When an investor “does work” on a potential investment, it usually means engaging in some form of due diligence.
One of my favorite VC sayings is from an investor that has said that “due diligence is something VC’s do very studiously when they want to kill a deal”.
I’ve often quoted this, half joking, half in truth. Especially in the early stages of investing, it’s super easy to do due diligence to the point where a “no” is obvious. There is always some major flaw in every company, and doing some cursory due diligence usually uncovers this. Too much due diligence creates conservatism which is poison to venture capital.
But as I mentioned in my last post, I’m trying to think more deeply about this these days. We talked about this as a team recently, and the opposite idea emerged. The point of “doing work” as a VC isn’t due diligence. Even the phrase “due diligence” seems to connote a CYA mentality around the work. Uncover all the bad stuff so you don’t make a stupid mistake.
But I’m realizing that being diligent as a VC is quite different. It’s about truth seeking. Or, put differently, identifying changes in markets, technologies, user behavior, etc before it’s obvious to everyone else. But this takes work. Gut alone won’t get you there, because these developments are non-obvious.
The idea of “doing work” to make you more open-minded, not less. Something best done studiously to see opportunities that others miss. There is a place for some due diligence. But more so, I think truth seeking is what “doing work” as a VC is all about.
I find that almost all startups look much worse beneath the surface than they first appear. I think this is particularly true of stuff with hyper-growth or really impressive top-line numbers. It’s also particularly true as founders have become more adept at telling their stories and communicating what they’ve done and what they plan to do to investors.
One of the things that you learn to do pretty quickly as an investor is get beneath the surface. You learn to pretty quickly uncover the hidden tells, or soft assumptions of a business or of customer data. As the venture market has gotten more efficient, many (if not most) investments get priced to the point where there is almost always heartburn around a decision. This is why for every great company, there are many investors that could have had a chance to invest but did not, at least at some point in the company’s early life.
I used to think that the antidote to this was semi-blind conviction. Some investors just believe, and choose to ignore some facts in favor of others. That’s the skill and gut of the business.
But after some recent reflection and conversations, I am questioning that belief. Actually, I’m starting to think that the antidote to this is actually getting FURTHER beneath the surface one additional layer.
As a seed stage investor, we see A LOT of potential investment opportunities. You see a lot of patterns repeat themselves, both across companies today and across companies over time. It’s ridiculously easy to draw on personal experience or do a couple calls to knowledgeable people around a sector or opportunity and kill a deal. “It’s been done before”, “these companies have a hard time succeeding because of X”, “top line numbers are great but engagement is too low”. There are lots of easy things to identify.
But I’m realizing that the best investors actually push harder for deeper truths. Those cursory, beneath the surface objections are not so much deal killers, as they are magnifying glasses through which to push deeper into the merits or strengths of an opportunity. Doing the work allows one to form a strong, non-consensus opinion that a few diligence calls or cursory assumptions can’t. It’s less about gut, it’s actually about being more diligent and more inquisitive. Actually, it’s also not just about doing due diligence. It’s about committing to using products and really trying to figure out what’s happening, or really trying to figure out how markets are changing and what old assumptions are on the verge of no longer being true.
The question then is how to handle your time. As a VC, you want to see more opportunities, not less, and the more time you spend on any one, the less time you have to see the next opportunity or to support your portfolio companies. Almost no one would say that the secret of VC is to spend more time and effort evaluating investments, and less time looking for new ones or working with companies.
But, I think that actually might be something I try to do more in the coming months. Chance favors the prepared mind, after all.
Dave, Lee, Jay, and I are really excited to announce that Tim Devane has joined our team! Tim is a Principal with NextView and is our first team member based full-time in New York.
Since the founding of NextView, we’ve been excited about the New York market and a big chunk of our portfolio is New York based. We’ve been fortunate to partner with some great entrepreneurs and invest in terrific companies like TapCommerce, Sunrise, and TripleLift, and bring on some great NY based advisors like Mark Josephson and Stephano Kim. Although we are excited about what we’ve done so far, we also know that there is nothing like having a permanent presence to be able to have the impact that we want to have in such a vibrant tech community. So bringing on someone full-time in NY and deepening our engagement in the NY tech market was a no-brainer.
