Hypothesis: Do You Know the Bet You’re Making?

Since the future is unknowable, by definition, we are all making bets in our life, testing hypotheses and probabilities. However, often, we aren’t aware we are making a bet or what that bet is. As a result, we don’t prioritize nor focus on the key things. This applies to careers, relationships, schools or starting companies as well. When we underwrite new deals at Pritzker, we clearly state in a sentence what is our core Hypothesis & bet we are making. 

“I don’t know where I’m going but I’m making great time”

A Core Hypothesis is demarcated by the significance of the outcome. This is the bet of all bets whereby if you are right, you are off to the races and, if wrong, you are road kill. It integrates the key success factor(s) critical to win. From this, you can determine what are the three sub-factors that can kill you and the 2-3 sub-factors that will massively scale your business. Focus all of your time & money on these.

Why is this important? If you don’t know the bet, you won’t set the right priorities nor hire the right people nor properly define your product specs for fit. You risk taking the wrong ground and winning the battle but losing war. People/companies err in three ways:

  • Death 1: assume the wrong hypothesis (e.g. You think it is developing the best consumer app & owning the customer when it is actually owning the channel which gives you scale)
  • Death 2: right hypothesis but poor execution
  • Death 3: right hypothesis but defined the wrong sub-factors (e.g. what can kill or scale you)

When we invested in Coinbase, our core hypothesis was that interest in crypto would continue to grow over time but people would want a simple, reliable and trusted brand as their gateway into this world. Given how complex the regulatory environment is along with challenges around security/hacking and actual trade mechanics, Coinbase was in a key place to consolidate share and become the Facebook of crypto (the main gateway in the US). Investing in providing the simplest user interface, the most reliable backend trading platform and world class regulatory compliance and security infrastructure, Coinbase would expand share. If the core bet turned out to be that people just wanted the cheapest, low-fee solution with little regard for “trusted brand”, then our investment would end poorly.  So far, so good. Coinbase continues to distance itself in the US from other retail & custody players with increasing market share.

So, whether it is your next career move, your start-up or your next relationship, ask yourself if you know the bet you are making and what is at the core to prove out that hypothesis. As John Doerr used to say, know the three things that can make, the three things that can tank you and spend all your money on those.

Enough: Your Savior or Your Demon

My partner, Carter, has hypothesized “…that behind every driven CEO is a 6 year old child seeking its parents’ approval”. In these formative years, we start the dance with being enough (and feeling we aren’t enough). We create coping mechanism to deal with this discomfort whether it be over-achieving, addictions, Instagram posts, compulsive behavior, etc. All of this is focused on filling an unfillable void (which actually is non-existent & manufactured by our mind).

This is especially true for entrepreneurs since we live in a world that is scrappier and has fewer resources. Our companies walk on tightwires and strive to avoid Darwin’s grasp. Ironically, there is also an abundance of creativity, freedom to operate, ability to connect with each other due to small firm size, flexibility/agility, etc. So, at any point in time, there is both Abundance and Scarcity. The difference is our perception of “ENOUGH”.

The source of most misery, conflict, wars, addictions & other fun things stems from one of three phrases:

  1. I’m not enough
  2. There’s not enough
  3. It’s not enough

The CLG coaching framework has a great representation of this by asking people if they are coming from “above the line” or “below the line”. Above is abundance, trust, being enough and Below is scarcity, fear and not being enough. When we dip below the line, we begin to self-optimize, make decisions from a place of fear, bath in anxiety, think win-lose and are short-term oriented. Armageddon is around the corner. We cling to outcomes and, as our fight or flight over-rides our rational pre-frontal cortex, we begin to make crappier and crappier decisions layered on top of each other. We justify bathing in this survival mode by telling ourselves that “if we lose our fear, we lose our drive & risk extinction”.  This is a red herring. As Ving Rhames says in Pulp Fiction…”…you may feel a slight sting. That’s pride [ego] fucking with you. F@&k pride. Pride only hurts, it never helps.”

When above the line, we are more connected to others, we seek win-win, we make decisions from a place of confidence, we enjoy what we do, we are resilient, we make clearer decisions and we can think long-term. We can actually enjoy the ride and welcome the challenges.

