The 20 minute VC

I love the 20 minute VC podcast. It’s the perfect amount of time and Harry Stebbings does a great job attracting interesting guests and asking them the right questions. I was honored when asked to be on the show, here’s that episode.

Harry asks me questions like:

  • How did I make the transition from Founder to VC with Techstars and Fund I?
  • Fund I is one of the most successful funds in history; what was the structure with Fund I? Why did you choose a $5m fund size? How did you decide initial to follow on ratio?
  • Why were you so valuation sensitive with Fund I? Why were you so rigid on a consistent check size on Fund I?
  • Why did you decide to expand from being a solo GP fund? What are the challenges and complexities of fund scaling and how did you approach this?
  • What do you think about uncapped notes?
  • Why do you like big boring companies?
  • How did you meet Ryan Graves @ Uber and how did the Uber investment come about? (even more about that here)
  • Where does David still see inefficiencies in the current venture model?

I hope you enjoy it. I had fun doing the interview.

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The “lead investor” dance

The term “lead investor” is often code. Just like the word “quaint” is code in the real estate business for “small.”

Let me know when you have a lead investor.

Loosely translated, these words often actually mean “I’m not ready to commit.”

You see, many angel and seed investors view it as their job to establish a “free option” on investing in your company. They have no incentive to commit early so they tiptoe up to the line of commitment, making sure not to cross it. By telling you that they’re potentially “in” if you have a lead investor, they establish the free option to decide later. After all, they are so close to commitment, you’ll likely come back to them first once you do have a lead investor. It’s a way that they feel safer and don’t have to be an early committer.

Fight through this using direct communication. Break it down. You can ask them what it is about a lead investor that will cause them to commit. Perhaps they will say they want well defined terms. Perhaps they will say they want to ride on the due diligence and pricing of a professional. Perhaps they will say that they just need to see the terms.

Ask them to commit with the assumption that you’ll later have those things. Tell them you’d never hold them to their commitment if they didn’t like the terms once they’re established later. If they truly want to invest and they want to be helpful, this is what actually helps you. Commitment, even if it’s soft based on assumed conditions that you’ll ultimately satisfy.

And if you’re an investor, consider no longer using the “once you have a lead investor let me know” gambit. You can be much more helpful by simply defining the conditions under which you will commit to invest. And if you’re not ready, just say you’re not ready and be clear about what you need in order to make the decision. And most of all, if you’re a no, just say no! That will save everyone some time!

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Group think vs Group smart

We’ve been running Techstars for almost a decade now. Every time we select ten or so companies for one of our accelerator programs, there’s some kind of group dynamic at play. Multiple smart people are in a room debating which of the 1,000 or so companies we’re considering should be funded. And those rooms are full of very smart people.

A while back, some Harvard and MIT researchers looked at all of the Techstars selection data and reviewed how all of those companies did over time. We have always scored companies on a scale of 1 through 4 with 4 being the highest. This ensures that there is no “middle score” and forces some polarization. It’s a bit of a simplification, but what the research found was that the average group score contained much less “signal” than what the higher scorers indicated. In other words, if the group of smart people ranked a company as follows:

Person #1 – 4
Person #2 – 3
Person #3 – 2
Person #4 – 1

Then the average here would be 2.5, which is a relatively low score. You might naturally want to exclude that company from further consideration.

However, the best way to score this for Techstars selection purposes turns out to be by counting the number of fours only. The only scores that would beat this one would have had multiple people scoring it a 4, like this:

Person #1 – 4
Person #2 – 1
Person #3 – 1
Person #4 – 4

Here the average is the same as the previous example, at 2.5. But the signal is “two fours” here, which is a much stronger signal than in the previous example. The research showed that had we been doing that all along, our outcomes would have been even better. So today we pick our companies from amongst those with the highest number of 4s, and not based on the average scores.

As humans, we have a tendency to score things and then respect the opinions of everyone in a weighted fashion. When selecting startups or looking for truly innovative ideas, you have to fight this impulse. This matches well with my own experience over a dozen years of picking startups – my Uber and Twilio picks were instinctual gut reactions from when I was a lone angel investor just learning how to run the first Techstars venture fund. Many other smart people told me Uber was a dumb idea. They would have scored it a 1, bringing the average way down. I also remember telling other investors how silly Twitter was when I first saw it. I would have scored it a 1 also. Averages kill instincts when it comes to startups. Others have learned the same.

A smart group of people with high trust for each other learns to look for signal from those who are most enthusiastic, and learns to ignore the idea of averages. It’s likely that the people voting the top score have some intuition or insight, regardless of the number of naysayers. Learn to respect the outlying data points in any group evaluation, and you’ll make your own team “group smart”.

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Hiring Developer Evangelists

I define “web infrastructure” companies as those (at least initially) targeted primarily at developers. They typically take the form of APIs and make life easier on the web for developers. I’ve invested early in many such companies including SendGrid, Twilio, FullContact, Stream and RunScope.

Recently, one of our newer portfolio companies was looking for some advice from our network regarding hiring a developer evangelist.

Fortunately, our network around Techstars is huge and active. John Sheehan of RunScope (he was formerly at IFFFT & Twilio) quickly said:

“Unfortunately this is about the most in demand position out there. If you don’t have one yet, I would suggest picking the most active member of your dev community (that’s what I was for Twilio at the time). If you don’t have one of those, are you sure you need developer marketing yet?”

