Category - Breaking into VC

1
The One Question Every Founder Should Ask (But No One Does…)
2
Establishing Your Personal Board of Directors
3
Just Because a Market Lacks [X] Doesn’t Make it Fundamentally Broken
4
More Than Just a Podcast
5
Hot Town, Intern in the City

The One Question Every Founder Should Ask (But No One Does…)

“What percentage of your investments have raised legitimate follow on rounds?”

Entrepreneurs have become a lot more savvy about fundraising over the past decade. And that’s a very, very good thing. Thanks to bloggers like Brad Feld, David Hornik and Mark Suster, founders have a legitimate window into how VCs assess people, theses, even financial returns.

Further, because horror stories still abound, founders have become very good at optimizing for people they can trust. That’s why newer investors (and firms) such as Hunter Walk at Homebrew and Jon Triest at Ludlow Ventures have quickly emerged as a top target for founders raising money – with said founders often eschewing the bulge bracket firms (and deep pockets) in favor of those personalities. Why? Simple: founders know they won’t get screwed. They have a material window into the firm’s personality via Twitter & digital content, and they know they’ll have a tireless advocate as they do the hard work of going from zero to one.

I’m glad founders are optimizing for good people and avoiding jerks. That’s how I try to live life too. But here’s the thing – what actually is the role of your seed investor? Is capital sufficient? Is being “nice” sufficient?

I believe there is only one truly fundamental role of a seed investor – to ensure your company doesn’t die. That’s the #1 metric of how I judge myself as investor: what % of my investments either raised a sufficient amount of follow on capital to reach profitability/next milestones or happily exited voluntarily. But here’s the thing – investors have different opinions on how they should run their firms to give entrepreneurs the best possible shot of getting there – some want to offer you tons of “services,” others want to get dirty with you on go-to-market or hiring, others may think that “brand” or press are paramount, or that networking with other VCs is foremost.

I am ultimately agnostic as to which strategy[ies] a fund wants to employ. But I do care about results. And my personal conviction is that good results will be found in funds that employ a healthy mix of all the tools: focused on building their own brand as a value-additive smart-money fund, strengthening relationships with upstream investors, broadening local networks to help with hiring, etc.

Hopefully this gets the conversation started about what a good benchmark is (I really don’t know). But I do think it’s an important metric for founders to focus on because it really answers the question: will my investor be able to do the job they’re selling me on? Appreciate any feedback or conversation.

Establishing Your Personal Board of Directors

One of the best pieces of advice I received when I moved into the venture world was to surround myself with a group of mentors who wanted to help me, believed in me, and would act as a sounding board as I grew in the industry. It’s a concept I believe is based on the Jim Collins article “Looking Out for Number One,” and was heavily emphasized during my two years as a Kauffman Fellow.

Except it’s not so easy.

Whether you are of the opinion that venture is an apprenticeship business open to anyone or disagree and believe it’s better served by operators transitioning into investors, there is no doubt that both profiles must have mentors to caution against mistakes, provide context for decisions, and provide guidance in planning for the future.

But the thing is: great, learned, wise people are, well, busy. And I, Ezra Galston, am, well, kinda normal. Further, four years ago, I had no existing relationships in the venture world, and I barely knew any really successful entrepreneurs.

There’s an ancient Jewish proverb found in the two millennia old book Ethics of Our Fathers that advises, seemingly offhandedly, “make for yourself a teacher.” The nuance of that odd language – “make” – is that mentors don’t fall into your lap. While there may well be altruistic people out there who take protégés under their wing for no reason other than their own big heart, that’s not the norm for most of us (at least I’ve rarely been the beneficiary of that). Most of us have to be proactive – and actively chase down our own Board of Directors.

But there’s one other nuance worth mentioning. When you “make” your own circle of mentors, you are optimizing for one goal: learning. And the truth is, someone greater, more experienced than you doesn’t ever need to view themselves as an altruistic, charitable mentor in order to “teach” you. In principle, as long as you have an open line of communication to someone who respects you and to whom you wish to learn from, you really need no level of formal relationship at all. All you need to do is prompt and then listen.