The heart of entrepreneurship (or just being a content human) hangs upon our ability to be self-aware about being above/below the line and on our tactics/behaviors we deploy to self-manage “ENOUGH”. The trick is to catch the downward cascade early in its formation…otherwise, you are going along for the ride. You are going to get tumbled mercilessly in the undertow of the wave. There is an array of successful practices to do this. Here are just a couple:

  • Somatic awareness (body): we all carry our emotions in our body. Some carry it in their necks, their stomachs, their backs, etc. When you go below the line, where do you carry your tension? Use this “body wisdom” as an alarm clock and check in during the day. If you feel the tension in that spot, you are probably swimming in the deep end below the line. Stop and address.
  • Foundation: monitor/track how much sleep you are getting, how often you are exercising, what you are eating (sugar & carbs or healthy food), how much time spent with family & friends. If you erode your base, below the line is unavoidable. Working massive hours, sleeping 4-5 hours a night, not moving your body will result in the Covey “Dull Saw” (the lumberjack doesn’t take time to sharpen his saw because he doesn’t have time…so it takes twice as long to cut down the tree.)
  • Mindfulness: when you feel yourself tensing up, unplug and go for a short walk (or do walking meetings), jog stairs, sit/breath deeply & meditate (feel the energy in your body & focus on stilling it), call a friend.
  • Attitude Check: describe your current story to yourself (or to a friend/partner). Are you a victim? Are you bemoaning how you don’t have enough xyz? Are you bathing in the fact that you “aren’t enough” or up to the task? Is your environment out to get you…you are alone? Rewrite each line from the perspective that you have everything you need? If it was a hero story, what amazing thing would your hero do? Position the “challenge” as something meant to make you better (like lifting a weight).
  • Say Thank You: Brian Johnson has a great practice of saying “thank you” to what comes into his life…especially the shitty stuff. Say what? First of all, your ego/brain get confused and start to search for reasons why something is being “thanked”. It begins to rewrite the story. Second, it shifts your perspective to one of events being gifts. As he says, who would Hercules be if he didn’t have monsters and armies to battle? He wouldn’t be a hero…he would simply be a really strong, big guy who wasn’t growing nor whose mettle was strengthening.
  • Integrity Check: be clear on both your values (what energizes you) and your mission/purpose. Why did you start the company? What change in the world are you seeking to see? What would the “highest version” of yourself do? How do you want to show up on a daily basis? Then ask yourself: “right now, am I behaving in alignment with this? Is this fulfilling the mission & am I the leader I could tell my kids proudly that I am?” (the “kid” test).

“Anything that does not bring you alive is too small for you.”    — David Whyte

Our genetics are set for species survival so our Sympathetic “fight or flight” alarm clock has a hair-trigger sensitivity. We are programmed to feel “not enough”.  If we don’t consciously monitor this, we will swim deep below the line. We are each enough & have enough. 

The Dawn of a New Era in VC & Tech

Tech and VC are entering the Dawn of a New Era. Our industry goes through thematic cycles roughly every 10 years (in addition to the “15 year tech” cycle).  The 2020’s will be known for the rise of Stakeholder Capitalism. We will significantly change how we build companies and what their greater roles are. There will be an expanded focus of business to “positively impact society” versus simply cranking out record earnings. We will be reminded daily of this as inequality continues to grow, homelessness worsens, cities & countries burn, etc. I’m not hugging trees here…ignore this advice at your own peril.

Something feels off as we are 11 years into an unprecedented bull market and most people are unhappy & anxious. We have “hedonically adapted” to all of the dopamine hits & blue ribbons of the past decade. Whether it is young entrepreneurs or veteran investors, I keep having daily conversations with people commenting on “how there has to be more to existence than “this”. We are hearing an increasing drum beat from mainstream America as well as idealistic millennials around stakeholder capitalism…the notion that corporations service a larger societal role beyond simply greasing the palms of the moneyed shareholder class.

