Some reflections on turning 40

Last week, I celebrated my 40th birthday with my family (which is pretty amusing since my birthday was last November).

When I think back about the last few decades, a few stories from my professional life come to mind that I thought I would share here.

1) Serendipity and luck trump everything.

Certainly hard work and skills are important, but luck and being at the right place at the right time is so critical.

I wasn’t born into a family of entrepreneurs or even tech. I got into startups, because of a couple of key events that happened to me. One event that got me into startups happened in 1996 growing up in the SF Bay Area during my freshman year of high school. My best friend Jennifer told me one day that her cousin Tony was building an internet startup. And she asked me if I wanted to help him and their startup over winter break. I didn’t know what a startup was, but I also had nothing major going on during winter break. So, we took the Caltrain up to San Francisco to “help” Tony. When we showed up, the place was honestly a bit of a mess and chaotic. But it was exciting! Tony and his friends were working together on all kinds of projects. They didn’t have to dress up in “grownup-work-clothing”. And they could eat all the pizza they wanted. It was the dream.

I wasn’t any help to their company. But I knew from that day on, *that* was what I wanted to do when I grew up. I didn’t even know how they made money or that there was even money to be made. But, even from that early day, it was inspiring to see a group of friends come together to build something bigger than themselves. A couple years later that company LinkExchange was acquired by Microsoft for a reported ~$200m. Tony — who was Tony Hsieh — would go on to become an active angel investor in many startups and become CEO of Zappos. And while I didn’t know it that day, he would also later have a bigger impact on my life as well as my startup LaunchBit and Hustle Fund, as I’ve written about before here. I’m incredibly grateful for the path he set me on, and that was entirely serendipitous.

2) Failure leads to success.

One of the things I’ve noticed is that most successful people have had *a lot* of failures as well. But people only talk about the successes.

For me, failure and success are oddly connected. When I was nearing the end of college, I thought I wanted to go to business school, and I applied to a few business schools in the fall of my senior year. Throughout this process, I had wanted to visit a couple of business schools I was applying to in Boston, but my money was tight, and I didn’t want to pay for a plane ticket to Boston from California.

Coincidentally, around that time, I saw an ad for a contest, in which the prize was a free trip to Boston from anywhere in the US. I immediately entered the contest on a whim, and amazingly, I won!

The contest was sponsored by the DISCO career forum, which was/is one of the largest job fairs for jobs in Japan. And oddly enough, it was and still is held in Boston every year. In fact, at the job fair, I met tons of people from Japan who flew to Boston just to apply for jobs back home!

I didn’t care about the job fair. I was merely excited to fly to Boston, see my friends, and visit a couple of schools for a couple of days. But, in order to get my reimbursement for my plane ticket, I had to attend the DISCO career forum for 2 days. While there, I met a ton of companies and even interviewed on the spot for various jobs. Although I wasn’t actually looking for a job, by the end of the weekend, I got a job offer!

I soon learned that I didn’t get accepted into any business school, but at this point, I was very excited about the job offer I received and accepted it.

About a year later, I packed my bags and moved to Tokyo. But, a month into it, I was told that I couldn’t stay in that role, because my Japanese was not good enough. Wow, was I getting fired? After just a month into my first job?? That night, I sobbed my eyes out.

To their credit, my former employer was extremely helpful in this situation. They gave me a few choices and told me that I could still stay at the company for about a year if I moved into marketing (so that I wouldn’t have to talk with customers with my poor Japanese 🙂 ). But they didn’t have budget to pay for me much beyond that, so I had to find something else to do.

I decided to re-apply to business school. But this time, I only had time to apply to one school – so I chose to re-apply to MIT which was the school I liked best after visiting. And, fortunately, the entire application was the same except for one question: “What have you done in the last year?” a topic on which I had a lot to say from my experiences in working in Japan. A mere few weeks later, I received an email saying there was a decision ready. I had not even received an opportunity interview this time, so I was pretty certain it was a fast rejection, but it turns out, I had gotten in!

Looking back, failure and success were so well coupled together. I failed to get into business school so I got a job. I failed to keep the job, so I went to business school.

3) Frugality and portfolio construction are keys to wealth. Wealth is freedom. 

I am a huge fan of the FIRE (Financial Independence, Retire Early) movement and was an avid reader of Mr. Money Mustache. I think when most people aspire to become wealthy, they think they need to be super successful with building a hit company or something like that so that they can buy all the stuff they want.

In truth, when you get there, many people realize that the stuff isn’t interesting. Wealth is about the ability to be free. Free from ever having to work at a job or on a project you don’t like again. Free from feeling pressure to work with bad people. Free to work on the things you do actually like or find worthwhile. Free to spend your time however you like. 

And it actually doesn’t take a life-changing event to become wealthy. Even if you never have a hit company, you can still become wealthy — with frugality and strategic investing. 

In my 20s, I quit my job to start a company. My husband was a post-doc (read: paid pretty much nothing). I took odd and end gigs to make ends meet and scrimped like crazy. This was pre-gig-economy, so random jobs I did included being followed around by a researcher from Xerox Parc, categorizing whiskeys, and critiquing MBA resumes for international students. I remember on the rare occasion we would go out to eat, I would get very nervous if we exceeded spending $25 in total. 

In looking back on that, most people – especially in my peer group of tech friends – think about $25 as “Oh, it’s just $25.” I have many friends who believe that saving $6 here and there on SBUX lattes and avocado toast is meaningless. It’s just $6. And as a millennial, I do believe there are systemic issues with our financial system and incentives, I also do believe that investing the equivalent of one latte a day can make you a millionaire.

The right way to think about spending decisions is in its compounded value. You take $6 a day and throw on a 7% annual interest rate in the public stock market or 12% annual rate or higher(!) in the private markets. That $6 daily latte is actually worth over $350k+ in your 40s if you take the money and invest it. Just from *investing* your latte money daily, your average person who invests in standard index funds available to everyone and lives an average lifespan *will become a millionaire*.

That’s pretty remarkable. 

But I think the topic of portfolio construction for investments is incredibly confusing. And frankly speaking, I think most people find the topic boring and honestly scary – you could lose all your money! Loss aversion is probably one of the biggest roadblocks to more people investing – even in index funds.

I, too, have thought for many years that investing was scary. But I read somewhere when I was very young that putting your money in a savings account actually *loses* you money due to inflation (which today stands at 8%+ annually!). And, I have been investing in index funds ever since my first job in high school. In other words, I was motivated to invest by the idea that I was losing money by merely saving it!

Now at 40, and having seen even some of the meager earnings I had in my teens compound, I still believe index funds are a fantastic place to put your money. You can passively compound and grow it reliably, because it’s diversified and rides on the economic growth of the world.