And that’s me (and most of us). There are a few people in my life who I’d imagine are aware that I consider them mentors (I’ve never asked). But there are a far greater number who I personally believe have no idea. I speak to them 3-4 times per year, they (hopefully) consider me thoughtful, and are willing to share their experiences with me.

More, the majority of the people I’m describing, I initially met via cold e-mail. I think e-mail is extraordinary. And most people utilize it extraordinarily poorly. I put a lot of effort into my cold e-mails: research, humor, relevance – and that’s worked. I have deep appreciation for the people who’ve been willing to build a relationship with me based on written text (I’d note them here but I don’t want to embarrass anyone…or flood their inbox). It’s probably representative of the fact I love to write. People who like to sing or be funny or be sardonic or whatever it might be should find an outlet for those qualities to connect with the people they look up to. There’s no one way to “make” a mentor – there’s only being true to yourself.

I think this is more important than ever, especially as both VC and entrepreneurship go through its biggest boom in a decade. I have enormous respect for my teammates and managing directors. And I continue to learn a lot from all of them – in fact, we learn together. But as a startup MicroVC fund ourselves, there is no one on my team with, for example, 20 years of venture experience. Many entrepreneurs – even those with institutional backing – have taken that money from investors who themselves (like me) have been in the industry for less than five years. That’s OK, it’s just a mathematical reality as the industry expands, but its also a situation that demands taking responsibility into your own hands – proactively “making” your own mentorship circle to increase your odds of success. Lots of people talk, but it’s incumbent on each of us to choose who we want to listen to.

I think all of us have some small piece inside us, always fantasizing that some angel will drop out of the sky, help us, believe in us and make us better. But there’s a reason the world doesn’t work that way. Becoming great requires hard work, effort and deep thoughtfulness – if it came easy, it frankly wouldn’t make any sense.

Just Because a Market Lacks [X] Doesn’t Make it Fundamentally Broken

When I first started this blog, the intention was to detail my own path into VC and be a resource for other aspiring investors to learn from. Admittedly I deviate from that regularly to write thought pieces, but after a couple of recent conversations around how to think through addressable market pain points, I thought the following post was in order.

In my mind, there are principally two types of winning bets in VC:

  1. When you are betting on a counterintuitive re-imagination of a consumer or enterprise process/experience. In these cases, you’ve typically observed some new behavior emerging which is completely underserved by existing infrastructure:
  2. When a market is fundamentally broken in a way that incumbents are incapable of servicing without deeply disrupting their own business models.

In reality these two points are inextricably connected (you’re unlikely to find one without the other), but I’ve found one typically holds dominant. The former point – imagining a new structure of the universe – is one of the most exciting elements of the job. But it’s also less frequent. More often, as VCs, we’re examining existing markets looking for dislocation that can be leveraged towards a new, defensible, process.

The struggle with picking winners at the seed stage is that in today’s environment – with the low cost of building product, cheap access to distribution, PR, etc – everyone has traction. Traction is no longer representative of fundamental product/market fit. The number of consumer startups I’m seeing break out to $50k in sales in their first month of existence is staggering.

Nearly two years ago I was losing my mind. Everyone had traction. On demand this, on demand that. My gut told me something was off, everyone was growing 20% month over month – but it didn’t feel sustainable as a broad market index. I saw Brian O’Malley of Accel Partners at a First Growth event in NYC, told him I was struggling, and asked him how he was approaching the space. His nonchalant response: “just because a market doesn’t have a mobile on-demand application doesn’t mean it’s fundamentally broken.” That one line changed my entire framework as an investor.

It is easy in this business to over-diligence companies. Like my years in poker, VC is in many ways a mental sport. You can talk yourself into or out of just about anything. And that’s why – ever since that conversation – I always start my process and end my process** with that one critical insight from Brian: is this market fundamentally broken?

You’re welcome to stop here. Below I list five of my learnings over the years and insights into how I define actual brokenness of an industry. No particular order and there are lots more…but just something to get the conversation started.