For the first time in 40 years, the Business Roundtable (comprised of the largest 200 CEO’s in the country) recently broadened the purpose of corporations to include serving all stakeholders (not just shareholders). Larry Fink, CEO of Blackrock & its $7 trillion in assets, has famously championed that his firm will start evaluating companies based on their ESG track records. TPG has raised over $3 billion in Impact related funds targeting 10 of the UN Development goals. Marc Benioff, CEO of SalesForce, announced the death of traditional capitalism and the rise of stakeholder capitalism at Davos. Goldman Sachs will not take any company public that does not have a least one female board member. Investors like the Gates Foundation & Emerson Collective will join mainstream venture investors. The list goes on and on. When the largest corporations and the largest investors pivot, you don’t want to be standing in the way…you want this wind at your back.

Everyone seems to be raising “Impact Funds” these days. Many of these will fail since most haven’t thought through the “Yes And”. They need to operationalize how embracing a new approach to investing and building companies leads to competitive advantage vs simply feeling good. Whole Foods upended the grocery world not just by creating a company culture & value set but also innovating around a unique supply chain that Safeway was unable to replicate. While Whole Foods increased its store count, Safeway shut down entire regions.

Why does this matter? Because you can’t put the genie back in the bottle. We have a demographic change of power in the US going on, with Millennials stepping into their key spending years and accounting for core parts of the workforce. The Gen Z’s are right behind them. They don’t want their father’s brand of capitalism. If you can’t clearly define what your firm’s values & mission are, how these translate into positive societal change and how you are focused on all stakeholders, the headwinds are going to grow significantly. Good luck recruiting top engineers. Many of my daughter’s top engineering friends in her class at Stanford won’t consider apply to Facebook & its brethren. They increasingly won’t buy your products. Your company will be less attractive to buyers (IPO or sale), especially when the Larry Fink’s of the world begin to demand to see greater ESG transparency. This will become table stakes.

I’ve simplified how this stakeholder impact shows up into three buckets:

  • your customers & product…what you do, what does your product stand for, what impact does it have when used or consumed
  • your culture…how you do show up to your employees, what behaviors & norms do you foster or repress, what trade-offs are you willing to make, what do you look for in your hiring & firing
  • your supply chain & your community…how do you engage & treat your suppliers, what do you demand of them, how do you give back to your community & cities

I will write in more detail about each of these. However, in the interim, appreciate that we are entering a new era in entrepreneurship which will create significant new opportunities as well as increasingly punishing those clinging to old dogma.

Choice Is All You Can Control in Life

I was talking with a distraught, young entrepreneur whose week had been rough. He had a much needed prospect go with a competitor and an existing investor reneg on a promise to fund the second tranche of his commitment. He was making himself miserable, thinking about a) the potential failure of his business, b) the injustice of the unethical investor and c) the implications of this on his reputation & what he would have to tell his employees. I asked him how much value he was getting from revisiting these topics after the first time or two (very little) and if his choice to focus on them was the optimal path forward (was not)? I asked him what he had control over & what would help solve the situation the company was in?

“Man does not simply exist but always decides what his existence will be, what he will become the next moment. By the same token, every human being has the freedom to change at any instant.” – Viktor Frankl

The entrepreneur was going down the well-tread path of mistakenly focusing on external factors which he had no control over instead of internal factors which he did. We all seek to control our lives, to achieve our goals and to be happy. However, we confuse that which we can control with that which we can’t all the time. Even worse, we then attach our happiness & contentment to the results of these external factors. Lastly, we then bath all of this in stories & narrative…usually with a negative or victim theme to them. The end result is anxiety, disappoint, poor sleep and missed goals. If I had one piece of advice for my entrepreneurs, my kids and myself, it would be that:

Our choices are all we have control over. Focus all our efforts on this sole freedom: the choices we make in the space between stimulus/events and response.

Despite our desires otherwise, we have little control over our health, others opinions, our environment, our children’s behavior, our management teams, our competitors’ actions or anything else outside our mind.  We do have complete control over how we respond, how we interpret, how we act and what stories we tell ourselves…inside our mind.  We have control over a tight set of choices:

  • Values: what values & virtues to set as True North
  • Beliefs: what stories or facts we believe to be true
  • Focus: what to focus our attention on
  • Action: what action to take next
  • People: which people to reach out to or be with
  • Place: where to physically be

Do we choose to continue on our path forward as we planned or do we choose to let events derail us? Are we conscious of what we are choosing to believe or what stories we are creating or why we decide to do A instead of B or why we are spending time with Fred versus Sally? Or, are we letting these all occur on auto-pilot subconsciously like algorithms?