But, the one thing I do regret about my investment choices was not investing earlier in *private markets*. I didn’t know anything about investing in startups until the last few years. In fact, for many years, the thought had never even crossed my mind to become an angel investor. I always thought you needed to be super loaded to do that.

And then when I was in my 30s, one of my entrepreneur-friends, who at the time had not yet had an exit, told me that he had been angel-investing into friends’ startups with $1k each. This surprised me. How could you invest $1k checks into startups? Why would anyone take that kind of money? I also didn’t understand how he was accredited to be able to do this (I have since learned that his own startup was valued above a certain amount, and his net worth on paper made him accredited). The world of startup investing was utterly unfamiliar to me even though I was a founder myself at the time!

And, it was very inaccessible — there was no information online anywhere on how to get into any of this. Friends learned from friends how to angel invest. I had wished there were an accessible way to get into small check startup investing once I had some level of a portfolio with my index fund investing. I wanted to be able to add some additional risk/higher reward to my portfolio in an educated and balanced way.

And, this is why my colleague Brian Nichols started a program called Angel Squad at Hustle Fund – to empower small angel investors to learn, invest alongside us for even as small as $1k checks, and network with each other as they start and further their angel investing endeavors. We now have almost 1000 angel investors in this community and the next cohort beings soon if you want to apply to join Angel Squad.

4) Family balance is challenging. Take all the help you can get. 

Being an entrepreneur is about doing a lot of sprints while running a marathon. I think the only way I’ve made things work is to rely a lot on help and to not attempt or even care about perfection.

How my child perceives me. I would love a gravity-defying computer like that.

Throughout the pandemic, things were tough for just about everyone. I remember this one day that summed up my life: my husband was working at his lab. I had tons of back-to-back meetings as sh*t hit the fan with everything. My older child who didn’t know how to use a computer needed help logging on to an online class. And my younger one wasn’t quite potty trained and had just pooped on the floor and then stepped in it and ran around from room to room. All at the same time. 

After that happened, my parents who live a few miles away from me, so graciously offered to take the kids to live with them for the *next several months*. That was huge. And I’m incredibly grateful. I don’t know how we would’ve pulled through without that help.

I recently listened to Indra Nooyi’s memoir My Life in Full: Work, Family, and Our Future about how her career progressed through Pepsi, and the multi-generational help she received from family resonated with me. As much as we’ve progressed and moved forward with society, there’s still a lot of burdens or asks that fall on the mom. Don’t get me wrong, I think my husband is a phenomenal dad, and many of my friends are amazing dads as well. Many dads do so much for their kids and childcare these days.

But society still puts a lot of little burdens on moms in unsuspecting ways. And, it’s the little things that add up. For example, during the pandemic, some of the moms in my kid’s class sent out emails asking folks to submit a page for the school yearbook. Thinking those were mass emails, I just completely ignored them. Eventually, those emails turned into a personal one sent directly to me.

You can bet my husband never received those emails even though he is on the parent list and certainly didn’t receive the direct personal one. I politely responded that unfortunately I didn’t have the bandwidth to do a class yearbook page for my first grader. (I mean…who does a yearbook page for first grade??) You might think, “well, it’s just someone asking you to do a yearbook page – sheesh. No biggie.” But it’s all the hundreds of little requests that happen everyday that compound and particularly on moms.

My child created this sign for my office

As it turned out, the mother who emailed me ended up taking on the task to do the yearbook page *herself* for my first grader. I never saw the yearbook page, because I didn’t order the school yearbook (see #3 on frugality). (Also, did anything interesting even happen during the remote school year?)  

Family balance continues to be a struggle, and honestly, I think this is an area that is still being pioneered. After years of getting unhelpful advice from people who have never been in a similar situation before, I think I’ve learned to just embrace the situation. You do the best you can. And that’s ok. Say yes to help. It will work out.

5) Adventures spark inspiration. Routine makes you better. There’s a balance.

Because I grew up the SF Bay Area my whole life, after college graduation, I decided I would go far far away. Even though I knew I wanted to start a company someday, I first wanted to see the world (on someone else’s dime of course — see point #3 on frugality).

So, I left the Bay Area in 2004. I interned at CERN in Switzerland. I worked in Japan in the middle of nowhere (in a town called Suwa in the Nagano prefecture) and also in downtown Tokyo (see point #2 on basically getting fired). I interned in India at Infosys. I briefly worked on a project in New Zealand. I did everything I could to not come back to the Bay Area (until I had my first kid). 

Although none of these trips were for the purpose of entrepreneurship or starting a business, oddly enough, I ended up meeting so many people who would end up becoming successful entrepreneurs. For example, in my intern group in India, one person noticed that a lot of food was served on leaves there. He later started a company in the US to make high end disposable plates made out of leaves, and that company is doing really well. 

I often hear that one of the best ways to figure out how to start a company is by working at other startups or by trying lots of different business ideas. That certainly is one path. But, sometimes, I think the most off-the-beaten path ideas — the ones with most opportunity — are where others are not looking. And that means also exploring or being an adventurer in paths that others are not taking. 

That could mean pursuing an unusual career path. Or living somewhere others are not.

I have been investing in global companies for the past several years now, and while I’m no expert in any and all problems, many of the problems that international entrepreneurs describe to me — at least on some level — are familiar because of my time abroad.

At the same time, running around from place to place and going from one new project to another has its limits. Entrepreneurial skills are honed by doing the same boring thing day in and day out. Just like practicing a sport or a musical instrument, it’s the repetitive mundane that makes you get better. And of course your role changes as your company grows — going from individual contributor to manager to CEO of a large company. But, working on the same problem day in and day out is mundane to many people. And to grow something big is work across a decade or more by doing the same mundane thing better and better everyday.

My thinking about entrepreneurship changed after my company LaunchBit was acquired by BuySellAds in 2014. The CEO and co-founder Todd Garland bootstrapped BuySellAds, and they have quietly become a behemoth. They have grown their ad network tremendously, and they answer to no one. Approaching 15 years, they just continue to hone their supply side and demand side, and that’s how you grow — there are no shortcuts to honing your skills year in and year out. 

Most people, including my younger self, don’t have the discipline to do that. But after many years of doing the same thing over and over, eventually you get really good, and a business does well enough to become really exciting. And BuySellAds has been able to push into new initiatives while keeping their cash cow afloat. They’ve gone into other areas beyond ads, building out a portfolio of other businesses, working with great people. This is the kind of stuff you can do when you own your own destiny and don’t need to answer to investors. And it’s the kind of thing you can do when you’ve got a flywheel going. I’m convinced Todd will be one of the first bootstrapped billionaires — AND most people probably won’t ever know it. 

I think too many entrepreneurs, including my younger myself, are enamored with getting acquired, because they don’t have the patience and the fortitude to do the same thing day in and day out. (And as a VC, of course, I like exits too). But, as trite as this may sound — my lesson from BuySellAds is that the journey is the reward. Getting better at honing your skills everyday is the goal. Being able to do cool stuff with cool people, work on interesting problems, and make money *is* the dream. 

