For VCs, “What Could Go Right” Is More Important Than “What Could Go Wrong”

You ever notice how when someone leads off by saying, “Now, I don’t mean to overgeneralize but…” they almost always are overgeneralizing? Now, I don’t mean to overgeneralize but I want to tell you about something that reporters and pundits frequently get wrong when evaluating the venture-worthiness of a failed startup. They focus on the answer to the question “what are all the things which could have gone wrong here” versus “how valuable would this company have been if things went right?”

VCs are in the business of backing companies that have a substantial chance of failing and the earlier you invest, the more likely you are to see a zero return on your capital. What offsets this is that the successes tend to be outsized, returning 20x, 50x, or even 100x+. The notion that tremendous value is created by a very small percentage of startups, and the financiers behind this businesses are counting on a few of these companies to make up for all the nonperforming investments is called a power law distribution. Heck, Satya and I could talk each other out of *any* investment at the seed stage – there’s always something “wrong” with an opportunity – but our job is to invest, not to *not* invest.


This means that when a venture capitalist evaluates a startup opportunity they are of course trying to understand all the reasons that the fragile little company could fail, but they’re actually more concerned about “how big can this be if it all works?” Or “what are the ambitions of the team – how do they define success?” There are plenty of very good, very valuable businesses which are still not venture scale. That’s fine — this post isn’t about whether venture is broken for depending on outsized outcomes or the tradeoffs a founder makes when deciding to go down the venture path. No, the point I’m making is that when a venture-backed company fails, it likely wasn’t that their investors didn’t realize the risks upfront but rather they were interested in the upside, not the downside.

Accordingly punditry that just says “OMG, I can’t believe this business got funded when nominally there are so many other ideas out there” or “duh, didn’t the VCs know there was XYZ risk here,” is kinda flat. A richer unpacking would be around whether the bull case actually warranted the capital – was it a reasonable risk to take, not, was there risk.

Of course played out to its extremes this would suggest any investor decisions are beyond reproach because with fuzzy enough math and juiced assumptions you can always make the numbers work on paper. This too would be silly position and we as an industry would lose access to self-reflection and documentation if we cursed at reporters for analyzing our failures. But I’d lay out a framework for understanding the risk/reward analysis that went into an investment, and believe reporting would improve if these were included:

For a failed startup….

  1. Was what caused the failure predictable or novel – ie were the risks ones that a reasonable person could have properly assessed upfront or did they emerge from changes in technology, market, regulation, etc.
  2. Under what assumptions or scenarios were the “venture scale outcome” dependent and how credible/achievable would that be given the degree of difficulty in execution.
  3. The firms which invested – do they typically invest in businesses with similar risk profiles and have they succeeded notably, or was the firm either stretching into a new area and/or hasn’t proved yet to be astute assessors of risk/reward.

Of course this is difficult information for a reporter to gather and assess, especially in a “must publish now” culture. So I’m going to suggest something perhaps a little atypical: if a trusted reporter is doing good and fair analysis, the investors should be willing to chat on background about their decision making. Never to the betrayal of a founder’s confidence – we’re talking about post-mortems, not companies in motion – and not about specifically placing execution blame on anyone, but in “here’s what we were thinking and here’s what was right or not about that.” I’m positive many firms do versions of this internally, comparing back to their investment memo for the deal and updating their frameworks for the vertical.

Now, I don’t mean to overgeneralize but I think that could be good for founders, good for the community and good for the press to have that level of conversation with an investor.

Five Posts I Would Have Written If Someone Else Hadn’t

Flying back to San Francisco, spending some time in my Pocket since I rarely read anything when it’s actually published. Here are a bunch of posts that I enjoyed, most VC or startup related, so if you don’t care about that stuff, skip this.

The Angel’s in the Details – Andy Dunn, Walmart (Bonobos cofounder/CEO)

Andy is a ‘wears it on his sleeve’ type of guy and his writing is always passionate and personal. This post reminded me how much I hate when I hear a leader of any type say something like “well, you can’t expect me to know everything that’s going on” or “that happened below my paygrade” versus accepting responsibility.

Six Ways Great Companies Use Board Decks to Their Advantage – Union Square Ventures blog

Solid meat and potatoes post about good board decks. Board meetings can be some of the best discussions and informative sessions if founders and Directors focus on using them correctly. At early stage companies specifically they’re not about just managing your investors or putting on a show. And they’re not about making a CEO jump through hoops and burn a week of productivity prepping for a presentation. At Homebrew, we believe in great boards early.

Ruling Out Rather Than Ruling In – Jerry Neumann (angel investor)

Jerry is very thoughtful – and thought-provoking. He uses frameworks kinda like we do — not to prevent exceptions but to know when he’s making them. Here Jerry outlines how he evaluates an investment.