So, when life, whether as an entrepreneur, a parent, a friend or in a relationship, goes in an unexpected direction, you can let go/put down what is no longer serving you or you can let it drag you into the spin cycle. Ego and pride will cast an array of Oscar worthy storylines. Ask the question: “What is my play now?” Focus on five steps:

  1. Acknowledge the setback or loss
  2. Assess what choices you have control over (see above)
  3. Let go of all that doesn’t serve you/don’t control
  4. Determine you next action (what is my play now?)
  5. Take decisive action (“action dispels anxiety”)

As the famous Stoic philosopher, Epictetus, said:

 “In life our first job is this, to divide and distinguish things into two categories: externals I cannot control, and the choices I make with regard to them I do control. Where will I find good and bad? In me, in my choices.

NKC’s: How I Focus My Year to Create Impact

We all come into the New Year with a fresh start from the holidays and the hope to check off a host of resolutions that will make the coming year a success in some small or large way. While these goals are well intentioned, we often set ourselves up for disappointment in the way we frame them. They are a) not focused on key priorities, b) poorly defined or c) lack actionable steps to make them happen. But, this doesn’t need to be the case.

A few years ago, my coach, Brooke Vuckovic, coined and taught me about using NKC’s: No Kidding Commitments. These are not just rough intentions or resolutions that I hope to get to but a set of Iron Clad commitments which I make to myself (and her) that will be completed by the end of the year. I have slightly modified her approach and added a reflection step.

There are four parts to my process: 1) reflection on the year before, 2) a theme to guide the new year, 3) four to five No Kidding Commitments and 4) a set of actions for each commitment to ensure they happen.

Reflection: Before I can move forward with the new year, I want to reflect on the previous year and use this as a guide/baseline for the upcoming one. I use Reboot’s Reboot Your Year course/process which is simple and straight forward. You get an email with a quote and Koan (paradox/poem) to reflect on and a prompt to journal on for five consecutive days. They include reflection on:
    1) key events that shaped your year
    2) the personal growth resulting from these events
    3) things to let go of that no longer serve you
    4) envisioning what would make a successful year
    5) a letter of advice to yourself  
This is one of the simplest & most effective reflection approaches I’ve come across.

Theme: Next, I create a unifying theme for the year to simply and focus my attention. I choose a word and define what that word means in the context of the coming year.  Since 2019 held a significant amount of change for me and the barrage of ominous news seems unending, I chose the word “FLOW” as my core theme. Athletes know this as being “in the Zone”. Mihaly Csíkszentmihályi defines it as being in “an activity, fully immersed in a feeling of energized focus, full involvement, and enjoyment in the process of the activity.” I’ve defined it contextually for this year as being present (mentally), energized (physically) and open-hearted (emotionally) in all endeavours.

Commitments: After I choose my theme, Brooke has me lay out my No Kidding Commitments for the year. These are the uber-important achievements that will create the greatest impact and deliver the greatest amount of contentment in the next 12 months in the major segments of my life (career, family, service/impact, health, spiritual, finances/home, relationships). Each includes a statement starting with “I will…” and has a clear success state, such as, “I will sell my house and move downtown,” or “I will staff up the LA office and refocus my efforts nationally,” or “I will relaunch my blog, develop my voice and post at least 3x/week”.  The issue with traditional resolutions is that they are sloppy agreements without a logical result.  It’s hard to make progress against something like “I will be more healthy this year.” By setting tangible metrics for your NKCs, it’s easier to track progress and commit to results.

Actions: Once I set my NKCs, I will then put actions against them so that I have line of sight towards realizing each one. I create a project in Things (my task management app) for each NKC and list out the actions to take. For example, To relaunch my blog, I had roughly 10 tasks ranging from securing the domain name to hiring a design firm to setting up the Mailchimp service. I review these to-do’s every week, assess how I am making progress, and determine if there are any changes to the action plan needed.

Through this process, I’ve found I am much clearer on my priorities, accomplish what I set out to achieve and am more content throughout the year.