I probably have about 30 — if I’m lucky 40 — good working years left. And, Hustle Fund is my last job. Our mission at Hustle Fund is to democratize wealth via startups by increasing capital, knowledge, and networks in startup ecosystems everywhere. It’s a company I won’t ever sell, because it’s what I want to work on forever. And though not everyday is easy in building Hustle Fund, over the years, I’ve learned to thoroughly enjoy the entrepreneurial journey of embracing all the ups and downs. It’s a joy and a privilege to be able to work on this problem with an amazing team. 

These are just a handful of learnings I’ve had over the last couple of decades. I look forward to learning so much more between now and age 50. 

To SAFE or Not to SAFE?

VCs debate quite a bit about whether they like The YC SAFE or not. (Spoiler: Most do not…) We’ve done a lot of investments on SAFEs as well as on notes and in equity rounds, so I thought I’d outline pretty openly the pros and the cons of raising money on a SAFE.

First off, what is a SAFE?  

A SAFE is a convertible security that was developed and evangelized by YCombinator.  (500 Startups also has a convertible security called the KISS).  The convertible security concept, in itself, is an interesting innovation.  In essence, the convertible security is a placeholder for equity without the cost of both time and money doing an equity deal.  For a more detailed primer on convertible securities and the differences between those and convertible notes and equity, read my post here. (A lot of people, especially investors, confuse convertible notes and convertible securities but they are actually quite different! One is debt and the other is a placeholder for equity)

PROs for using a SAFE:

  • Your legal costs will be zero or low because it’s a template
  • There is no minimum threshold to raise before a deal goes through; investors simply sign and wire
  • Investors receive equity when an equity round happens; if a company goes through a liquidity event before an equity conversion happens, you’ll convert to equity and receive your proportional share
  • The new SAFE is a post-money SAFE, which is a BIG deal

The last bullet deserves a conversation in itself.

The post-money SAFE is easier math to calculate than the old pre-money SAFE

Previously, there was a lot of confusion before about how much equity an investor really owned.  The old SAFE was a pre-money SAFE — meaning your equity ownership was affected by how much money was raised on other SAFEs.  When companies raised lots of money at different caps on the pre-money SAFE, the math got to be pretty confusing for many people — both founders and investors.  No one really understood how much equity they owned. I also saw a lot of math mistakes in various deals that we were in that converted these SAFEs to equity. Investors were upset because they thought they owned a certain percentage of a company but then actually didn’t.  Founders didn’t understand how much of their company they had company they had sold.  This is why there are so many articles about how SAFEs are not SAFE.  The biggest pushback against the SAFE is in response to the old pre-money SAFE not the new post-money SAFE — namely, that no one knows how much equity they own.

With the new post-money SAFE, it’s quite easy for everyone to figure out how much equity has been sold.


Photo credit: Giphy

How to compute your ownership with the new post-money SAFE

Let’s say that we invest $30k on a post-money SAFE with a $3m.  We own $30k (how much we invested) / $3m (the post-money valuation) = 1% of the company.  That’s it.  When we convert this SAFE in the first equity round, we will own 1% of the company.  It doesn’t matter who else is investing and at what price or anything.

This is a lot easier for people — both investors and founders — to understand.

Now let’s say the company raises another tranche of money on a post-money SAFE with $5m cap.  Let’s say we put in $50k now.  We own with this tranche: $50k / $5m = 1% of the company.

Now when both of these SAFEs convert, they will convert at the same time.  So we now own 1% + 1% = 2% of the company upon conversion.

One update and caveat (6/7/2019): Thank you to Seth Bannon of — “The new post-money SAFEs get diluted by any options pool created for the equity round (the old SAFEs did not) so an investor’s actual ownership will likely be ~10% less than this example.”

Continuing on with the other PROs…

SAFEs enable small investments

For smaller investors (such as ourselves), there’s a cost to doing a deal (mostly legal).  So, with a SAFE, this makes our costs virtually nothing.  This means that with a SAFE, as a founder, you can bring in small investment checks here and there a lot more easily, and you don’t even need a lead.

The reality is that most companies will not be able to raise a seed round with an institutional lead, but there are many more startups that will go on to do incredibly well and should be able to be backed.  I like that SAFEs democratize the startup ecosystem and make funding more accessible beyond the 100 or so seed funds that write large checks. 

What are the CONs?

These are the biggest CONs that I hear about the SAFE:

  • People don’t know how much of a company they own (addressed above)
  • Investors modify the SAFE
  • QSBS tax exemption doesn’t apply to SAFEs
  • SAFE holders don’t receive dividends

Another pushback that I often hear about the SAFE is that a lot of investors try to modify it to create weird new SAFEs.  I encourage investors to please please please not do that.  Templatizing docs, in general, is a good thing — it reduces time and legal fees to do a deal, and if you want modifications, please use a side letter.  The SAFE is meant to remain a lawyer-free template.  Templates keep the expenses down for smaller investors who cannot afford high legal fees.  Reviewing a side letter is a lot easier / faster / cheaper than reviewing a modified SAFE.

From our experience, the biggest downside as a very early investor is that QSBS tax exemption doesn’t apply to SAFEs. This is a much longer blog post, but the QSBS tax exemption was enacted in the US to encourage early stage investment.  If you hold private company stock for more than 5 years and there are other criteria met by that startup, any gains from a sale of that stock after the 5 years is tax exempt. This is amazing!  However, if you are a SAFE holder for 2 years and then you convert to equity and then the company sells 4 years later, you do not reap those benefits even though you made the investment 6 years ago.

One last corner case of being a SAFE holder is that even though you will convert to equity, if a company doesn’t raise more money nor has a liquidity event and then starts printing money and issuing dividends to shareholders, you as a SAFE holder do not get those dividends. This is a possible situation (though rare) – have never come across it myself personally.

SAFEs avoid dilution

There’s one last interesting tidbit about SAFEs – I couldn’t decide whether this is a pro or a con. I’m seeing money raised on SAFEs at the pre-seed, seed, and post-seed levels.  Let’s go back to that prior example where we invested in a company twice at two different caps on a SAFE.

Now let’s say that we invested those same amounts on two separate equity rounds at the exact same prices.  The interesting thing is that when we invest in two separate equity rounds, our first check got diluted down…  But when we invested both checks on SAFEs, we did not get diluted down, because both SAFEs converted simultaneously into the first equity round.

As we see multiple tranches of seed happen more and more, investors who write checks on a SAFE will avoid some dilution than if they were to invest in the equivalent equity rounds.

And for founders, this characteristic of the post-money SAFE is a double-edged sword.  On one hand, the post-money SAFE is great because it’s easier to figure out how much of the company a founder has sold.  On the other hand, ultimately, its founders who take more dilution on this new SAFE than on the equivalent equity rounds.  However, I think if everyone is aware of how this conversion happens, then this characteristic should just get priced into the initial cap of the SAFE.

