Hey there,
I’m a big fan of Bessemer’s “anti-portfolio.”
It’s a collection of the deals they’ve missed, along with some context and commentary. In a world in which VCs are relentless in their back-patting, the anti-portfolio is the antidote. At least, that’s the thesis behind “The Miss,” a new feature for The Generalist.
Once a month, I’ll be talking to great investors — people I respect and look up to — to hear the story behind the deals that make them wish they could wind back the clock. My hope is that in addition to being interesting, it’s an opportunity to learn. A chance to pick through the wreckage of bad decision-making, biases, and flawed mental models, and take something out of it. Maybe founders will get a clearer view of the (flawed) framework of investors; maybe investors will take the time to interrogate closely-held-under-thought convictions.
There’s no one I’d rather start with than James Beshara.
His credentials are impressive — he’s a full-time investor with over 55 portfolio companies including Halo Top, Matchabar, ZeroDown, RigUp, Bolt, and others. He previously founded social crowdfunding platform, Tilt, where he served as CEO. In addition to being a product I would venture that most of us used (and loved!), that business raised capital from a16z, SV Angel, Felicis, Alexis Ohanian and Naval Ravikant before being acquired by AirBnB in 2017.
But arguably more important than his accomplishments, James is a deeply thoughtful person. He’s a diagnostician, someone who likes to get to the bottom of things, and is willing to acknowledge missteps to do so. I’m grateful he took the plunge with me. (And h/t to Ajay for introducing us!)
If you’d like to be better acquainted with his thinking, I’d recommend following him on Twitter and listening to his podcast Below the Line; it’s quickly become a go-to for me. (Perhaps a more influential endorsement: NYT best-selling author Eric Reis called “The most exciting new podcast in the startup world.”) He’s also written a book on creation and caffeine Beyond Coffee, and can be found here. It’s great.
With that in mind, let’s get to The Miss.
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In this course of the conversation, you’ll learn about…
🦄 Finding a unicorn on your first investment
3️⃣ The three traits the best pitches share
🤔 The paradox of investing in innovation
🤬 Missing a founder that took his last company to $100MM ARR
📚 Where to give the best entrepreneurs a buy
🥇 The First Check
It was a company in our batch of Y Combinator. I had about $25,000 in my bank account, and the company’s CEO asked me to join the round. I don't remember exactly what he said when he came up to me, but I wrote a check for $20,000. It was a compelling business with founders that I had spent months with and believed in, and though that was almost all of my savings, I always thought I could “make” more money but I couldn’t necessarily “make” these kinds of opportunities happen very often. I was ok with the downside and knew I would learn from it either way.
In the years since, that company — Gusto — has become a multibillion dollar unicorn.
In the micro sense, it was so lucky. In the macro sense, it was an example of the value of building trust, and building a network. Those two things are phenomenally valuable for anything that you want to do, whether that’s a startup opportunity or something else. If you have those two things, you’ll be able to navigate to people that can help. It also ends up presenting opportunities you could never have planned by being someone people believe can be a reliable source of help in their own journeys.
🗒️ The Criteria
Fifty-five companies later, I’m investing based on more or less the same criteria I did back then, though I didn’t have framework for it. It’s three key things that have to be over-the-moon exciting for me (can’t be a lukewarm excitement): (1) the founders, (2) the space they’re going after, and (3) their ability to communicate. It’s all three; they’re intertwined.
The reason I think about those three things is because to do anything of significance today, 99.9% of the time, you've got to recruit amazing people. And to do that, you really have to have all three of those down.
Even with that framework, I want to be very clear, a lot of the time, ~50% of me is still thinking: I have no idea what I’m doing. I mean, by employing an investment criteria, by definition you’re using “pattern-matching” to find anomalies. Every great startup is anomalous in its own way. And when you zoom out and think about it, that sounds ridiculous… “pattern-matching technique to find things that break all patterns?”
The more hardcore that an investor claims to know what they’re doing, what the future will look like, the more you should tread with caution. In many ways, the description of a certain investment process or “thesis” — those are for LPs in the investor’s fund to feel like “well, they know what they’re doing when it comes to startups.” But things like rigid “theses” are LP speak in my opinion. It sounds legitimate. It solves what you’re trying to solve for (sounding like you know what you’re doing). But again, you’re trying to find the anomalous. So I try to have equal parts “listening” and being ok with not having a clue what is about to happen, as much as I feel “confident” in a certain direction. The best investors I’ve had the chance to interact with, whether it was Naval Ravikant, Ron Conway or Elad Gil realize that a thesis is really a continual evolution, a conversation. It’s not something static that you can put on a page, and never change. You can’t expect anomalies to fit within a fixed framework.