Part of a VCs Job is Making it on to The List – Christian Hernandez, White Star Capital

“The List” is different based on your stage and investment strategy but it holds true generally. In a competitive, power law industry, it’s not enough to have a checkbook, you need to be a preferred partner to some set of constituents. At our seed stage, much of the good dealflow is “dark” (ie not shopped broadly) so Homebrew needs to be on The List for a subset of founders and coinvestors who want to preference us.

What Founders Really Want From VCs – Fred Destin

When it comes down to it, there’s lots of “nice to haves” but in Fred’s opinion the MUST HAVES are actually pretty clear – do you have my back, are you insightful, can you help me recruit/close, and can you help me get funded.



What I’ve Learned When I Ask For Feedback

Something NEW and TRUE. Every time I’ve asked for feedback from those around me in a structured format I’ve received a gift. A learning that was previously unknown to me (NEW) and, even if I want to deny it, 100% correct (TRUE). My first N&T arrived when I was in grad school as part of a semester long T-group with a dozen or so of my classmates. Here I learned about a way I was unintentionally creating resentment by making people feel judged and discarded. By acknowledging and understanding these reactions I was able to improve myself.

The second N&T emerged during a 360 Degree Assessment that I received upon making Director at Google. You know what I heard? That I was actually a pretty shitty manager of people who had different communication styles and motivations than I did. So again, I took it to heart and evolved (and also made sure I had managers in my org who were better at this than I would ever be). Always a work in progress you know….


My third N&T was delivered earlier this month as part of a feedback exercise that Satya and I did for Homebrew. We had a third party coach reach out to 36 of the CEOs we’d backed and about a dozen co-investors. She had conversations with everyone around a set of goals and expectations for how we seek to assist companies and build relationships with teams (which we provided to them in advance to make best use of time). As we approach Homebrew’s 5th anniversary next year, it was great to get structured feedback from our customers (the founders we back) and ensure that our roadmap in the years to come is tuned even more specifically to helping them succeed. We’re thankful to all the people who took time out of their schedules to help us.

Satya and I are still digesting the aggregated and anonymized data (and we shared a summary with our LPs) but mostly feel great about what we heard back, with a few areas to work on. My N&T this time was actually something more positive than I’d expected — that our founders, by and large, knew I cared about them as human beings, not just as investments. I’ve always struggled with a feeling that my fondness for people didn’t translate, that I felt more transactional to them than truly committed. Part of this has been due to my introversion which sometimes causes to me to not show up at events or disappear suddenly, and part is just my manner, which tends to be more emotionally restrained. But I feel deeply about my friends and relationships so I’m glad this has started to come through more tangibly.

So if anyone *hasn’t* experienced structured feedback from their peers, colleagues or customers, I’d strongly recommend figuring out how to experience this. It’s a wonderful way to get out of your own head and confront truths on how you’re impacting others.

Rafat Ali on Media Startups and the Nature of Venture

“1) VC money is not evil. 2) VC money is not sustainable.

Those are not contradictory statements.”

Those are Rafat Ali’s words from a post he wrote Friday in reaction to the cascade of bad news for a bunch of venture-backed new media companies. While Rafat’s expertise is concentrated in media (he started and sold Paid Content and now runs vertical travel startups Skift), the statements above apply generally (we’re investors in theSkimm and Cheddar, so clearly believe there is a place for venture here).

The most challenging aspect of taking venture capital is that it’s difficult to step off of the venture train once you’ve taken too much money, or negotiated too high a valuation, or gone too deep on executing a plan that requires high burn ahead of profitability. But complaining about that or assuming it’s fundamentally “evil,” is like getting married and then complaining it makes dating other people difficult. You knew what the ring meant when you put it on.


Side note: I generally enjoy Rafat’s perspectives on media, technology and culture. Here’s a 2016 podcast he did with Recode’s Peter Kafka that’s worth a listen.

If You Work at Google or Apple, I Need You To Read This Post About Charity & “FlashMobs for Good.”

There are 43 days left in 2017. That’s not many for any of us, but it’s an especially important countdown if you work at Google, Apple or any other tech company which has an employer match program for charitable donations. Have you maxed out your match yet? Please consider doing so and let me give you an idea for a fun way involving your team and colleagues.