Five Insights Into Brokenness:

  1. There are a lot of companies, especially in the consumer internet world, trying to manufacture brands. And I use “manufacture” critically. Brand is paramount – that part is correct. But trying to manufacture a brand into a space that isn’t demanding one is really just gambling.
  2. In marketplace businesses, solving demand side brokenness is more powerful than supply side brokenness unless the supply side is consequently empowered & incentivized to perform customer acquisition for you.
  3. Solving fundamentally broken processes for consumers has outsized benefit in that it has the potential to generate explosive Word of Mouth virality and referrals.
  4. Being fundamentally broken in an enterprise software world can mean a number of different of things. But many founders conflate price savings with brokenness (ie, this software can replace 5 people, yielding savings of $200k). Too few people in the purchasing cycle are prioritizing wage savings – most are focused on communication, functionality, accountability or growth.
  5. I am extremely hesitant about markets whose brokenness is rooted in regulatory mandates – ie, municipalities are now required to spend $X to decrease Y problem by Z% (insert healthcare re-admission, air pollution, energy, whatever). The problem is that these markets are therefore obvious to everyone and you are in many cases playing a budgeting allocation game rather than building a company.

**I should note that before getting this far, any investor should pre-qualify both the people behind the company as well as the size (or conceivable size) of the market. This post assumes both those variables have checked out.

More Than Just a Podcast

I was honored when Harry Stebbings, founder of the 20 Minute VC asked me to be a guest on his show. He’s had a number of my close friends on the show as well as some industry heavyweights such as Brad Feld, Jason Calacanis, David Pakman and others.

The full audio of our interview can be found by clicking here.

But there’s a deeply important lesson behind Harry’s podcast – that you create your own destiny. Harry is 19. And he has the most popular podcast about venture capital in existence.

Between Kellogg and Chicago Booth, I would imagine I have between two and three dozen MBA students reaching out to me every year about how to break into VC. That number doesn’t include several dozen more from various professional positions in Chicago who are interested in VC, etc etc etc. All of them are looking for help – and that is fair – but they are looking at the world traditionally. Very few, if any, are brute forcing their own path.

With nothing more than a Skype account and a few cold e-mails, Harry has over the past year gained access to some of the top venture capitalists and entrepreneurs in the world.  Frankly, I’m jealous.

The podcast started simply enough when Harry recognized there was a massive amount of interest in VC, but no focused podcast less than a hour+ – effectively criminal in an age of more bite sized information. So he launched a product to solve it.

Harry’s story actually inspired me to reach out to some of the VCs I look up to for interviews on my blog (and those will be forthcoming in the next few weeks). This is a karma driven business and no one that I know of is succeeding who wasn’t mentored or given by assistance for no good reason other than pure altruism.

I have absolutely no idea if Harry is a good investor, or a good venture analyst (sorry, just the truth!). But a lot of investing can be taught – it’s access that is prohibitive. Harry is the latest proof point that there are plenty of openings to build a reputation, create relationships, and make a mark in this industry.

Hot Town, Intern in the City

Hot Town, Intern in the City

Late last week, I got asked for advice on how to excel at summer VC internships. As someone who worked as a Spring MBA intern, a summer associate intern, and held a paid, effectively full time internship for another six months – all of which I leveraged three years ago into a FT job – I think I have some credibility when it comes to advice in this realm

In my mind, being a good intern is kind of like being an acoustic solo opening act to a six piece rock band. Everyone leaves the show (or summer) with good vibes & memories – but no one ever thinks much about the opener. If you’re a good summer intern, you’ll learn a bit, make some friends, but little in the way of lasting relationships (and I’ve been a “good” intern many times in college…so I would know). The question every intern needs to ask themselves is: how do I become a great intern?

The challenge with trying to be great as an intern is obvious. You have three months, minimal training, and a light existing network. So if you attempt to punch out of your weight class, it’s hard for anyone to take you seriously – you’re more likely to look outright foolish. Why should you be trusted?

When I was getting into venture, one of my mentors, John Tough, taught me what I consider to be the golden rule of Junior VC: the single greatest asset an experienced VC has is time, and unfortunately, they are mostly (and knowingly) operating on borrowed time. The catch-22 of breaking into venture is that you need to convince a group of people who already have ZERO free time to invest their non-existent free time into training you. It’s a seeming impossibility.