I’d be curious to hear what any of you do as part of your New Year reflection, resolution and planning process.

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The Three Drivers of Contentment & Motivation at Work

What motivates us to perform and drives contentment at work? Most entrepreneurs struggle with this question. You want success, want to have drive and yet rely too heavily on fear-based or external motivators which often leave a negative residue. The research shows that the most effective motivators are intrinsic and positive.

A champion needs a motivation above and beyond winning.
~ Pat Riley, six-time NBA championship coach (Lakers/Heat)

This post comes from the first part of a lunch & learn session I recently did at one of my former portfolio companies, Graphiq.

What truly motivates us? Three words: Mastery, Autonomy & Purpose. Daniel Pink, in his book Drive, reviewed the sea of research around motivation at work. While factors like money, prestige, punishment or fear can drive us, these pale in comparison to MAP. This video does a great job expanding on this work (worth the 10 min watch):

Mastery: the urge to improve, to have a sense of forward progress. In my Flow framework, this is at the heart of “thriving in the entrepreneurial journey”…defining the core elements of your identity (and focus) and then applying the habits and discipline to master the key skills critical to them. For example, in a work context, this could be “becoming the best salesperson possible” and developing the skills around prospecting, objection handling, relationship management and negotiations. On a personal level, it can be self-mastery and developing a greater sense of equanimity & patience in your daily interactions, better self-care practices (sleep, working out) and becoming less reactive to ups and downs of daily life. As you get better at something, the more rewarding it becomes.

Autonomy: the desire to direct our own lives. As we master our core responsibilities, everyone in the organization or those around us feel more confident in giving us more freedom: when we work, how we work, what we work on, who we work with. Said another way, we experience less micro-management and enjoy more degrees of freedom.

Purpose: The service to something larger than ourselves. When we do something for our own gain, it can motivate us but it is short-lived and often requires another hit (like an addict). Service can be defined in a host of different ways ranging from providing superior care to customers to mentoring junior reports to helping those less fortunate to being a role model for others. The key is that it is not focused on your own gain.

So, to reiterate…three words: Mastery, Autonomy & Purpose.

That said, none of us want to win the battle and lose the war.  Too often, we drive ourselves hard only to feel empty or drained at the end. Contentment comes from when we progress towards something better/greater versus escaping from our fears and inadequacies. Let me repeat this as IT IS CORE…focus on motivation around progressing Towards something versus the anxietal default approach of motivation through Escaping our Fears & inadequacies (e.g. the inner voice that says “look asshole, if you don’t do this right, you’ll be a failure or you’ll get fired or you’ll be embarrassed or…).

In Which Wolf Do You Feed?, I discussed the importance of Intrinsic versus Extrinsic motivations.  In his book, Pink argues that effective human motivation is largely intrinsic around mastery, autonomy and purpose. He argues against old models of motivation driven by rewards and fear of punishment, dominated by extrinsic factors such as money.

My challenge: see how you can integrate more positive, intrinsic motivators into your daily work. Define your core role at the firm, laying out the key responsibilities and outputs for this and then commit to building the skills and obtaining the knowledge to be your highest version of this (vs just getting by). Focus on the input(s) versus the output. Start with just one area or skill and go from there. Additionally, write down 2-3 ways in which your work is in service to others. Put these out where you can see them. Focus your motivation on this versus simply gaining recognition or earning more money/bonus.

Which Wolf Do You Feed?

Question: If you lose your fear, do you lose your drive?  It’s a question many entrepreneurs ask themselves.  They seem to have bought into the idea that you can either be content or you can be driven, but those two states cannot coexist. But that idea is flawed.

In reality, we are the stories we tell ourselves, becoming the characters (hero or villain, creator or victim, etc) that we believe and repeat. Once set, these identities and these stories rule our lives. For the same conditions or situation, they determine whether we are thriving or surviving, growing or just getting by, content or disatisfied.  And yet, we often make this selection sub-consciously.

One of the leading experts on peak performance, Mihaly Csikszentmihalyi, coined the term “Flow” in his seminal research on top performers. We sometimes call it being “in the zone,” performing at the top of our game and enjoying a sense of mastery and ease rather than enduring the “fear and angst” that can accompany performance.

