, respect for their time, and excitement about them and the opportunity. In hyper-competitive processes, this can make a real difference. (H/t Alex Taussig)
If you don’t understand how someone has a fund, it is probably because they have a very rich friend or family member. In your early days as a VC, you will meet a selection of relatively unimpressive fund managers with no unique advantages. They do not have a storied track record, outstanding operating experience, or a blue chip apprenticeship in their past. You will ask yourself, How? What am I missing here? What secret have they discovered that perhaps I, too, might learn and use to vault five steps forward? Do not waste your time: the “secret” is usually a debonair uncle with the wealth of a small island nation.
Prove your worth before the term sheet. VCs often think of their dance with founders as a sequence. First, a founder pitches you; then, once you have built your conviction, you pitch them. In reality, these steps happen simultaneously, though many investors don’t seem to notice. From the moment a founder pitches you, you are also pitching them – demonstrating what kind of a partner you might be with the acuity of your questions and speed of responses. Recognize this dynamic, and use it to your advantage by delivering as much value as possible long before you make an offer.
Often, the best thing to do is nothing. Do not pass your anxiousness onto your companies by checking in too frequently or inserting yourself too deeply. When you have something of value to offer, do so. When asked to help, move quickly. But do not bother entrepreneurs to combat your fractiousness.
A portfolio CEO doesn’t need to hear about something a competitor just did. They will almost certainly already know about it. If they don’t, they will soon enough. By sending it over, you project your insecurities and fears – which founders do not need. It is not helpful, it is deeply irritating, and it will never be well-received.
Look for teams of former founders. The single best indication of a high-performing culture is the prevalence of former entrepreneurs. It usually portends a high-agency organization equipped with people mentally and emotionally prepared for a startup journey. Figure out what percentage of a company’s employee base previously launched businesses of their own, and try to understand why they’ve decided to forgo their independence to contribute to a new mission.
Great founders fear death to an abnormal extent. Several impressive entrepreneurs I’ve met have an unusually keen sense of their own mortality. Beneath other layered motivations, this is the heart of what drives them—the feeling that the years are running out and that if they are not careful, not fanatically vigilant, they will fail to meet their goals in the allotted time.
Beware of living in the exhaust pipe. You must find a reason to become an entrepreneur’s first choice. Without a superpower, you risk living in the “exhaust pipe” of more exalted firms, surviving off their leavings. Though you might get lucky over a short period, thriving requires finding a true raison d’etre. (H/t Frank Rotman)
Most investors will not send you their best deals. The fancier the investor, the greater their sourcing abundance, the more likely this is true. No matter how many of your best deals you send to a firm like Sequoia, for example, they are unlikely to reciprocate. (Their incentives are to invest as much as possible in the best companies, not build a diverse coalition.) Do not build a strategy that relies on the largesse of the affluent.
No one gospel. There is no “right” way to win at venture capital. Some do so by identifying unknown companies and backing them early. Others woo breakout businesses and concentrate capital in them. Some focus almost exclusively on founders; others on markets. There is no one gospel to follow.
Founders often don’t go to their fanciest investors for help. A benefit of being a small, non-industrial venture firm is that founders will actually ask you for help – especially on the small, tender, slightly vulnerable things. For such matters, reaching out to a partner at a legendary firm may feel daunting or like overkill.