Final thoughts

All-in-all, on the net, we, as a small fund, like the SAFE, because being able to do small deals as a small fund or an angel enables more startups to get funded. I can understand why larger funds would prefer to do large equity rounds – the reality is that often it’s the smaller investors who bubble up those deals before the large funds end up funding some of them.  And empowering smaller investors is a good thing for the ecosystem, because more startups can then have a shot at the big stage.

Featured photo courtesy of Pexels


Why I don’t (usually) meet startups in person

The other day, I tweeted.

Screen Shot 2019-03-07 at 2.32.26 PM

“Contrarian perspective here – it’s ok to *not* meet a founder in person before deciding to invest.”

This set off a tweet firestorm — mostly with people telling me in some form or fashion that I was wrong. (Side note: what I love about the VC industry is that people tend to have incredibly strong opinions based on limited or no data 🙂 )


Image source: Giphy

It’s interesting — at this point, I’ve been investing in early stage startups for almost 5 years.  And, I still have a lot to learn. But I’ve also personally interviewed 1000+ early stage startup teams.

Most of these teams in person.

And after looking at all this data about interviewing, I believe that it actually doesn’t really matter *for me* whether I interview teams in-person or remotely. Let’s dissect this a bit:

First, why should you interview startup teams in person?

1) I think cultural and historical business norms would say that you should always try to meet people in person and try to build rapport in person to win a deal.

While I don’t think anyone has great proof on this, intuitively, I believe this is true. What better way to win a deal than to fly to a founder and just show up and say, “Hey, I want to invest”.

So for investors playing in highly competitive spaces, this makes a ton of sense. E.g. investors going after a hot series B deal. Or for investors chasing after founders who came from Facebook and MIT who are building the next scooter company that utilizes AI.  Building rapport is really important to winning hot deals.

For me, most of my deals are not hot when I invest. Hah. Often these companies go on to be hot later. But since I’m first check into companies when they basically have nothing, usually it’s just me and the founder’s mom who are investing. Writing the check is in itself the rapport-building activity.

2) You can assess founders better in person.

I also believe you can assess founders better when speaking with them in person. You can detect when there is co-founder tension / drama / something weird. You can detect when a founder is stretching the truth. All kinds of stuff.

I know this because I’m a super blunt / direct person. And, I’ve often called out things to founders directly. For example, there have been many teams over the years where I’ve noticed tension in a meeting between the co-founders. I’ve often pulled founders aside afterwards and mentioned my observations as such.  e.g. “Hey, it seems like there’s some weird tension between you — are you having a lot of miscommunication?”  And every single time, founders have broken down and admitted that they’ve been having some problems.  You can definitely detect co-founder issues in an in-person meeting.

So given these huge benefits, why wouldn’t you meet a team in person?  A bunch of reasons…

1) Unconscious biases.

It’s amazing how a team that is great at pitching can really “fool” you. There have been so many meetings I’ve taken over the years where you walk away from the meeting feeling really pumped and believing that the founders are amazing. And you think, “These are great founders!”

And then, I look back at my notes 24 hours later and re-read everything they’ve done or not done in the last few months, and you think, “Oh, this just sounds ok – they’ve only sorta achieved some things.”

Charismatic people can really fool you. Having charisma is a great trait, just in general.  But, it can mask actual execution.

Moreover, charisma is cultural. What we find inspiring in a leader in the US is very different from what other people in other places of the world find inspiring. So, we have unconscious biases around what makes a charismatic leader. Extroverts, for example, in the US have a huge advantage. We generally think of extroverts as highly charismatic people. But extroverts are not actually any better leaders than introverts. There are plenty of examples of successful introverts who manage to inspired large groups of people towards a common goal. So we let our unconscious biases get in the way in assessing things like leadership because of the way our culture is set up.

One of my learnings over the years in venture is that it’s really important – as much as possible – to be objective.  I try to assess what a team has actually achieved. Or what they are actually doing. But very often, meeting people in person detracts from assessing this, because some founders are much better at selling the dream and others are much worse.

There’s a well known top female VC who works at a very well known VC fund, and she was telling me a few years ago that one day her partnership heard 2 pitches. One of the pitches was by a woman who matter-of-factly just talked about numbers and growth and how she could build a big company. Another pitch was by a man who sold the dream and hadn’t done much of anything. After both meetings, the rest of her partnership talked about how they could really relate and build rapport with the male founder who was quite the visionary. This top female VC, however, realized that, although she was more excited about the male founder’s pitch, when she objectively thought about what he had accomplished, she realized it wasn’t much.  And that the female founder had knocked it out of the park although her storytelling wasn’t as amazing.  This story is a true story and this happens all the time in venture.

In the venture community today, we reward “visionaries” much more than executors. And a big reason for this is that we make investment decisions based on pitches rather than on execution (aka working) in our decision-making.  This is a big problem and this is precisely what I want to change at Hustle Fund (though it takes baby steps).

The last piece about unconscious biases is that sometimes what we see in-person scares away traditional VCs.  Such as pregnant women. Being a pregnant woman and pitching investors is NOT a recipe for success to raise money.  Although there are plenty of successful female CEOs who have children while running their respective startups, it’s still not a positive sign to most VCs.  This is a shame and something that is only noticeable / an issue when pitching in person.

2) Meeting teams in person limits your deal flow.

At the earliest stages, it’s important to see a lot of dealflow.  If you are only doing meetings in person, it means that:

  • Companies can only be located in your geography
  • You need to spend a lot of money and time to fly to other places to see companies
  • You need to spend a lot of money to fly companies to see you.

If you’re a series B firm, all 3 of these can be fine limitations. You presumably have enough management fees to spend money on travel, and presumably, you don’t need to be seeing tons of companies in order to do great deals. But if you are at the earliest stages — such as a pre-seed fund like ours — you need to be seeing lots of deals and generally don’t have the budget to either do a lot of traveling or to fly companies to you.

And at the pre-seed level seeing lots of top-of-funnel deals is critical!

So, meeting teams in person is a tough strategy for small firms like ours — for both time / money reasons.

3) Technology is good-enough for remote meetings these days.

Technology is actually quite good these days. I think 10 years ago, vetting people through video conference might have been rough. But, today,, for example, is an amazing product for doing video interviews. You can see a lot with strong connectivity — including founder tension — and you can really feel like you’re in the room with the founder.

4) Meeting people in person is inefficient.

I don’t want to waste founders’ time and my time. The priority activity for them is in running their business. So for the most part, driving all around the Bay Area (in traffic!) is not a value-add activity for anyone. If we happen to be in the same place at the same time, that’s great — such as a conference / event / co-working space, but for the most part, commutes are a bear that I don’t think anyone should have to put up with if given the choice.