During my last few years at YouTube we were able to raise tens of thousands of dollars in just a few hours by creating FlashMobs for Good where we turned charitable giving into a critical mass event. Here’s what we did and I’m hoping some of you will try this at your company:

  1. Pick a period of time (24 – 48 hours work best) and declare it a “FlashMob for Good” during which you’ll track the combined donations going from your company to a specific charity.
  2. Any charity works but I found it most successful to select one that’s (a) universally beloved, (b) is approved in your company’s match criteria and (c) has a giving model where donations of different levels are matched specifically against projects or outcomes (such as backing projects on DonorsChoose or buying specific items on Heifer International). (c) makes it especially fun because you can see the combined impact of your work in more than just a sum of money but instead a set of discrete accomplishments – eg “10 chickens, 5 cows and a portable generator.”
  3. Set up an online spreadsheet where each employee can enter their own donation contributions (or enter them as “anonymous” if they desire). Send an email with this info and the details for #4 below to the entire company.
  4. During the 24-48 hour FlashMob period, select a specific 60 minute slot where you reserve a large conference room. Tell employees they can give any time during the 24-48 hour window to participate but that you’re holding a LIVE MOB during that time. They should bring their laptops. Project the donations spreadsheet on the screen. As employees give online during the LIVE MOB, have them enter their donations on to the sheet and ring an online bell every time they complete a donation. Watching the number go up and hearing the bells creates an energetic giving environment. If you’re giving to something like DonorsChoose, it’s especially rewarding to all descend on a single project and complete it for the teacher – ie 10 of you make a $900 project complete.
  5. After the FlashMob period is over, remind everyone to enter their donations for corporate match. And send around a closing email with the matched total.

A large amount of corporate match goes unused because employees forget to give or forget to file for the match. While each person’s situation is different, as tech as an industry becomes wealthier it’s great to see charity become a larger and visible part of our values.

Hope this helps. If you have any questions or suggestions, let me know via Twitter. And if you’re reading this, please try to help me spread the concept.

“Thoughts & Prayers” Won’t Change VC Diversity But Incentives Will. Supporting Female Founders Office Hours.

I hope some male VCs got scared yesterday, and if they didn’t, they should. Seeing Jess Lee of Sequoia bring together a group of amazing female investors as part of Female Founders Office Hours isn’t just about empowering women. It’s about keeping firms who don’t have female investing partners out of this dealflow. That’s not the stated intent of FFOH, which is about relationships and kicking off a “virtuous cycle of women helping women,” but hopefully a secondary effect of this group. And I think that’s great.

I’ve joked that if VCs found diversity as interesting as crypto we’d make much faster progress on solving gender and underrepresentation in our industry. VCs are market-driven — they’ll move towards opportunity with high velocity. Similarly they’ll seek to solve existential threats, otherwise they’re in the business of offense, not defense. Homebrew, my seed fund, doesn’t have a female GP – it’s just me and my cofounder. And even though so far we’ve funded female founders at a rate 5x industry average (26% of our core investments have at least one female founder vs 5% of all VC-backed companies), we know we have some liability from being two dudes.

So you want to get more women into GP positions at VCs? Well, then continue to increase the stakes of *not* having a woman at your firm. And to me, FFOH is a positive push in that direction because it creates another centralized pool of talent your male GPs can’t access. And that’s how VC changes. Not by diversity “thoughts and prayers,” but by incentives. So apply to FFOH here, and scare some male VCs.

Virtual Assistants Are Still Vital to My Productivity But 2017 Was Ho-Hum

The Consumer Virtual Assistant landscape was pretty uneventful in 2017 but it felt more like business model stagnation than any limit in the longterm technologies. Humans are still involved in much of the supply-side fulfillment and, well, human labor is still expensive. In addition, I wonder if consumers will trust Apple, Google, Facebook and Amazon AI assistants to truly represent their best interests given ongoing investigations into bias in algorithms, designing for addiction (err i mean engagement), and the regulatory conversations occurring around 2016 elections.

My Year One 2015 summary and my Year Two 2016 summary


What Virtual Assistants did I rely upon in Year Three 2017?

Facebook Messenger M: While M moves more towards auto-replies, I believe I still have access to the fuller version of M that more closely resembles the original virtual assistant beta (remember when you could ask M to do nearly anything?). I use M to make reservations for restaurants and such when there’s not an online booking option clearly available. Also light amounts of information retrieval (call XYZ and ask 123), but stay away from anything more complex.

Wonder: I use Wonder for b2b’ish research but they’re really good for any type of research question where you could imagine a subject expert needing 15-30 minutes to pull you together an answer. Think of it as someone who is really good at Googling. They’ve continued to tune their business model, now bifurcating into faster, subscription-based product and a slower a la carte. Quality can really vary but they’ll redo a project if you find the results insufficient. Use this URL to get yourself $15 off a task:

Fancy Hands: Oh Fancy Hands, how I love you. FH isn’t great for work that needs real intelligence/decision making, but I find the timeliness and quality of execution to be great. Often my main purpose is time-shifting not just time-saving – ie having someone call a business during regular daytime hours where I don’t have a chance to prioritize getting it done between 9-5. If you want to use FancyHands, you get a discount using my referral code. Here’s a snapshot of some recent requests:

Screen Shot 2017-11-11 at 11.58.43 AM

Are there other virtual assistant services you use that I should give a try?