A Seed VC’s Decision Tree
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robgo.org
Most investors, IMO, are not great evaluators of founders (e.g., are easily fooled by elite credentials), markets (they tend to chase shiny things), or founder / market fit (this takes a lot of operational expertise to realistically evaluate).
Definitely isn't the decision tree from first contact to investment - that would be much deeper. It would also have to factor in how much heat there is behind the deal already - which for most seed firms is probably the most important signal! Seems accurate as a decision tree to take a meeting with someone though.
As an exercise, try running some of their portfolio companies through that decision tree and see what kind of results you get.
You can tell a lot by the first five seconds with a person. That's why so many founders today are the cool kid/hot guy variety and not the Bill Gates/slovenly nerd variety.
VCs won't take seriously a guy who shuffles-when-walks with zero eye contact and stares-at-floor-constantly habits unless they come with someone vouching for them.
VCs will take seriously someone who can project all the right social signals, act strong, and not let anyone see into their weakness.
Oh wait: those are the values of society at large.
We've already abandoned all pretense of disruption. This is just the next iteration of the elite, where your value as a person hinges on how well you project your own narcissism.
I had a chronic illness in my teenage years and 20s, hit a nadir around 24, and recovered by 27-28. I'm healthy now, but didn't have the start that's "expected" of people with +4 sigma talent. It's obvious, since I'm 30 and not earth-shatteringly successful, that I have some kind of health story... but I prefer not to get into the details with people I barely know. I don't want it to be the first conversation, but in the contemporary Valley, it would be. ("If you're so smart, why aren't you rich?")
Silicon Valley used to be for weird people. It was about second chances (and third, and fourth) and outer-range creativity and acceptance of weirdness. People were too busy building for the cool-kids shit and high-school drama that dominates now. That Silicon Valley was worth defending, and protecting. This iteration, this Disney-fied new one, is worth attacking, humiliating, and bringing to its undignified end.
I wonder that of myself all the time. I don't have any medical problems other than the tragedy of living inside my own fucked up head.
I find the cheap ways of getting rich untenable (abusing users, SEO affiliate ad crap, stealing personal information, facebook viral shitfests), and the hard ways are too much for my unconnected self to tackle alone (remaking credit card processing, remaking flight finding, anything requiring network effects to get off the ground).
But, for now, I'm not homeless and I have a view of Manhattan from my window. It could be worse.
I felt that if I wasn't 'great,' then I was squandering my life, and that I always had to hustle more. I'd internalized a bunch of toxic messages (some from well-intentioned family), lived in a fast-paced area that focuses on power (DC), had impostor syndrome, and was a nerd when growing up. It was easy to think that once I reclaimed my 'rightful' place, that life would be as it should be.
It should be little surprise that I was well on my way to predicating my identity on my career. I placed enormous pressure on myself to succeed, and rapidly started viewing many facets of life as inherently zero-sum. I became reductionistic in many areas, and my interests narrowed, as I pursued only things that I was good at.
It was all an enormous lie. I'd bought wholesale into a weird, Nietzsche-Darwinian belief system where I had to become the ubermensch before I could allow myself to be human. I had to become someone so I could see myself as someone worthwhile. I had to achieve so I could rest. I had to be the best, lest I become undesirable.
In short, I believed I was not worth loving until I'd received a certain amount of external validation. I'm still being broken of this, but the break/repair/rebuild cycle is much better than the desperate grasping. Fuck status. We think we have to waste our lives accumulating it, when it's really borne out of fear of the future.
1. My wife is very supportive of my ambitions while not letting me be consumed by them. The vulnerability and accountability are key here.
2. Regular time doing wholly non-constructive things: video games, reading, guitar, etc. This took some time to acclimate to, but now I can play a game or the like and lose track of time, as well as not feel guilty.
3. Killed my Twitter account, which was sort of the symbol of my personal brand. Not sure what I'm going to do there.
4. Pulled back from open source work for now, as it got too close into the realm of 'being someone' in a particular community.
5. Meditation and prayer is huge. Admitting I have a problem is still hard but there's a huge relief that comes from being honest with yourself.
6. I work at a lifestyle company, which is fairly unheard of on the East Coast. This helps a bunch with being flexible about when and where I work.
I still make time to do side projects and such, but the effort is mainly directed towards learning and fun over developing my personal brand. I'm still strategic about it, as I'd love to do more Clojure in the future, esp. professionally.
Hope this helps.
2. Regular time doing wholly non-constructive things:
So how did you get started doing that? I have a reeeaaly hard time with that one, to the point that I even see time with the family as non-constructive. It feels like time spent doing anything that is not pushing one of my goals forward is actively stopping forward momentum (including posting comments on the internets) so I end up getting frustrated at having wasted time and get depressed that I haven't done anything. Its a tough cycle.
But the bit about your family? Sounds like a red flag to me.
Do things for yourself on a regular basis. Make time to exercise and spend with quality people. Talk about this issue. It's very tough to fix by yourself; you effectively been mentally rooted for now. Understand it will take time to fix, and the process of recovering will feel strange. I'm convinced half of it is showing up and resisting the temptation to do just one more thing.
