I’m always a fan of investors who write consistently, while blending personal experience and utility, versus just content marketing. Chris Neumann (of Canada’s Panache Ventures) checks these boxes so I asked him to come on my blog (currently less consistent, hopefully still the other two) for Five Questions.

Hunter Walk: So why venture capital, why early stage, and why Canada?

Chris Neumann: I’ve been lucky to have been a part of 5 startups going back to the late-90s, including two that were VC-backed (DataHero and Aster Data). After DataHero was acquired, I felt like it was time to try something new. 500 Startups was looking to add someone with an enterprise background to their investing team, so I made the leap into venture at the start of 2017.

At 500, I had the opportunity to work with early-stage founders from around the world and quickly realized that this was where I wanted to spend my time. I really enjoy the creativity and problem-solving that takes place during the early stages of a company, when founders are trying to solve a crazy number of challenges in parallel in order to get to product-market fit.

As to “why Canada?”, I’ve spent a lot of time in international ecosystems over the years (I’ve invested in startups in more than 20 countries and helped run accelerators on 5 continents). That exposure gave me insight into the significant knowledge gap that exists between Silicon Valley and the rest of the world. When you spend most of your time in the Bay Area, you’re oblivious to how much of a global outlier the region really is in terms of the density of experience and availability of people who have “been there before”. I felt that there was an immense opportunity to help narrow that gap for international founders, which led me first to found Commonwealth Ventures and eventually to move back to Canada and join Panache Ventures.

In the last 5 years, the Canadian tech ecosystem reached a significant inflection point in terms of the frequency with which world class startups were being founded and the ability of the ecosystem to support the creation of globally-impactful tech companies at scale. Toronto has now firmly established itself as the third largest tech/startup ecosystem in North America (sorry Miami) while Vancouver has finally embraced its proximity to Silicon Valley and the advantages that come from being the only major international city in the same time zone as San Francisco. What’s happening in Canada right now from coast-to-coast-to-coast is really quite remarkable.

HW: Your blog, which I love, tries to bridge a knowledge gap between founders and investors, often explaining ‘why investors do/care about X’ and so on. If you could magically give one piece of advice to every founder seeking venture capital what would it be?

CN: Thanks so much – that means a lot coming from you.

Speaking to international founders – which is really my focus – the number one piece of advice I would give is to spend time in the Bay Area. And I don’t mean going for a vacation or one of those week-long “startup tourism” trips, but really spend time there. Like a month or two.

The corollary to my earlier comment on Silicon Valley’s outlier status is that many people who live outside of the U.S. downplay or outright dismiss the advantages of being in the Bay Area, without really understanding them. They latch on to the narrative that “great companies can be built anywhere” and assume that founders around the world are competing on a level playing field, when they couldn’t be further from the truth. It’s a mix of naivety and nationalism that is detrimental to the success of both the individual companies and the broader ecosystems.

That doesn’t mean I’m advising founders to permanently move to Silicon Valley, but all of the best founders I’ve met have spent serious time in the Bay, immersing themselves in the tech culture and dynamics of the region. They return to their home countries far more informed and educated in terms of what they’re up against and far better positioned to win vs. relying on bad advice and what they read in the media.

HW: Of the companies you’ve backed that truly failed financially (let’s define that as weren’t able to return the invested capital back), what percentage of those CEOs would you back again? What are some differences between those you would line up again to support and those you merely wish best of luck to?

CN: That’s a great question. I’d have to say that number is probably less than 10%.

For me, there are three major differences between CEOs I would back again and those I would not:

First and foremost, how capable were they as CEOs? In many cases, it becomes apparent over time that a particular founder isn’t actually well-suited to the role of CEO. Maybe they can’t sell. Maybe they’re too stubborn and their own idea gets in the way of hearing the market’s feedback. Maybe they have trouble letting go of things and empowering others as the team grows. Being the CEO of a company is a singularly unique role with demanding expectations and responsibilities, and most people really don’t belong in that role.

Secondly, how effective are they as communicators? The best CEOs I’ve worked with prioritize communication and keeping key stakeholders in the loop. That doesn’t mean that I expect to get a weekly call from a founder, but it’s essential that I have some idea of what’s going on with the company if I’m to gain confidence in the CEOs ability to navigate the ups and downs of a startup. That’s why investor updates are so important.

Finally, are they able to thoughtfully reflect on and learn from their failures? Once the dust has settled and the CEO has had time to process the emotions that come with having your startup fail, can they look back objectively and identify things that they might have done differently or decisions they made that turned out to have negative long-term consequences? That’s a big one for me.

It also goes without saying that how a CEO handles themselves in the final days and weeks of a company plays a crucial part in how investors ultimately see their legacy. You’ll never be able to tie everything up with a bow, but acting ethically and with integrity while trying to take care of your team is ultimately what matters.