Mihaly defines Flow as:

“being completely involved in an activity for its own sake. The ego falls away. Time flies. Every action, movement, and thought follows inevitably from the previous one, like playing jazz. Your whole being is involved, and you’re using your skills to the utmost.“

How do we get into it and why do we fall out of it? It’s all about what’s driving you.  Is your motivation internal/intrinsic or external/extrinsic motivation? This is the heart of my blog and my framework below.

At a high level summary, the key to enjoying sustainable success rests on Arete.  This is the Greek concept around striving to become the “highest version” of ourselves as defined by us (intrinsic) and not as defined by others (extrinsic). This is motivation driven by moving towards something aspirational versus moving away from fear.

IDENTITY is at the heart of all of this. If we define our core Identity in empowering ways, we set ourselves up for Flow. If we define ourselves in ego-centric, inflexible ways, we set ourselves up for terrible suffering. Identity has a host of components ranging from core values, narratives, identity statements, behaviors, life segments, etc. We have a core identity and then layers that we use to define ourselves i.e. Mother, wife, boss, coach, athlete, daughter, friend. 

EXPECTATIONS flow from the Identities we choose. These are often subconscious but dictate our lives. When reality shows up differently from our expectations, we begin to feel anxious and suffer. Being conscious around the Identities we chose and understanding the Expectations that arise from this is half the game.

There is a Cherokee story of a chief talking to his grandson. He describes that he has Two Wolves battling inside of him. One is full of ego, greed, anger and pride. The Other is full of truth, hope, empathy and service. When the boy asks “which wolf wins?”, the chief responds “The one that you feed.”

In selecting our identities and in embracing specific narratives about our lives, we feed one of the wolves. Do you work for personal glory or in service to something greater? How critical is external validation to your happiness? Is your inner voice on fire or can you find windows of inner calm?

For example, belieiving that life is a zero sum game and defining yourself as a successful entrepreneur who doesn’t fail can set you up for misery. Things won’t go your way on a daily basis. Setbacks confirm the harshness of your reality and this identity will light up your ego and your fear. Anxiety sets in. “This shouldn’t or can’t be happening.”  “What will people think?”  You might project negative scenarios causing the voice of your inner critic to get louder.  Why? Because you defined yourself and your Identity in a way that plays to ego, requires external validation and has limited flexibility.

However, if you view experience as driving growth, then challenges/setbacks become a means to grow and improve. If you identify as “a resilient & creative entrepreneur who uses persistence in confronting challenges “, your expectations and your interpretations change. In a perfect world, you would welcome these challenges to sharpen your craft and skills. Your value isn’t reflected in what others think of you but rather how you grow and improve your mastery. This is a simplistic example but it shows you the importance of answering: Which wolf do you feed?


Challenge: What is your current Identity and Narrative and how can you define what a “Higher Version” looks like to incorporate more intrinsic motivation and Flow?

VC Confidential Is Now Something Ventured

Something Ventured is pretty fully operational! Back in 2005 when I was on the FeedBurner board (Twitter 1.0), I started VC Confidential with two goals: 1) to help entrepreneurs see behind the VC curtain on how we thought/made decisions and 2) to see how the FeedBurner RSS service worked in practice. Dick Costolo (CEO), Brad Feld and Fred Wilson (fellow investors) were great mentors and helped build my base. Over the years, however, I have felt a different calling with my blogging. So much so that I stopped for 2 years while I worked things through.

There are a lot of great blogs out there now around the tactical and practical elements of entrepreneurship and venture. However, what I have seen lacking is a deeper focus on the Entrepreneurial Journey from a more holistic perspective. This became the focus of Something Ventured (.net). Too many people (both entrepreneurs and everyday people) win the battle and loose the war. They survive the day, the month, the start-up, the next financing versus thriving and finding purpose/energy in the Journey. Jerry Colonna has built out Reboot.io around this (highly recommend it for all entrepreneurs). The Life Coach industry is booming for a reason. Why just “survive” when you can “thrive”?  Why hit the finish line burned out when you can have sustainable success?  When does “just getting by for the next three years” end? If I “lose my fear, do I lose my drive”? (No, BTW, just lose less sleep). These are the core questions I’m focused on.