5) Lastly and most importantly, if you construct your portfolio in a certain way, it’s actually ok to miss things in a virtual interview.

At the end of the day, doing VC right is actually much more about portfolio construction and modeling than picking. This is surprising to many people.

After investing in hundreds of startups, I genuinely believe that it is much better to invest based on execution rather than to try to assess accurately based on talking.  But, the entire industry is largely based on making investment decisions based on talking. This is a grave mistake, in my opinion.

Here’s an analogy in the job market — in the old days, you would interview a bunch of candidates. And then you would pick someone to hire largely based on talking. But as it would turn out — people who are great at selling themselves in the interview process are not necessarily the best performing hires! Business people have figured this out, and so these days, at so many companies, you no longer just talk in a job interview. Hiring teams now try to assess in other ways — through projects / short term contracts / tests / etc. In other words, execution-based tests are now used much more commonly to better assess hires.

In VC, the right analogy would be — why don’t we make a small bet for seemingly promising companies? And then try to assess based on execution whether or not to write a much larger check.  (On the flip side, startups can assess us/me, to see if I’m living up to standards as an investor.) And as performers perform, let’s continue to do this. This seems like the much better way to assess performance — by actually assessing performance itself rather than talking.

For this reason, this is why I think it’s actually ok to miss some things in interviewing founders for a potential investment — because I care much more about how a team performs than how they talk & look.

Learnings from a 6x angel investment portfolio

I debated writing this. Partly because I didn’t want to jinx my portfolio. Partly because my gains are all on paper anyway. And partly because when I did my angel investing, it was at the beginning of my investing career when I really didn’t know what I was doing. Hah.

Nonetheless, I do think I’ve had some great learnings that are worth sharing with entrepreneurs and would be angel investors.

1) You don’t need to invest a lot of money to become an angel investor.

I think a lot of people think of angel investors as super rich, investing $25k-$100k at a time. This is what I thought too when I was an entrepreneur. I thought, “Someday, when I get to be super rich, I’ll start angel investing.”

Later I learned that actually a TON of entrepreneurs in Silicon Valley angel invest. And they are not even that rich. How is this possible? I would later meet a number of entrepreneurs who invest $1k-$5k checks into startups.

That was a mind blowing discovery.  You don’t need to be filthy rich to angel invest.  Just like how there are now microfunds. There are microangels.

2) Being an angel investor helps you network

The second learning was that entrepreneurs who are angel investors can mingle and network with fellow angel investors. This allows you to build friendships and rapport with other investors who have more money than you and guess what…they can invest in your company and introduce you to other investors!

This is a great strategy for raising money that I wish I had known when I was building my company.

3) Your small check size doesn’t matter if you are value-add.

You might wonder why any entrepreneur would even accept such a small check of $1k. If you can be value-add, then that really helps you win deals. Because more than money, people want help. Especially at the earliest stages. Think about it — money buys help, so if you can provide help for free, then that’s huge.

Do you know something about engineering? Marketing? Sales? Design? Do you have a good network? Can you provide good feedback on things like marketing materials / landing pages / pitch decks? These are all value-added activities at the earliest stages that help you win deals when you are writing small checks.

4) Your reputation matters most.

A lot of new investors inadvertently are a pain to work with. I hear stories of people who take 5 meetings for just a $25k investment. Or stories of investors who require tons of due diligence for a $10k check, including 5 year spreadsheet projections and extensive business plans.

If you’re new to the game, set expectations for what your process will be like. Be transparent. How many meetings do you typically need to make a decision? Do you want to mentor the company first before deciding? Whatever it is, be transparent with your process so that the founder can decide whether or not he/she wants to go through with your process.

Reputation matters and word gets around very quickly. This will set you up for future deals.

5) Work with founders lightly to learn

Like everything else, investing requires practice. And the only way to practice is if you have a feedback loop. You need to work with your founders after investing in order to better understand what type of company you picked and understand what’s going on in the business / with the founders.

Make sure you are not a nuisance. See above. You don’t need to work with the founder forever. It could be a few meetings to help them with their deck. Or it could be a few meetings to help them with their website. Or UX of their product. Or product testing. But you need to interact with the founder so that you can get better at picking companies.

An alternative to becoming an angel or microangel is to work at an accelerator or incubator.  Or even mentor as a volunteer for an accelerator or incubator.  You will learn a lot about teams and different kinds of businesses.  Accelerator programs see a TON of deal flow and invest in a lot of founders, and you will learn a LOT about investing without risking your own money very quickly.

6) Build a large diverse portfolio

VCs often debate whether you should have a “spray-and-pray” portfolio vs a “concentrated portfolio”. Having built both kinds of portfolios before, I think building a “spray-and-pray” portfolio is the easier strategy to start with.

What do these terms mean?

“Concentrated portfolios” — these are portfolios that have a few number of companies — say 10-20 in total. So if you are allocating say $100k in total to angel investing, you might put $10k into 10 companies. Most Sandhill VC funds are in this camp.

“Spray-and-pray portfolios” — these are portfolios that have a lot of companies in them — certainly 20+ and some cases 100+ companies. So if you are allocating say a total of $100k to angel investing, using this strategy, you might put $1k into 100 companies. YCombinator and 500 Startups are examples of this approach.

A lot of investors have strong opinions about which is the better approach. Having looked at the data, you’ll see big winners and losers utilizing each strategy.  So, like everything else, it’s really a matter of how good and lucky *you* are.

I think the spray-and-pray portfolio strategy is easier to start with, because there’s room for a lot of error.  Your initial investments will likely be horrible, because you won’t know what you’re doing.  This method gives you a lot of shots at trying to capture a super huge winner, much like how YC has Airbnb and Dropbox.

Statistically speaking, if your sample size of deal flow is “generally good” and you are an “ok picker”, you can at least get to at least breakeven with the spray-and-pray strategy.  A former colleague of mine Matt Lerner, simulates this nicely in a post on the spray-and-pray strategy.

The tl;dr is that in essence, if you have a portfolio of roughly 100 companies, you should be able to pick at least one company that is 100x+ return or higher to get your portfolio to breakeven.  For each additional startup that is 100x+ return, your overall portfolio will yield an additional multiple.  E.g. if you have 3 100x+ returning companies, you’ll have roughly a 3x portfolio multiple.

The question about this strategy that I often hear is whether it is possible to generate say a 50x returning spray-and-pray portfolio?  And the answer is yes – YC is a good example of that.  To achieve this, you must have at least one deca-unicorn (like Airbnb or Dropbox) in your portfolio.

So if you go with the spray-and-pray strategy, you can start to build this over a few years — invest in say 5-10 companies per year to end up with 50-100 companies in your portfolio.  Each year, as you get learnings, hopefully your dealflow and picking gets better.

7) Be patient and don’t freak out.

