How to Break into Startup Investing
Building Personal Moats as a Startup Investor
|Oct 26, 2020||19|
In my response to my piece on personal moats a couple people asked how they should think about it in context of becoming a venture capitalist, so I’ll explore that in this post.
The first thing I’d say is confirm that you want to be a VC in the first place. You don’t need to be a full-time VC to be a startup investor. Many people become VCs and then realize that they could get most of the benefits just by angel or scout investing. If you can, consider writing a tiny angel check into a startup to get a taste of the experience before going all-in. Especially if it’s your friend.
My short-hand, oversimplified framework is as follows:
If you want to create a massive impact and control your destiny and focus on one thing intensely for many years, then start (or join) a company. If you’re more intellectual than operational, or enjoy more breadth than getting into the weeds, than maybe VC might be for you.
Contrary to popular belief, you don’t have to start a company if you want to eventually be a VC. To be sure, being a successful founder provides the most optionality, but if you don’t want to be a founder, you'll learn more more about VC by...being a VC.
Similarly, you don’t need to be a VC if you want to start a company, You'll learn the most about starting a company by...starting a company.
After you’ve confirmed you want to be a full-time venture capitalist, then consider which kind you might like to be. Michael Seibel at YC is different from Kanyi Maqubela at Kindred who’s different from Sarah Tavel at Benchmark who’s different from Jack Abraham at Atomic
Don’t read too much into these examples, as they are more nuanced than I’m describing, but let’s just use them as archetypes. YC invests in 400 companies a year, Kindred in 10-20 seed rounds, Benchmark in 3-5 Series A, and Atomic incubates a few companies a year. Each investor and firm has a different style that plays into not only how they source and evaluate investments, but how they support them post-investment as well.
Benchmark / Bessemer — Lead a few investments each year at Series A/B
First Round / Kindred — Lead a few Seed rounds each year
Atomic — Incubate companies in-house
YC / Village Global — High-volume investor that builds a platform to help entrepreneurs at scale
To determine which archetype of VC you might want to be, one question to ask is how much do you enjoy the operating element of building a firm (e.g. hiring, fundraising, platform) vs the actual craft of investing and sitting on boards, etc. If it’s mostly the former, then the YC or Village Global archetype makes sense. If it’s the latter, then a firm like Bessemer or Benchmark makes sense
Another question is at what stage do you want to invest. If you tend to be more people driven than market driven, or enjoy working pre-traction than post-traction, then VG/Kindred archetype would make more sense than the Benchmark archetype.
Another question is how many founders do you want to work with at any given time. If you prefer to work with a couple dozen or more founders at a time, then perhaps seed would be best. If you prefer to go all in on just a handful of companies, then perhaps leading series A or B would be best.
The last question to ask is do you want to join or start a firm. Most people don’t have the luxury of starting a firm, but some people are able to get at least small firms off the ground. If you enjoy autonomy and founding is important to you, but are willing to take a (at least short-term) pay cut and do the work—i.e. fundraise, build the firm—or have partners that will, you may enjoy this path. But if you prefer to focus on investing without worrying about overhead, and you want to operate at scale now with some of the best in the world, then joining might be a better path.
Joining a Firm
When it comes to joining a firm, you ideally want to find one that, in addition to educating you, allows you to either:
Have a defined path to writing checks
Share credit on deals you work on
Once you know what type of firm you want to join (i.e. what stage), it becomes increasingly important to position yourself as someone who could add value to their current (and future) deals. No matter the type of firm, partners will ask themselves, “Will this person help me invest in companies in which I would not have otherwise invested?” If the answer is yes, you'll be the first call when they have a job opening; if not, keep working until you are.
Build a personal moat — a unique & compounding competitive advantage specific to you. Basically, you want to see yourself as having an asset (or “portfolio” of assets) that make you uniquely valuable — not only compared to the thousands of other smart, connected, well-branded people trying to break into VC, but also to other existing angels/VCs. Again, Why will you see great deals?
To be world class, it’s not enough to just be kind, thoughtful, proactive, positive-sum, and all the other personality traits that make a great investor. Those traits are necessary but not sufficient to truly separate oneself from the pack. You need some asset or unfair advantage for why people come to you. Here are some examples of what assets could look like.