I thought this was terrific succinct advice so I wanted to share it. The thread went on:

“There is a large community around our open source project. Unfortunately nobody in the <our town> area stands out. “

To which John further replied:

“Why is local a requirement? I spent first 12 months at Twilio remote. You can do outreach locally already. Watch this and see which parts require a specific location.”

Then I watched that video, and it provides great insight on this topic. If you’re building something where you need to evangelize to developers, I hope John’s experience can be helpful to you as well.



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Back from Sabbatical

I spent the last month completely offline, not working. I hadn’t done that in the 8 years since i founded Techstars. Last year, we raised a new venture fund and I was on the road twice as much as normal. When we closed it in January, I promised myself and my family some time for rejuvenation last this year. Needless to say, it was amazing. I feel very refreshed and energized, and I’m raring to get back at it today.

I’m not going to detail the time off. Instead, I thought I’d record a few random takeaways.

Time to disconnect: People may ask how long it took me to truly disconnect. I’d put it at about 5 days. For the first 5 days, I woke up thinking about work, and instinctively reaching for my phone to check email and other messages. After that, it was completely gone until I was flying home. I think this worked both ways at the start, because various co-workers contacted me on each of the first 5 days via text message – probably also instinctively, but also due to a couple of small emergencies.

Emails: I didn’t check my work email once while i was gone. Only about 1,200 emails came in over 30 days. Typically I get about 300-500 per day. It turns out if you don’t email as much, you don’t get as much email. Well, that, plus tons of great co-workers covering for you and dropping you quickly to bcc. I sent 44 personal emails in those 30 days and received about 25 back. Most of those were scheduling activities.

Weight: I gained 1.8 pounds during my 30 days of sabbatical, which is under 1% for me.  I put this in the miracle category, the way I ate on vacation. I was able to play tennis about twice a week, so that must have helped. I think I ate ice cream in the middle of the day on about 75% of the days (exclusively chocolate, of course, with one exception which was a clear mistake).

Massages: I got two eighty-minute massages in the last month. I’ve put it on my list to get at least one of those a month from here on out. I think it can really help with the pains of too much travel.

Books: I read five. My favorite was Give and Take. Highly recommended for everyone. A ton of actionable stuff in there for our #givefirst organization at Techstars. One I re-read was Zen and the Art of Motorcycle Maintenance. Hadn’t read that in 20 years. If you’re in that bucket, re-read it. I took away many new meanings later in my life than i had before.

People might wonder if any new inspiration or “aha moments” came to me while not thinking about work. Yes, a few. I won’t detail them here. It seems true that inspiration does occasionally hit when you’re not focused on it at all.

I want to thank my co-workers for allowing this and covering for me while I was out for a month, most notably my incredible assistant and my partners. One thing I did think about on the time away was the people that I missed. I’m very lucky to work with such a great and dedicated time that lives by the Give First mantra. It’s nice that Techstars and our venture fund is at a point where stepping away for a month is just not a problem. I think that’s a sign of a healthy business. Things seem to have gone very smoothly. Perhaps too smoothly. 🙂






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The Tricky Pool Shot

At Techstars, my partners and I have been using the term “tricky pool shot” quite a bit lately. We’re seeing more and more startups that have to accomplish something difficult as an ante in order to get to the point where they’ll have the opportunity to do the thing they really want to do. The other type of tricky pool shot we’re seeing is when startups are trying to time a potential new market and be there when it emerges. In effect, they are trying to stay alive long enough to be relevant and be in the right place at the right time. They have to knock down multiple difficult goals in the right order to win.

Obviously (as in the video below), tricky pool shots are crowd pleasers and pay off enormously when they work. But the fail all the time too and they’re very high risk.

As investors, we don’t mind risk. We’ll occasionally invest in a tricky pool shot. But we’re very skeptical of them because they’re extra difficult. As in billiards, it helps if the first part of the “shot” puts you in a very good position even if you miss the second or third shot, so at least you get to shoot again because it’s still your turn.

For example, imagine that you believe in the future driverless cars. You’d probably be thinking back to when we used to call cars “horseless carriages” and thinking that perhaps this would be more of a change that people might imagine today.  So you are building a company that imagines a world without the need for gasoline, and one in which the roads themselves will charge these futuristic cars. So you’re building infrastructure to enable these future cars to always be charging while driving, much like the trolly-bus system of San Francisco. This is a tricky pool shot indeed. Not only do we have to bet that most cars will be powered by electricity, but we also have to bet on when that will happen. And finally, you have to be on the mega-trend of autonomous vehicles as a driver for the change. You want to be there at just the right moment in time, and you’re starting right now. Investing in building out this expensive infrastructure before we know if any of those things are going to happen is quite a challenge. Perhaps there will be many electric vehicles but their range will be extended and there will be need to charge them so frequently. Perhaps solar will win. Perhaps we’ll all be flying around on drones instead of in cars at all. You only win if a certain tricky combination of possible futures come together. In this case, it’s several things to bet on with no great obvious intermediate states.

Of course, you might make the shot. And that would be rad.

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