You will want to freak out in the beginning, because you will see a lot of seemingly losses. This makes sense because the companies that can’t make it will die earlier than later, and the big winners that will return your portfolio won’t get to maturation until years later. So you need to have some faith and a strong stomach. You won’t see your portfolio start to inflect for years!


Image credit: Tumblr

I was a microangel from 2014-2017 (I no longer angel invest because I now run Hustle Fund).  I invested in 7 companies over those 3 years with $5k checks in 5 of them and $10k checks in 2 of them.  3 of these companies shut down more or less before I had paper gains on the others.  So it was incredibly nerve wracking, because I felt like I was losing all my money!

8) Be prepared to lose all your money!

All of this said, you can always lose all your money. So, be prepared to do so. Angel investing is risky, and most angel investors (and VCs!) do not see positive returns. Don’t part with more than you can handle.

And this brings me to my next point.

9) Investing is all about power law — don’t worry about your losses.

In talking with a number of fund managers and seeing data from my own experience, you can basically think about your portfolio companies in 4 buckets.

1) Non-returners
2) Low returners
3) Good returners
4) Excellent returners

Most of your companies will fall into category #1. And that seems scary. But, as you can see from my portfolio, your losses don’t really matter. In fact, if you copy this sheet and play with the numbers, you’ll see that your low returners don’t matter either! Everything is really riding on your excellent returners, which you won’t have many of.

A few takeaways from this spreadsheet of my angel investments (and please do copy this and play with the numbers):

A) You need at least one excellent returner. I often hear angels talking about looking for 10x returns or 2x returns from their companies. As you can see, you need to be shooting for much much higher in your ultimate winners.

B) Your good returners don’t have as much impact as one might think unless you have a whole handful of them.

C) New angel investors worry about the losses and sometimes get nasty with founders who lose their money.  But in practice, those losses don’t matter either.  If you get nothing back vs $0.20 on the dollar, it’s a wash — it’s literally all the same.

Of course, it’s always nice to receive money back from a company that is winding down. I see that as a good signal about the founder — that he/she is looking out for your interests and wants to do right by you. But as you can see, from an ROI perspective, that dollar amount itself in that category really doesn’t matter.

In contrast, seasoned investors don’t care about the losses and concentrate on the potential winners. You need to try to find as many of those 100x+ returning companies as you can — that is what the game is about.  This is something to keep in mind as an entrepreneur — how can you convince someone that you are a 100x+ winner?

D) You won’t know who in your portfolio is the excellent returner(s) when you start investing. And you won’t know for years.

My portfolio is 3-5 years into angel investing, and all of this is paper gains.  So all fake gains right now.  Any one of these companies could go belly up at any time.  The hope is that one of these companies can inch up to 100x real gains. But we’ll see.

10) Start by co-investing with people who have good deal flow

In the beginning, you won’t have a brand or deal flow. The easiest way to jumpstart your angel investing is to find people who do. Find friends who already have been investing for years and have been doing well. You can also invest in funds, who may share their deal flow and pro-rata rights. Or you can mentor at accelerators or co-working spaces.

Once you start generating deal flow, by continuing to invest, you build up a brand over time.

You will want to see a lot of deals in order to start to compare companies to each other. Seeing a company in isolation won’t help you understand if it’s a “good company”.

You need to understand whether the team is in a competitive market — e.g. are you seeing 10 companies chasing the same thing?  Do you place a bet after seeing a lot of companies or do you shy away from the space altogether?

You won’t know if a company’s revenue growth is good or not until you see other companies and their growth.  The other benefit to being an angel-entrepreneur is that you get to see what is “market” as far as competitive spaces go and growth rates go.  You don’t normally get to see that as an entrepreneur.  That helps you understand how your startup stack ranks.

11) Entry and exit points matter

One of my most surprising learnings from investing the last few years is how much entry and exit points matter. I learned that there are a lot of investors that brag about investing in marquee companies that have done phenomenally well and yet have made little to no money because they got into a deal at too high of a valuation and got out at a valuation that isn’t high enough to cover their other portfolio loses and make money.

Unfortunately, as an angel, you have no control over the exit point. You are just along for the startup ride. So you can only control the entry point.

So for example, if you are shooting for 100x+ multiples in your winner(s), then if you are investing at $3m cap on a SAFE, then roughly speaking, you are trying to exit around the $300m valuation mark (or higher!).  If you are investing in another company at $6m cap on a SAFE, you need that company to deliver 2x the exit of the first company, which is incredibly hard.  Note: historically, the number of new companies that get to the $1B valuation mark each year was less than two handfuls WORLDWIDE, though in the last couple of years, hundreds have been promoted to unicorn status in the startup bubble.

So maybe your strategy is to invest at a low valuation.  Maybe it’s to invest in high valuation companies run by high profile founders.  But whatever your strategy, entry and exit points matter.

12) It’s all luck. No one can spot a winner at the earliest stages.

One final thought — angel investing at the earliest stages is pretty much luck.  Anyone who tells you it’s skill is sh*tting you. You can have amazing founders do amazing things and then get run over by a bus or have some regulation come in and break up the party. And if you’re riding on just your one winner covering your loses and delivering big gains for your whole portfolio, that’s a lot riding on one company. Maybe you have a couple or a few of these winners, but if one falters, then that reduces your multiple by a point or so on a portfolio of 100 companies.

So your best investment is probably to buy a magic 8 ball.


Image credit: Gfycat

To recap:
-Risk capital you can afford to lose
-Learn from your investing and improve your thought process and strategy
-Microangels are en vogue and being one helps you access other angels
-Structure your portfolio to diversify enough to increase your odds of capturing at least one big winner (at least 50 companies if not more to get a winner of 100x)
-Keep entry and exit points in mind

Featured image credit: CBS News

What problems do I want to fund and solve?

People often ask me what startups I want to fund.  I hesitate to write this list because I’ve found there’s actually very little correlation between areas that I would love to fund and what I end up funding.  This is because beyond business ideas, there are so many factors that make a great business.

For example, in 2018, I’ve championed and completed 7 deals at Hustle Fund.  Coming into 2018, because I was/am seeing so many blockchain and health companies, I thought I would fund mostly blockchain and health companies.  It turns out, I have done 0 health deals in 2018 (I did 3 in 2017), and I have done 2 blockchain deals.  In other words, the majority of the deals that I have done this year are not in either category.

That being said, these are the areas or problems that I’m interested in funding, all other considerations aside:


Our medical system is a huge f***ing mess.  I am looking to fund ideas that will make big changes here.  In particular:

Health Insurance:

Health insurance is the biggest scam ever.  Because health insurance is tied to your employer (which makes no sense from a societal perspective), you as the consumer, are at the mercy for what your company thinks is best for you.  As a result, you don’t actually get to vote with your dollars which doctor you choose or which services you want done.  This means you will over-visit the doctor and clog up our medical system if your employer gives you a low deductible plan  (and rightly so – from an economics perspective, you should take advantage of this). It also means that you will be tied to horrible health care providers if your employer bought a cheap plan with a limited network.