Maybe you have an asset because you own a key network:
You worked at Stripe or Palantir and run their alumni group (Company)
You went to MIT and ran their on-campus venture fund (College)
You ran Waterloo’s startup community and you know all the great projects coming out of the region (Location)
You host the signature AR/VR conference (Vertical Network)
You run a community like Interact with the top young technologists (Horizontal Network)
You’re the best writer in, say, crypto (or more specifically, privacy coins) (Legible Expertise)
Or you have some unfair advantage:
You worked at Product Hunt or in journalism (and, thus, can help startups with distribution and PR)
You host "The 20 Minute VC" (and, thus, can help startups raise money)
You run a podcast called "The 20 Minute Blockchain Engineer" (and, thus, can help startups recruit top talent)
If you’re a up-and-coming VC trying to build a name for yourself I think there’s a big opportunity in niche podcasting. Make the go-to-podcast for healthcare, VR, DTC—pick any topic. It’ll build your network in that space & you’ll be the first person people think of for deals in that vertical.
Similarly, some smart person looking to break into venture should create a Stratechery for early stage VC. Take the fundraising announcements and explain & analyze the broader trends behind them.
The most important thing is that you do the work upfront — send investors good deals; send their portfolio companies customers and/or talent; invite partners on your podcast, event, etc. Whatever you do, don't just talk the talk, walk the walk.
All that said, of course, these things are hard! (but then again, no one said they'd be easy!)
How do you get access to customers in the first place? Host a VP of Sales event once a quarter, or an event for another core buying audience. Talent? Start a job board site for engineers, or a regular happy hour for top designers. Deal flow? Have some asset that makes founders come to you — an event series, a valuable network, or unique domain expertise, and then send deals to others. The more you send good deals the more you’ll receive.
To quote Rob Go from Nextview: “it’s much less about 'how' to find a VC job, but more about 'being' the kind of person who can get a VC job.”
Part of getting a job in venture capital is less about “who you know” and more about “who you’ve helped.” Start creating a personal portfolio of projects that allow you to help others — specifically, if these projects show you can get into deals, you may be well on your way to breaking into VC. The key is to be proactive and creative — Turner Novak is a prime example of this with his fantasy VC portfolio, and I’m sure there are many others out there who have done similar things in the realm of supporting companies. Turner’s fantasy portfolio got him a job at Gelt where he now runs their entire venture practice; he did the job without asking, and now he’s running the ship.
Breaking in Without Joining a Firm
You may be thinking, "Hold up. I don't want to be a junior investor at a big firm. I'll probably have to join another startup, or start my own company, before becoming a partner many years later, and I want to invest now. What do I do?"
This may be controversial to people who’ve paid their dues as junior VCs without check-writing, but I think the answer is to find a way to write checks as early as possible (into good companies!). To be sure, if you have a non-check writing job at an amazing venture firm the learning from being in the room might be worth the tradeoff.
Of course, it's not enough to do deals; you want to write the check into a winning company, at a stage that proves you exercised investment judgment. If you invest in a bunch of duds, you won’t prove much. Further, why you invest is almost as important as what you invest in. What do you see about the market, people, and team that others don’t see?
Being a “good investor” (to many founders) is about who you’ve invested in and what they say about you. You can say all you want about other attributes (and they’re all true!) but at the end of the day, your track record is your most legible currency as a VC. Further, since it takes 7-10 years after your first check to build a track record, it's obvious why there's a sense of urgency — the sooner you start, the sooner you're 7 years away from being potentially considered a "great investor."
It's not just about the ego boost. VC is reflexive — an investor is considered “great” because they have a big win. This creates a flywheel effect — once you're branded as a great VC, more impressive deals come your way, thus increasing the chances of having another big win.
Success begets success. It’s somewhat tautological.
In a field with extra-long feedback loops, track record reigns supreme as the success measure.
Of course, there are more sophisticated ways to evaluate investors: Do other people like them? Do they have good decision making processes? Etc. But these are hard to measure accurately, and, thus, hard to prove.