As the first new addition to our investment team, we went through a deliberate process in bringing Tim onboard. We will always be a small, tight-knit team, so each member of the firm has a huge influence in the way we operate, make decisions, and collaborate with founders. Our goals in recruiting for this role was to find someone who:
1. Already shared our ethos (authenticity, behaving like an invited guest, hunger, participation in the community, and blank-canvas thinking).
2. Is a “native” of the New York Tech community
3. Will be a great investor
Tim has literally spent his entire professional career in New York Tech, joining Betaworks out of Wesleyan and then spending time operating at Bit.ly and Epic Magazine and investing at Red Sea Ventures. And while many people love startups and are excited about VC, Tim embodies the competitive hustle, entrepreneurial empathy, and optimistic curiosity that we think founders love to see in their investors. We also heard fantastic feedback about Tim from some folks we really trust, which was a huge confidence builder as well.
Welcome Tim! We are really looking forward to partnering together to continue building our firm. If you want to follow Tim online, check him out on Twitter @tdevane or his blog http://tdevane.tumblr.com/
We recently launched our new Podcast “Traction”. Check it out here.
One of my recent interviews was with Ken Chen, the co-founder and CMO at Naturebox. The company is doing great and Ken is a very strong performance marketer. There were a couple interesting tidbits that I learned from our conversation that is particularly relevant to early stage companies, and I thought I’d try to crystallize a few learnings on my blog as a companion to the podcast. The link to this specific episode is here.
Learning #1 was how to think about non-performance channels. I think it’s always a tricky question at the early stage how much to invest in stuff like PR, social, influencer marketing, etc. Ken talked about how Naturebox invested pretty heavily in influencer marketing and other brand channels. The way he thinks about it is that these tactics help your marketing dollars “work harder”. The idea is that if it costs you X to acquire a customer through a paid channel, it might cost you some fraction of X if a) the customer has already heard about you through some sort of brand, social, or influencer channel before or b) are able to Google you and easily get some positive social proof. I thought it was a very simple way to think about the value of these efforts. I often see founders either discount brand and PR entirely because it’s not measurable, or focus too much on these without enough analytical rigor. I thought this was a very simple way to think about this.
Learning #2 was the importance of experimenting with new channels. Building a company is always easier when the wind is at your back, and one of the biggest ways to propel the growth of a company is to take advantage of emerging new ways to reach consumers. Naturebox has done a very good job of this – they have been pretty early and aggressive advertisers on podcasts, for example before many other companies caught on. At their current scale, they need pretty big emerging channels to move the needle for them. But for a small startup, you can be much more creative because scale matters less. This is also why, as Ken says, the marketers who are experienced often struggle with early stage companies if they are wed too much to an old/existing playbook built off older channels. Great early-stage marketers are experimenters and competitive about uncovering opportunities that others miss.
Learning #3 was around making good decisions with incomplete data. Two tidbits. The first is that you can get a good sense of the productivity of a channel with just a few days of data. You don’t need to max out for a month to know what the rough theoretical max would be for a channel. The second is that you also don’t need to get many many months of customer data to get a good feel for LTV. You get a very good feel for customer retention curves in the first 3-4 months. Relatively speaking, what is more likely to have a big impact on the value of a cohort is a major shift in the way a channel works or the acquisition economics, not an unforseen change in how customers stick with you several months out.
There will be tons more really interesting learnings in the episodes to come. I’m really enjoying the process of creating these, and am learning a ton. Hopefully it’s helpful for founders and early stage operators as well. Again, you can subscribe here via iTunes, SoundCloud, or Stitcher
This post was originally published on the NextView blog, The View From Seed.
Today, we are excited to announce the launch of our new podcast TRACTION. On the show, we’ll explore and share the stories of all the creative, unusual, and clever ways that entrepreneurs find early results.