🤦♂️ The Miss
There are two stories that come to mind, and it really goes back to this lesson that I now think quite a lot about, which is this: the best deals often do not look like deals. Someone said that on Twitter a year or so ago — I don’t remember who it was, but when I read it, I thought, holy shit, that’s right. It was the perfect articulation of the opportunities I had missed. It was only afterwards that I realized I had been at the table when a deal was happening — the best ones just happen so damn fast.
The first one is Mighty, Suhail from Mixpanel’s new company. When Suhail and I talked about what he was building, he didn’t have a name, didn't have this crisp perfectly polished pitch, didn’t have a demo or a cool brand. It was just an idea. He told me he was thinking about fundraising and having conversations, but mostly talking with friends to test the concept out.
I thought more about it afterwards, for maybe the next 30 days. The more I thought about it, the more I thought, this is a really, really good idea. But when I reached back out to him, Suhail told me the round had closed about a month ago. I was like, wait, while you were having that conversation with me? And he said, yeah, pretty much, three or four days later we had a lead come in and do the round.
There was no deck, no process, no email saying hey, I’m fundraising. It was done.
That was the second time I learned that lesson.
My friend Immad is the founder of Mercury; he had previously built HeyZap. I had spent so much time in the fintech space with Tilt, so he approached me with his idea to build a bank for startups. Again, it wasn’t a perfectly polished pitch; it was a kind of broken pitch really, gathering feedback as he thought about going after a very big space.
And so he asked me, would you be interested in investing? Because he’s a friend, and I believe in him, I invested $5K, a small amount. I’ve since invested more, but when I look back at it, I wish I’d had the foresight to understand that it takes time to get to that perfectly polished pitch. You have to be giving it 10 or 20 times a week. And since both of these were successful repeat founders and great communicators, I should’ve known they’d get that part down. Instead, I waited too long to think about it and didn’t anticipate how quickly they’d gain momentum around what wasn’t even a fundraising process. In this environment, I have since learned to appreciate that more…the best deals often don’t look like deals.
✏️ The Lesson
What I’ve learned is that if an exceptional founder is going after a big space, you can forgive them the articulation, the clarity of their positioning. It takes so many cycles to get it just right. If you wait for that there’s a very, very high chance you’re catching them at a time where your return is 1/10th what it could have been. So you build in a discount for the specific idea-related communication if you know the person is an otherwise great communicator, and it’s someone great chasing something big.
And then the second, even more important lesson is: great deals can happen so fast that by the time you realize you were at the table, it’s too late. I don’t think I was aware of just how fast a deal can happen for a great idea and great founder — and even though the story is still being written for Mighty and Mercury, I can say they have both of those things going for them.
🔭 The Watchlist
I don’t think about themes too explicitly, but when I look at my investments, I’ve done quite a few in financial technology and the health and wellness space.
In the fintech space, the world is still operating like it did 20 years ago. You can still feel that when you need to send a wire on Wells Fargo, check your spending, or visit a physical branch of your bank.
Healthcare is another obvious area for innovation. Whether you’re deciding what doctor to go to, or figuring out which vitamin you should take — there’s so little clarity and transparency in that process. And it’s not for lack of desire on the consumer end. I think we’ll look back at the time we’re living in right now as the Dark Ages for health in that respect. We still have so little idea of what we’re putting into our bodies; it’s the equivalent of a doctor telling you to smoke cigarettes, which they used to do 50 years ago, even for pregnant women (not joking, doctors would advise pregnant women on what cigarettes to smoke, filtered or unfiltered). The chances that’s still the case today in some respect is high, in my opinion.
One theme that I’m more and more interested in is creation itself. The inner journey, the psychology of creation. Hence creating the Below the Line podcast, to dive deep into the process that creators, founders, musicians and artists go through. I think it’s wildly under-discussed and it leads to each of us separately — through trial and error — piecemealing our individual psychological approaches together.
And if you’ve ever had a real, honest conversation with a founder or creator, it’s not a pretty sight in terms of how they (myself included) handle the ambiguity much of the time. It’s like we’re all custom building our own internal computers without blueprints and a little bit of tribal knowledge here or there. With research and more honest sharing of people’s real stories, I think we can learn, develop best practices, and build awareness for the inner struggle creators go through.
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Photo credit: “This Founder and CEO,” Entrepreneur; “This 29 year old…”, Inc.