HW: What’s the dumbest argument that our industry is currently having and why is it “remote vs hybrid/in-person?” But seriously, you’ve been a founder/CEO – what choices did you make about the culture of your startup that you think suited you well, and which ones would you revisit (or try to do differently)?

CN: If I never again have to read a bunch of entitled tech bros mansplaining on twitter about their way of working is the only way, I will die a happy man.

When we founded DataHero back in 2011, there was a trend going on where people were obsessively trying to “design” their company cultures. I never understood that – how on earth you could reason from first principles about culture and simply proclaim “this is what it will be” (Later, when Ben Horowitz published his book “What You Do is Who You Are,” I realized that I wasn’t the only one). Overall, we just tried to do the right thing. Treat people well. Show them that you respect and appreciate them. But also make sure everyone understands that startups are hard and work ethic is important – so keep the bar high.

In terms of specific choices, I think we did a really good job of being pragmatic. We didn’t overthink things. For example, we had a hybrid work schedule starting in 2012. M/W/F in the office. T/Th work from home. Why? Because Bay Area traffic sucked. That’s it. That simple.

We also worked really hard to keep a pulse on how people were feeling and take breaks when needed. For example, I remember one period where the whole company had been grinding for a couple of weeks leading up to a big release. It was apparent that everyone on the team was getting really stressed, so one day we declared that we were closing the office at lunch and going to get massages. We then took the entire team down the street to a Thai massage place, paid for everyone to get one, and went out for beers afterwards.

I think the hardest choices for me were around people who were underperforming. It’s easy to proclaim that you’re going to “hire slow and fire fast,” but when it comes down to it, very few people do that effectively – especially in resource-constrained startups. I can think of a few cases where I kept underperformers far longer than I should have, leading to longer-term cultural issues amongst the rest of the team.

HW: Who’s an investor you consider to be a role model and why?

CN: There are so many investors I’ve had the privilege of learning from over the years. Josh Kopelman was an early investor in Aster Data and for me really exemplified what it means to be generous with your time as an investor and show respect for founders. When Aster Data was acquired and I left to found DataHero, he spent more hours than I can remember meeting with me and brainstorming about the potential for cloud BI. On the one hand, he was definitely playing the long game and hoping for a potential investment, but it was more than that. Even after passing on our Pre-Seed round, he continued to make time. It was only later that I realized how much of an outlier he was in the way he interacted with founders.

From a partnership standpoint, the guys at Foundry (who ultimately led our Pre-Seed round) have been another role model for me. They make a point of encouraging founders to reach out to any of the partners – and have no ego around that. When I was a founder, it was such a powerful way of supporting portfolio companies. Now that I’m an investor, I can see how much efficiency and effectiveness comes from trusting your partners – not only when it comes to deferring on “risky” investment decisions, but also in terms of handing over a bit of “control” of the relationship with portfolio founders. There are a lot of things they do from a portfolio support perspective that we’ve looked to as examples at Panache.

Thanks Chris! Everyone subscribe to his blog.

I’ve got a few flights next week so hopefully more original content coming then, but for now, sharing some good reads.

Which AI Model Should You Pick for Your Startup? (Tomasz Tunguz) – My former Google colleague and fellow VC provides a guide to Big Model vs Small Model (as well as a Third Way).

“A product manager today faces a key architectural question with AI : to use a small language model or a large language model?”

Where Your VC Can’t Help (Ellen Chisa) – Product manager turned founder turned VC chimes in with some of the areas that your VC can’t (or shouldn’t) help. Specifically “I can’t tell you what product or company to build,” “I can’t find your first engineer,” “I can’t help you ship,” and “I can’t make someone use your product.”

Entrepreneurial Archetypes (Jared Hecht) – The founder of GroupMe and Fundera compares and contrasts five types of entrepreneurial motivation (the serial inventor, the opportunist, the problem obsessor, the industry expert, and the academic), along with the pros/cons of each. Jared starts to get into what I think would be a great follow-up post, which is what about cofounder pairings? Which combo well together and which are too much, or too little, of a good thing.

What Happens When Small and Large VC Firms Decouple and Have Less in Common? (Charles Hudson) – You all know how much I love Charles’ posts and tend to agree with most of them. Here he talks about the bifurcation of models and incentives among funds of different sizes.

“In a world where all funds were part of the same ecosystem, the venture capital business worked like a relay race. The pre-seed and seed investors worked with companies to get traction, the Series A and B investors provided capital and support to help them prove out scale, and growth-stage investors helped prepare them for life as public companies. Each participant had their own lane and specialty and mostly focused on the thing or things they did well until it was time to transition that company to the next person in the chain.”