Optimize for happiness, and trust productivity will flow out of that.
We live in a bizarre world where everyone that founds a startup is often a credentialed, healthy Stanford grad re-implementing an unremarkable idea in network effects. Is it mobile or social? No? You might as well get on the next flight out of here.
To me, it seems utterly remarkable that our industry has grown up from kids running computers in their basement to a new breed of slick, Macbook-toting framework programmers that couldn't set up WiFi or SSH to save their life.
The things that I moved here for have been gamified and manipulated. In the process we've not only damaged our own industry, but destroyed San Francisco's cultural identity and pushed out the artists and misfits that make this such a special place.
What?
Your street cred can wain though. The Powerset acquisition by Microsoft was okay for the time, but now it shows up as essentially an acquihire. If that sale was going through today, it would probably be a $200 million to $500 million acquisition instead of the $50 million bauble they got at the time.
That's the point. Most VCs pick who to fund like 14 year old high school cheerleaders pick friends.
He mentions "Top 0.01% founder" which is probably about one of ten people in the world.
VC culture selects for arrogance and narcissism. The few who are "top 0.01% founders" would never describe themselves as such.
The theory is that if someone doesn't have elite credentials, he doesn't have the hustle to stitch a business together amid adversity. I'd generally agree that it's much harder to launch a successful business than it is to get into Stanford. The latter is not at all hard if you (or, more accurately, your parents) know how to go about it.
Two fallacies are that (1) people who didn't go to Stanford couldn't get in, as if everyone wanted to go there at 17, and (2) that "hustle" at 17 correlates significantly to hustle at 25 or 38.
VCs come from a socioeconomic milieu in which it's normal for kids of average intelligence to attend Stanford or Harvard, because of all the connections they can pull, so their assumptions are valid where they live. The mistake they make is that they assume that (no Stanford => not founder material) to be true for the other 99.9% of the population.
I'm a bit skeptical of that point, being that there are a lot more successful small business owners than Stanford grads.
Now, if your idea of a successful business is a multi-million dollar exit on VC money, then sure, but plenty of people are happy to get by on a bootstrapped business that pays the bills.
- investment decisions,
- hiring/contract decisions,
- travel agencies,
- and probably countless other services too.
- For one VC, market size was the main predictor of whether a company would get a term sheet. (http://iterativepath.wordpress.com/2013/02/11/how-vcs-decide...)
- A survey showed that angels and VCs care about the management team more than anything, although market characteristics and the product rank highly, too. (http://www.go4funding.com/Articles/Angel-Investors/Angel-Inv...)
"Founder" as a singular rarely get investments. No man is an island, and you don't want your investment to get hit by a bus.
So take out life insurance on the founder.
And if two founders are essential for a successful startup, then there is actually twice as much chance of it failing by one of them being hit by a bus.
You can only insure for the amount of your investment, that offsets the risk but doesn't cover your gains. Also since the cost to do so is 1/10th of your investment over 3 years, you would typically not opt for the coverage. I don't know of an investor who does.
There is also a belief that no one guy is "that smart" that anything 1 person can build has any competitive advantage.
However, taking this as a given doesn't strike me as right as founders can definitely get to some sort of market traction on their own and hire people to fill in their deficiencies. It also strikes me as odd that while Dropbox is one of YC's biggest hits they still hang on to this 2-founders doctrine.
I can't help but think that not investing in single founders is caused by the social signalling involved of single individuals. The reasoning would be "If you can't convince somebody else to join you, why would I invest my money in you?".
Another genuine concern would be that this individual would have to have mastered a broad set of skills to run a successful business independently and such people are unicorns.
This is a serious question. It actually looks easier to gauge the marked than the people..
As others alluded to, much of investing is intuition. No one can predict the future, otherwise they'd be billionaires hand over fist. So they use their intuition and available data to get as confident as they can about an investment.
I feel for them - what data do you have on a founder, especially a first timer? Maybe pedigree, relevant experience, or a portfolio of past projects for a hacker, but outside of that, seems to be a fuzzy haze of gut feeling...confident, had "good" answers to questions, etc.
Here's Geoff Smart's Phd thesis (Management Assessment Methods in Venture Capital: Toward a Theory of Human Capital Valuation): http://www.ghsmart.com/media/press/methods_in_venture_capita...
And a simpler overview [pdf]: http://www.ghsmart.com/media/press/human_capital.pdf
And, he wrote a book called "Who", but he generalized the research to hiring anybody. Still a good book.
TL;DR: VCs who hire people that have successful experience doing what they plan to do end up getting the best ROI. VCs who hire people based on their gut ("I like the cut of your jib!" keeps popping into my head as I write this) do worst.
The simpler overview is interesting reading.
(1) Get publicity for the VC firm and, thus, more deal flow. We can conclude that they are not getting much deal flow.
(2) Have criteria that look good to the LPs, that is, easy to understand and like nearly all other VCs. Then forget about the 20% and live on the 2%.
An insightful, actionable blog post. A true gem in the HN treasury.