So, how do you start writing checks sooner to start the flywheel earlier? If you don’t want to join a fund, your options are:
Raise your own fund
Be a scout
Side note: if you want to learn to angel invest, you should apply for our angel fellowship that On Deck runs in conjunction with Village Global.
For those unfamiliar with the term, a scout is someone to which a venture firm gives money to invest on their behalf. The firm puts up the money, the scout makes the investment, and the scout typically gets a small cut of the profits. Sequoia popularized this early on, but there have been many iterations since. A firm might do this to extend their network, get better deal flow, test out a potential GPs, and more. Some firms, like Village Global, think a network-based investing model can be great for returns, and thus, set up their fund to reflect that. After all, Sequoia’s early scout fund had Uber, Thumbtack, and Stripe, among others.
Scouts aren’t as common as people think — I assume there’s less than 500 scouts in existence. But to get chosen as a scout, the same rules apply — you must have some unfair advantage as it relates to deal flow.
You can then leverage this unfair advantage to build strong relationships with VC firms. Send them deals they end up investing in; then ask if you can be a scout so you can send them more of the same. You may be surprised — they may say yes, even if it's only to stop you from sending deals to a competing firm!
We compare startup investing to poker a lot, but I think that’s a misleading analogy for VC, because it implies an equally distributed deck. In reality, a great firm gets pocket aces every time, and a bad firm always gets 4,2. What's hard isn't knowing how to play pocket aces, it’s building the machine that repeatedly gets pocket aces to begin with. It’s building the machine (or personal moat) that repeatedly enables you to see and get into the best deals.
That moat could be a reputation, a network, a platform—but it has to be materially differentiated from other moats.
I liked this analogy from Dan McMurtrie: “When you’re learning how to be an investor they kinda teach you how to box. And then you get into the ring....the other guy has a gun, and you think what the hell…” That’s the power of a personal moat.
When I first started angel investing, I was able to see who had moats and who didn’t. The best investors got the best deals sent to them early, and even when they saw a deal late, the founder would always make room for them. I realized I needed a clear reason why I would see deals ahead of these investors or have an edge to getting in when rounds were competitive.
At rapt.fm I learned about the positive sum mindset: Offering people value even when there’s nothing to gain in return. But then I also learned it wasn't enough to have the mindset of positive sum, you actually had to have something to offer.
I knew I’d never outmatch people who had been doing it for decades, so I needed to build products and services that would enable me to get in front of founders first and offer value that would secure my allocation.
Joining Product Hunt opened my eyes to what it meant to have an unfair advantage in startup investing. Product Hunt had this amazing power to give startups customers & distribution — the lifeblood of any company. It was also a place where we saw companies before they launched, so we had proprietary deal flow that helped get us into deals others couldn't — simply because we had a tangible value-add in distribution.
I wanted to build other unfair advantages too. If customer distribution is a lifeblood of a company, another lifeblood is hiring.
So I created On Deck, which initially was just a community for people looking to start or join their next company. With On Deck, I’d see companies before they were formed, and then also have an asset that would help me get into deals (i.e On Deck helping founders find co-founders or first hires).
Building off the community driven approach to “value add”, I then teamed up with Anne Dwane and Ben Casnocha to start Village Global, a network driven venture fund that amplified the network I could bring to support a company.
So much of the game in my opinion is being able to help founders before they get off the ground such that when they raise money you are their first call.
It’s about having a clear answer to these questions:
Why is my capital not a commodity?
Why will I see deals or get into deals that others won’t?
What’s my one sentence value prop that is easily understood in the market?
What’s my asset or structural advantage that allows me to add value beyond just my time?
In summary: People use track record to determine the “good investors.” Why does this matter? “Good investors” get better deal flow. To build a track record, write checks early into good companies and add value to the founder such that they will recommend you to others. To write checks, join a firm that lets you do so, angel invest, or become a scout.
Of course, there’s no one-size-fits-all approach, and, as with anything else, there’s a ton of luck involved.
Read of the week: Identity by Francis Fukayama
Watch of the week: My friends at Krazam.tv with a hilarious outtakes video. They worked with me on rapt.fm back in the day. Proud to say I knew them when…
Until next week,