So, there will be a broad array of tactical and practical (how to draft a value proposition, how to layout fundraising narrative, how to build culture, etc) but there will also be a lot on determining North stars & values, embracing radical self-inquiry, setting goals and establishing disciplines/habits to stay in alignment with these. Building skills not just for business for living the “good life”.

So, all of my old post (450+) still sit over at VC Confidential but all future posts will be here on Something Ventured. Tell your friends and share. Thanks!

— Matt

My Venture Covenant With Entrepreneurs

There is a false dogma around the VC/Entrepreneurship relationship…supported by bad behaviors on both sides. You feel a need to manage your investors & board, to not show weakness and present to us. We fail to fully listen, dictate desires or fears and financially optimize our investments. Trust and open communication are our most precious assets which we squander away as a result. In reality, we are on the journey together with a common enemy (Darwin). We must hang to together or “surely, we will all hang separately.” We need to optimize our chances for success, row together, remove unnecessary drama and minimize self-inflicted wounds (the majority cause of pre-mature death). Over the years, I’ve seen both the good and the awful with this relationship. So, here is my rough draft of a Covenant with My Entrepreneurs

Be committed to your personal & the company’s success Be self-aware and embrace your blind spots
Respect that this is your company but provide guardrails & accelerants Don’t self-optimize. Your employees and I depend on you
Show up rationally, empathetically and, “first, do no harm” Don’t let fear or ego dictate how you manage and lead
Be open and frank in my communication Be open and honest in your communications
Seek homework from you to knock down barriers & accelerate growth Say “no thanks” when I’m not helpful
Respect your boundaries Acknowledge when you need help or don’t know
Honor confidentiality Embrace this as a partnership, not as a necessary Evil
Encourage experimentation, quick iterations and respect failure Don’t feel obligated to carry the world on your shoulders

Multiples vs IRR

One of my most popular posts from VC Confidential…

“You Can’t Eat IRR.” — anonymous

I was at a business school today helping judge several business plans. As group after group presented, I saw each make the same mistake as the previous. When they tried to justify the investment from the perspective of the VC, they kept telling us that this was a 40% IRR deal or a 25% IRR as if we had magical IRR thresholds.

The reality is that the venture world is all about multiples and the IRR’s are the results. I don’t know what the original legacy behind this was, but from a practical perspective, it is driven mostly by the fact that we live in a boolean world. Some is also based upon the high net worth legacy of our business. Originally, because pension law did not permit the large institutional investors in, our business was funded by family offices, endowments and foundations. Multi-generational families, while they want high IRR’s, are really looking to double or triple their invested capital.

From a portfolio perspective, if we invest in 10 deals, 4 are tube shots, 2 we fight to get our money back on, 2-3 we get 2-5x on and the 10th deal drives the return (hopefully north of 10x). If we doubled our money in 1 year (100% IRR) but lost all our money on the next deal over 6 years, we aren’t happy (net gain is $0). We don’t care that we made 2x in 1 versus 3 years or lost all of our money over 6 years versus 4 years (this impacts IRR), because we earned 1x on the capital.

We often see complex financial models with discounted cash flows, hurdle rates and such. These are useless. I have never seen a set of financials in an early stage company that ever reflect what Darwin will allow to happen in reality. So, you start your modeling with unreliable numbers. Secondly, what is the beta for an early stage biotech deal, a semi-conductor start-up, etc? Can you assess the risk associated with a given management team? How about a new market space?

Perhaps we are too lazy to try and figure this out, but after decades of effort, the only method that seems to work in the venture world is to target 10x on each early stage deal (3-5x on later stage plays). They all look like the next Microsoft, but eventually, the portfolio of these settles down to the profile above. In the early stage world, if you target, say a 40% IRR, through assuming a number of 5x wins in a compressed period of time, you will likely be out of the business. Your 5x wins, while possibly generating high IRR’s, don’t return enough multiple to pay for the 4 tube shots and 2 break-even deals. Your winners need to deliver 10x.

So, next time you are trying to convince a VC about the merits of your firm, show them how they can make 10x capital on a realistic exit scenario (not how to get a 40% IRR).