He also touches on how company exit size (and its return to normal expectations on average) is such a huge impact on fund models. The smaller funds that lack concentration will find that even winners don’t really move the needle enough (you need several) and the larger funds are trapped by their own AUM. Summer 2022 this was one of my two biggest statements about what the downturn means for startups and venture.

Enjoy the reads!

My friends at Weekend Fund recently put out a round-up newsletter of some investor responses to the question “Do Valuations Matter?” It’s all worth reading but I’ll excerpt my thoughts here since it’s a discussion Satya and I have often with new VCs.

How Hunter Walk @ Homebrew approaches valuations 

Homebrew is an evergreen fund investing primarily in pre-seed, seed and Series A rounds. 

Like NEA, Homebrew takes an ownership-driven approach to investing. They view valuation as an important guardrail in evaluating an investment opportunity. Hunter also breaks down their framework for evaluating an investment opportunity when achieving their target ownership exceeds their maximum check size, and the “opportunity cost” of doing so resulting in less diversification. 

More from Hunter: 

“In our historically concentrated approach to seed stage investing, hitting our ownership target mattered more than valuation *but* valuation was an incredibly important guardrail in evaluating an opportunity, for it has great impact on the company and our portfolio management overall. 

We set a ‘max check size’ for our initial investments which was meant to get us, on average, 10-15% ownership and if held to, would overall guide us to an investment period that provided both time and company diversification for the fund. It also drove our reserves strategy. So in any negotiation, whether we wrote our ‘max check’ to get the target ownership was a factor of round size, company stage, and so forth. But we would rarely walk away from an opportunity based on valuation if it fits within that target ownership and check-size box. 

In situations where targeting the 10-15% ownership would have required a commitment larger than our ‘max check size’ we had to decide whether (a) the opportunity here was worth 1.5 or 2 slots – ie are we going to make one fewer investment out of the fund in order to do this one or (b) would we stick with our check size but take lower ownership as a result or (c) walk away. Of these three, (c) was the most common decision for a variety of reasons that were about being consistent in our strategy and product offering.”
— Hunter Walk (Homebrew) 

Compare your level of conviction to the price the market is setting

“The ‘valuation question’ is one that comes up frequently in our discussions with the emerging managers we back via Screendoor (where we will invest up to 10% of a fund’s target raise and bring them into a community of investors ongoing for these types of questions). While situations can differ, my general rule is that the market determines the price, so you have to kind of decide whether your conviction in a company is equal to, greater, or less than price the market is telling you they are ‘worth.’”

My daughter and I love San Francisco’s driverless cars from Cruise and Waymo. It’s extraordinary to see these autonomous vehicles putter around our streets, sometimes with non-driver passengers in the back seats.

I know they’re not perfect. I know lots of capital was spent and commercialization has been slower than some pundits imagined (although some of the reasons are up for debate). And the left-turn problem is more interesting to me than the trolley problem. But I can’t help but think ‘moonshot in motion’ when I see them and it brings wonder to our faces, which helps reinforce and remember that technology continues to have amazing potential.

Some recent reads that I’ve enjoyed

Fund Size is Still Strategy – The Growing Disconnect Between Founders and VCs (Charles Hudson) –

“The biggest understanding gap I see between founders and VCs today is this understanding of the relationship between the investor focus on terminal outcome and the founder focus on the microeconomics and unit economics….. The net result is a lot of of frustrated founders who don’t understand why they can’t raise with $1-2 million in ARR and investors who don’t understand why founders don’t realize they are in small markets, regardless of early traction.”

As Charles also notes, this is exacerbated by the rapid increase in venture fund size. Every dollar increase effectively needs another several dollars of startup exit value to justify the AUM growth.

Tips for Talking With Your Investors About Bridges and Extensions (Charles Hudson) – Charles covers a bunch of the questions VCs and founders should consider, and hopefully align on, when raising an incremental insider financing.

Beware the “Mediocre Recycled.” The Zombie Executives of SaaS (Jason Lemkin) – The type of folks who are at a bunch of companies, some of them actually good, for 1-2 years, never really getting the job done but polished enough to fake it for a while.

Skip the Line – make it easy for your VC to walk you in the door of potential customers (Ellen Chisa) – Bunch of practical things you can do to tee up your investors for sales help and make it easier for them to execute your asks.

Investor Relations Should Not Be Scary (Sean Byrnes) – Sean’s a repeat founder/CEO and gets to the heart of these conversations between founders and VCs.

“The expectations of most investors are very simple. Your investors want:

A credible plan for the business that you, as a leader, believe strongly in.

That’s it. That’s what they want. It sounds simple, but let’s break it apart to see what it takes to give that to them.”