We’ll talk to founders as well as executives, investors, and journalists, all of whom did something smart or sneaky or downright brilliant to go from zero to one in an important area of their business.
Everyone likes to say that startups should do things that don’t scale. So we wondered – what ARE those things?
Why Does the World Need Another Tech Podcast?
Yes, there are other tech podcasts out there that do a great job talking about industry trends, strategy, and founders’ stories. We find that these are great, and I personally listen to many of them. But we noticed that while the information in these podcasts is interesting, many are often far removed from the actual day-to-day challenges of very early stage founders that are just trying to go from nothing to something.
In Traction, our focus is on the practical things that founders did at the earliest stages when they have almost no resources or credibility just yet. This is about the non-scalable stuff that founders have done to “make things happen” and the “hustle” that actually creates step-function results rather than just wasted effort.
So, given the general topics of most startup podcasts and our goal to be more narrowly focused, here are examples of what we WON’T discuss:
- What’s the latest trend in drones?
- Are we in a tech bubble?
- Should Microsoft buy Salesforce?
On the other hand, we WILL discuss things like these:
- How did a non-technical founding team actually get a product built?
- How do you test demand for a product without having said product?
- How was liquidity built on Day 1 in a marketplace business?
We’ll also throw in some fun stories and rants from some great founders, and put them all on the hot seat with three personal questions at the end with a segment called Alpha-Beta-Scale. And, hopefully, you’ll find the style and sound of the show to be pleasantly different from typical interview-based podcasts.
Is This Practical If The Stories Are Inherently Non-Scalable or Not Repeatable?
The point of these stories and interviews is NOT to create a playbook for future success. Early stage founders end up doing many things that fall outside of any traditional blueprint or approach, and therefore it might not be repeatable again. Taking advantage of an emerging distribution channel or market inefficiency is an opportunity in a moment in time, not today. Using some brute force tactics to get early growth isn’t scalable over time, even if they work early on.
We don’t try to share a playbook because, at the seed stage, there IS no playbook.
Instead, the point of sharing these stories is to stretch the imagination of listeners and to get us all to think differently and creatively about how to approach the challenges of building a very early stage business. The ability to take advantage of unproven things or non-scalable methods is, in a way, the super-power of an early stage founder that large companies just can’t compete against.
Knowing what these might be for your business is the challenge, but hearing stories of others will help you frame your constraints and opportunities differently.
How Do I Get Future Episodes?
You can listen to Traction and subscribe to the show in two different ways:
- Subscribe to the NextView blog, the View From Seed, if you haven’t already. You’ll get each episode as soon as it’s live, plus other content we create — resources like board deck or pitch deck templates, strategies and data for raising seed or Series A capital, and other great stories and tips from founders and investors.
- Subscribe on iTunes or wherever you get your podcasts. On iTunes, please consider rating the show. It helps Traction get more traction
And since we’re excited about today’s launch, we’re also giving you immediate access to the first three episodes below. Thanks for listening!
Episode 1: Fred Shilmover, Co-Founder/CEO, InsightSquared — We hear the story of how one of Boston’s fastest-growing SaaS startups began — namely, with a clever tactic that Fred used to earn revenue before he had a product (or co-founders, or capital, or an office, or …) We also introduce our closing segment, “Alpha-Beta-Scale.”
Episode 2: Lee Hower, Co-Founder, NextView Ventures — Lee shares the story of co-founding LinkedIn and getting hired by Elon Musk to X.com (merged with Peter Thiel and Max Levchin’s Confinity to form PayPal). He discusses what it was like pioneering virality- and social media-based products before that was even a thing, and how the climate and technology of Silicon Valley back then was radically different than today.
Episode 3: Ken Chen, Co-Founder/CMO, NatureBox: Ken looks back at how they scrapped their way towards an initial proof of concept — all in a single weekend. They’re now a Series C startup delivering millions of boxes of snacks to customers each year. How did they prove this could work, especially since brand is so important? How do you even build a brand as a startup?
Future episodes include founders, executives, or journalists from: General Assembly, DraftKings, Pando Daily, The Boston Globe, and many more.