On the first day of my internship back in 2012, I turned to my boss and said “my goal over the next three months is to make your life easier. If I don’t save you time every single day, I’ve failed at my job. That’s what I want you to judge me on.”

Because it became abundantly clear within minutes that my priorities as an intern were genuinely to reduce the burden on the partnership – as opposed to say, just trying to sweet talk execs at fund parties, or try to look cool with entrepreneurs, or whatever – I was increasingly given additional responsibility and my decisions were increasingly respected.

With that of the way, here are my principles for VC internships:

  1. The internship is not about you. It’s about the fund. Every action or decision you make needs to consider: what is my intention here? To benefit myself or benefit the fund? The partnership will recognize that.
  2. Hopefully there will be one partner or senior member that is drawn to you. You will know this because they will either say “X about your background really appealed to me. Why don’t you swing by my office for lunch this week?” or something similar. When you have that opportunity be genuine. There is a beautiful line in a book of Jewish wisdom I study regularly “Ethics of our Fathers” that urges “Make for yourself a mentor/teacher.” It uses the language of “make” rather than “find” specifically because mentorships are a process. Be keenly aware of signs that someone may have an interest in teaching you and latch on to those opportunities.
  3. If you’ve found someone you connect with deeply, request a consistent 15 minute meeting every other week on the calendar. In reality, these meetings get scheduled for 30 minutes anyway, but a 15 minute ask reflects how much you value their time. Where possible, try to have these meetings in the early AM before the day has become too hectic.
  4. VC firms optimize for resourcefulness. You will be asked to review some decks that come in. Don’t shoot from the hip like the majority of people – “I think this will work because X”. Make an accounting of your friends and contacts and where they are in different industries. When something comes in, immediately call your friends to get their feedback on the viability of an idea, or pain point for market participants. Respond with: “I asked a friend who runs an $X business in Y industry about this idea, and she told me that it is/is not a real problem, because:”
  5. When you are included on firm correspondence discussing an investment opportunity and you see a window to provide value in a credible way, do so. For example, both of my in-laws practice medicine in a private practice. Several times during my internship, we looked at HCIT companies selling to small practices. I offered in each case access to my in-laws as diligence. Of course of course other people at the firm also have access to doctors (who doesn’t), but my offer was accepted it reflect my willingness to hustle and be selfless.
  6. Internships are not the time to play politics. Sadly (and I hate this) there are a lot of politics in VC firms. But if you meet people (through friends, parents, or your own outreach) that you think the partners would benefit from meeting, it pays to be selfless. Invite those contacts to the firm office and schedule a meet & greet meeting with your seniors (ideally your mentor). They will appreciate those contacts and your selflessness. Especially in firms where politics (and exclusive relationships) are a regularity, your break from that process will enable you to stand out.
  7. Focus on being a great culture fit. You can never go wrong being positive, happy and optimistic. Most importantly though, you need to be yourself. Find ways to express yourself that are genuine. As most of you know, I love writing. So six months in to my internship, I wrote a reflective piece on all the pitch decks I’d seen. It ended up getting thousands of views and the partnership got great feedback from entrepreneurs and fund LPs who viewed it. That affirmed their decision to have given me increased responsibility and access.
  8. I am torn on the idea of working on a “summer internship project.” On the one hand, I think it’s great to emerge from a summer with a tangible project you can reference for future opportunities. On the other hand, I think it can detract from your overall fund experience and turn you into a mindless, rat-racing researcher as opposed to an integrated member of the fund.  This is one, that imo, you need to feel out. If you do choose to work on a research project, try to ensure its actively relevant to the fund, not busy work. I would even advocate that it become a market map on a fund thesis, where you get the opportunity to engage with each of the companies you find relevant to a firm’s thesis. Entrepreneurs LOVE people (no matter how junior) who obsess over their markets the same way they do and its imperative that you communicate to your senior partner that your presence will be highly value-additive to those discussions.

I hope these eight points are helpful to everyone starting/getting going in a VC internship this summer. It is an amazing industry, but one that is extraordinarily competitive and demands heavy focus to break through the noise and become an outlier. I’m hopeful these nine tools will point you on the right path. Hit the comments if you have other specific questions.

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