So, let’s change this up.  I’m most interested in funding completely new health insurance models that give power back to the consumer.  Things like health savings accounts – you get to decide whether you would prefer to keep your cash as an investment or go see the doctor.  I like the general direction that Lively seems to be going in.  Or direct primary care plans – you should be able to decide which service providers to pay for, and they should be on the hook for drumming up their own business and serving patients well.  You also shouldn’t have to get a referral from another doctor to be able to see a specialist weeks later for an issue that needs to be addressed today.  Money or credits of some type should allow you to prioritize your situation when you’re in a bind.  These days, it seems that connections to doctors are more important than anything else.


We have a shortage of internal medicine physicians and nurses in this country.  On one hand, it’s great that we have a lot of certifications to enable our medical professionals to be properly trained, but if I’m going to be forthright, the medical system is really just a cartel.  We need to increase the number of people who have some basic medical knowledge to help alleviate the strains of our bogged-down medical system.  I’m interested in ideas that take advantage of geography – can you see a doctor today who is in the midwest somewhere (virtually) or even overseas somewhere, where there are more medical professionals?  We are starting to see some doctors who are licensed to practice in California live abroad in Bali and partake in telemedicine – can we do more of this to help with patient loads from state to state and perhaps get more doctors certified in multiple states?  Or perhaps it’s a tech-enabled service in itself – I like the direction that Carbon Health appears to be going in.


I’ve seen a lot of startups attempt to reduce medical costs.  90% of medical costs are attributed to about 10% of patients.  So, even though in the US, our medical costs have really ballooned, I’m actually less concerned about optimizing the costs of the remaining 90%.  There are all kinds of startups trying to address different ways to track the sick and the elderly and encourage preventative measures and reduce costs.  But it’s a hard problem to solve, and I’m still looking to make a bet here because I haven’t quite found a solution that I’m bought into that I think will really solve this problem.

As a sub-category of health, I’m also really interested in startups changing women’s health.  I think we still have a long way to go when it comes to contraception, fertility, and postpartum care.

This an area that I’m incredibly bullish on and yet at the same time find really difficult to fund because often solutions in these space require hardware, new devices, and FDA approval (all areas that I tend to shy away from as a small fund).  There are a few trends that I think fit into this space.  Women are delaying having children, which means that we as a society need to embrace new forms of contraception (not sure this is something software can solve) to improve reliability, usage, and side effects.  One of our portfolio companies called The Pill Club, for example, sends women birth control right to their doors.

The flip side is that we are now also seeing a number of women go through IVF.  I think we are in the first inning of what this looks like, and again, I’m doubtful that software can solve this actual problem.  But, I can see how there may be opportunities to use software to increase the chances of success of IVF – perhaps through better data analysis – or help women receive the care they need through telemedicine and consultation.

On the post-child front, there are a lot of women-specific issues.  Postpartum care and depression, as a result of having a child, is a real and is a serious problem.  A postpartum care platform called Mahmee is tackling this by using software to help new moms get the support they need online from professionals.

Originally posted by hibbant-allat


Speaking of children, childcare is a topic in itself that affects all parents – not just moms.  Childcare is expensive.  One thing I noticed in living in an area with a high cost of living is that your expenses go up dramatically once you have a child.  Even if you’re not sending your infant to the “Harvard of daycare”, your monthly expenses for 2 children under 5 years old can easily be an extra $3000 per month if not a lot higher!  On the other hand, the people who need to send their children to daycare the most are people who need to work and can’t afford to stay at home.  So it’s a bit of a catch 22.

I’m interested in exploring very different childcare models.  For example – some wild ideas:

Daycares are a supply and demand issue – in higher cost areas,

  • Is it possible to load your toddler up on a bus and bus your kid out to a daycare 2 hours away where the facilities and cost to run them are a lot cheaper?  I’m sure this is fraught with all kinds of problems including obtaining necessary licenses, and heaven forbid what would happen if said bus got into an accident.  But, it’s an interesting question to explore, because in the coming years, I expect transportation to get cheaper / reliable (more safe) / autonomous or semi-autonomous.
  • Is there a way to increase the use of home daycares?  Why are many parents reluctant to use home daycares?  Because of potential negligence of the sole-provider of home daycares?  Is there a way to add video technology to add checks and balances to make sure that your kid is being cared for?
  • Is there a way for employers to provide loans for early childcare?  I.e. for 4-5 years, parents in high cost areas shell out $10k-$40k per year just on childcare per child.  And then at kindergarten, public schools are basically free for the next 13 years.  Is there a way to spread this cost of say $40k-$200k across time while simultaneously improving employee retention?

I’m not sure if these ideas are any good, but I think childcare or the way to fund childcare can be completely reimagined.


The workplace is changing a LOT.  In particular, I’m most interested in funding ideas that further entrepreneurship and being entrepreneurial.  These days, everyone is an entrepreneur.  Whether you are starting a mom and pop business or a tech startup or are getting into freelancing / consulting or are joining the gig economy, you are an entrepreneur even if you never thought of yourself as one.  When I was a child, being an entrepreneur was basically limited to tech startups and restaurants and salons.  These days, you see doctors and lawyers doing virtual consultations and living in Bali.  You see students, immigrants – everyone really – driving cars, returning scooters, and renting out their homes to make some extra money.  You see stay-at-home moms making crafts to sell on Etsy and Shopify.

With Hustle Fund, this year, I’ve backed a banking service for freelancers called Every Financial.  And I’ve backed a back ops platform for freelancers called Hyke.  I’m very interested in this category overall – whether it’s new ways to make money or tools to help support new entrepreneurs, this is a category I’m bullish on as a whole that is only growing.

Originally posted by trapstrblog


Education is an area that is so incredibly important but is often a very tough to make money in.  I’m most interested in ideas that can enable students / graduates to make a livelihood.

For example, people are changing jobs more than ever and need the skills to do this.  I’m interested in new forms of education that will help people get the skills that they need to switch careers faster.  For example, we have backed Kenzie Academy, which helps teach people to become developers in cities where this education is traditionally not available.  But, I don’t think everyone needs to become a developer.  There are lots of jobs that could use more skilled people.  Can you use VR to teach new skills that require your hands?  Is there a way to teach people sales online?

At younger ages, I think that there are opportunities here as well to both teach and offer compensation.  In the old days, we had apprenticeship models.  Could the replacement for colleges and universities look more like an apprenticeship?  Instead of spending $500k on college, can you break-even for your education by working while learning?  For example, as a business major, can you take classes on lead generation?  Outbound sales?  And also some theoretical ones on game theory and pricing?  And can you intern at Salesforce to pay for your education in a co-op fashion during the year?  Minerva is doing some incredibly interesting things here, and what is amazing to me is that in just a short period of time, high school students are clamoring to go to Minerva.  They rank up there with the Ivy Leagues et al.  And I think there can many more schools that can be established with a differentiated approach to drive the cost of education down for young people.

At an even younger age, can you do the same thing for high school summer programs?

Education in this country is broken, but I think we can start approaching this by providing better programs that center around livelihood and job placement.

Housing and commuting

Housing is an issue that is near and dear to my heart.  In the San Francisco Bay Area, we have a massive problem with housing.  We don’t have enough housing supply.  And, we have terrible restrictions in many places in California that prevent us from building up – this is why you don’t see skyscraper apartment buildings around here unlike in NYC.  This means that people’s commutes around here are really long – in some cases, people commute 2-3 hours from outside the Bay Area each way to work here.  And rents are astronomical.  This isn’t sustainable.  I really don’t know the right way to approach this, but this is a problem I think about a lot.

Decentralized and verified data

We are funding a lot of blockchain companies attacking many different problems.  Here are a couple of broader trends that I’m a big fan of.

1. Decentralized data / crowdsourcing of data / verification of data

This has mass implications everywhere.  Tracking people (refugees, drug addicts, professional credentials, etc.) in order to better help them.  Tracking objects (validating scarcity, validation of the creator, verification of ownership).  Tracking information of the crowds.

For us as a fund, the tricky thing about this category is that the business model is a bit rough / not straightforward.  But, I’m seeing interesting business models, where companies insert themselves in transactions (that involve validating things or providing services).  The scope can also be tough – i.e. does your business need to aggregate massive amounts of data in order to be useful to other people?

2. Decentralized Marketplaces

I’ve written a whole blog post about this here.  Basically, this makes sense where there’s a dumb middle(wo)man who takes a massive cut for doing little to no work.  Or there are payment transactions that involve lots of fees today because there are cross border or cross currency payments but using cryptocurrency, this can all be avoided.

3. Tools and protocols

Blockchain is in the first inning of this baseball game.  There are a lot of tools, platforms, and protocols that need to be built to make it easier for developers and startups to build companies.  Much like how in the 90s, a startup would need $5m just to get a server going in a closet, blockchain also is in that same era.  I am interested in funding tools and protocols to make development and spin-up of new blockchain companies easier.

These are some of the problems or opportunities I’ve been thinking about lately.  But, A) they could turn out to be horrible businesses since I haven’t done the customer development on any of these, and B) as I mentioned before, the vast majority of companies I fund are not necessarily chasing any of these opportunities.

Cover photo by Sharon McCutcheon on Unsplash


Are you an investment or an option?

Early stage fundraising is an interesting beast because there are all kinds of reasons why VCs invest at this stage.

Some background

There are essentially two camps of investors: a) those with a concentrated portfolio and b) those with a large, diverse portfolio.

Diversified portfolios:

Funds like YC, 500 Startups, and Techstars all have diverse portfolio strategies.  They invest in lots of companies.  Say, on 100 companies in a given portfolio, there may be a lot of losses, but a portfolio of this size only needs a couple of outsized winners to not only make up for the losses but also to return great multiples for the overall fund.  Because downside risk is mitigated by investing in a lot of companies, funds that utilize diverse portfolio strategies often have consistent results fund after fund – there isn’t as much variation across funds as you might see with a concentrated portfolio.

Concentrated portfolios:

Funds like Sequoia, A16Z, and Benchmark all have concentrated portfolio strategies.  They invest in few companies, so there’s little room for error.  Of course, any outsized winners will make the overall fund really, really fantastic because there are not that many losses for which to compensate.  These funds tend to have high variability across the industry.  Certainly there are top tier funds who are able to consistently return solid multiples fund after fund, but there are also many, many more funds who can’t even return 1x because the variability in this model is very high.  In other words, compared to the diversified portfolio model, this model is much higher risk and higher reward (for better or worse).

A couple of thoughts:

1. Some funds invest early to capture more ownership.  Others want to buy an option.

This is a point I didn’t fully understand until I became an investor.  Because large Sand Hill VCs largely make their money on a concentrated portfolio strategy, they need be really, really confident that their investments are going to work out.

By the time startups get to the series B level, it’s fairly clear whether a business is working and printing money.  Hot companies are highly sought after.  It’s very competitive to try to win a hot series B deal because every investor is chasing the same company.  As a result, there are a lot of large funds that will essentially buy a much smaller option at the series A level to be able to get potential access to a hot series B deal.  If some of those series A deals don’t turn out to be excellent businesses, then it’s just a small amount of money relative to the fund that didn’t work out.  If there is a hot deal in that group of series A deals, then it provides access to pour in tons of money and make a lot of money at the series B level.  Funds that make their money on later stage deals and who only invest at the earlier stages to buy an option don’t care so much about valuation.  They are only trying to buy a seat at the table to invest a lot in your company later when it’s clear you’re a winner – they are not trying to buy any ownership now.  

Originally posted by gifsme

In the past couple of years, series B deals became way too hot and competitive.  A number of big funds have come down to invest at the series A to increase their optionality on capturing winners at the series B level.  Now that seed and series A are starting to bleed together, you are now seeing some large Sand Hill VCs do seed deals again.

In contrast, microfunds (small funds) largely only invest at the earliest stages (seed stages) because their money only goes far at these stages.  For most of these folks, they are trying to capture as much ownership at the earliest levels because they do not have more capital to invest at the later stages.

2. In general, microfunds are more valuation sensitive than bigger funds

As a result, because microfunds are trying to capture most of their ownership in a company at the earliest stages, they are going to be much more sensitive to valuation than a fund that is just trying to buy an option to invest in you in later rounds.  I’ve noticed that this can be a difference of as much as 2-3x on valuation caps!

In general, funds that do fewer (or no) follow-on checks will be more sensitive to valuation because they really only have one or two chances to buy as much of your company as possible.

Obviously, from an entrepreneur’s perspective, valuation is an important consideration, but it’s not the only one.  Even though larger funds will tend to be willing to invest at higher valuations, there is also more signaling risk that comes with an investment that is perceived as an option-investment.  In other words, if a fund invests in your company, if they typically make their money on series B rounds, and if they don’t invest in your series B round, many investors will wonder what is wrong with the company.  In contrast, no one cares if a small microfund doesn’t follow on because they don’t have the capital to do so and are not known for doing so.

So hopefully this provides some context as to how investors of big and small funds are thinking about your valuation.  Ultimately, valuation is really a matter of supply and demand, as I’ve written about before.  If no one is demanding your round, then it’s a moot point.  If everyone wants in, no matter how valuation-sensitive the microfund, they may get swept up in clamoring to invest in your round.


Cover photo by Kody Gautier on Unsplash