I want to start with a question for for
marking Ron which is by part number one
the question how would you like answer
what you guys decide to invest in here
no no you first
um well we have a slide on that we have
it we have an app for that
um mark can start while we try to get
your slave okay maybe guys so say the
question again what makes you decide to
invest in Connor so what makes us invest
in a company is based on a whole bunch
of characteristics I've been doing this
a since 1994 right before mark got out
of the University of Illinois
so SV angel and its entities have
invested in over 700 companies so to
invest in 700 companies that means we
physically talked to thousands of
entrepreneurs and there's a whole bunch
of things that just go through my head
when I meet an entrepreneur and I'm just
going to talk about what some of those
are and literally while you're talking
to me in the first minute I'm saying is
this person a leader you know is this
person rifle focused and obsessed by the
product I'm hoping because usually the
first question I ask is what inspired
you to invent this product I'm hoping
that it's based on a personal problem
that that founder had and this product
is the solution to that personal problem
then I'm looking for communication
skills because if you're going to be a
leader and hire a team assuming your
product is successful you've got to be a
really good communicator and you have to
be a born leader now some of that you
might have to learn those traits of
leadership but but you better you better
take charge and be able to to
to be a leader I'll switch back to the
slide but let's let mark yeah I agree
with all that I guess and there's a lot
of detail to this question that we could
talk about and we maybe even a little
bit different than Ron and that where we
are different around that we actually
invest across stages so we invest at the
seed stage venture stage growth stage
and then we invest in a variety of
different business models consumer
Enterprise and a bunch of other
variations so there are kind of
fine-grained answers you know that we
could get into if there's specific
questions to general concepts that I
would share so one is the venture
capital business is a hundred percent a
game of outliers it's extreme exceptions
right so the conventional statistics are
you know on the order is on the order of
four thousand venture fundable companies
a year the want to raise venture capital
about you know about 200 of those will
get funded by it what's considered a
top-tier VC about 15 of those will
someday get to 100 million dollars in
revenue and those 15 from that year will
generate something on the order of 97%
of all the returns for the entire
category venture capital in that year
and so venture capital is such an
extreme feast or famine business
you're either in one of the 15 or you're
not we're in one of the 200 or you're
not and so the big thing in truth is
looking for no matter you know which
sort of particular kind of criteria we
talk about they all have the
characteristic if you're looking for the
extreme outlier the other thing I'd
highlight that we think about a lot
internally is we have this concept
invest in strength versus lack of
weakness and at first at something
obvious but it's actually fairly subtle
which is sort of the the default way to
do venture capital is to kind of check
boxes right so you know really good
founder a really good idea you know
really good you know products really
good initial customers
check check check check okay this is
reasonable all put money in it what you
find with those those sort of check box
deals and they get they get done all the
time what you find this they often don't
have something that really makes them
really remarkable and special right they
don't have an extreme strength that
makes them an outlier on the other side
of that the companies that have the
really extreme strengths often have
serious flaws and so so one of the
cautionary less is a venture capital is
if you and if you don't invest in the
basis of serious flaws you don't invest
in most of the big winners and we could
go through except flat for example after
example of that but that would have
ruled out almost all the big winners
over
and so at least what we aspire to do is
to invest in the one in the industry
artists that have a really really
extreme strength along an important
dimension and that be willing to
tolerate some other you know set of
weaknesses around the guy you're like
okay I don't want to over dwell on on
the the slide but when you first meet an
investor you've got to be able to say in
one compelling sentence that you should
practice like crazy what your product
does so that the investor that you're
talking to immediately can picture the
product in their own mind probably 25%
of the entrepreneurs I talked to today
still after the first sentence I don't
know what they do and as I get older and
less patient I say back up I don't even
know what you do yet but so try and get
that perfect and then I want to skip to
the second column you have to be
decisive the only way to make progress
is make decisions procrastination is the
devil in startups so no matter what you
do you got to keep that ship moving if
it's decisions to hire decisions to fire
you got to make those quickly all about
building a great team once you have a
great product then it's all about
execution and building a great team
Parker could you talk about your seed
round and how that went and what it was
you had done differently as a father
easy money sure so actually I think my
my seed round most of the stuff with my
current company felt like from
fundraising perspective felt like it
came together relatively quickly but
actually one of the experiences that I
had I I started a company before this
that I was at for about six years and my
co-founder and I pitched almost every VC
firm in Silicon Valley we literally went
to like 60 different firms and they all
told us no and we were constantly trying
to figure out you know how do we how
should we adjust our pitch and how
should we know how should we do the
slides differently and how do we tweak
the story and that sort of thing
and at one point there was this sort of
key in
site that someone gave me when I was
pitching actually someone at coastal
ventures and the this VC said guys you
know he was looking for some very
particular kind of analysis that we
didn't have on hand and he was like guys
you don't get it he was like you know if
you guys were the Twitter guys you guys
could come in and you can just be like
little bit and like you know put
whatever up here and like we would
invest in you but like you guys aren't
the Twitter guys so you need to make
this really easy and have like all this
stuff ready for us and all this kind of
stuff and I took like the exactly
opposite lesson of what he I think
wanted me to take away from that with
which was like she's like I should
really just figure out a way to be the
Twitter guys and like that's that's the
way to do this and so so actually like
one of the reasons I started my current
company or one of the things I found
very attractive about Zen offenses as I
was as I was thinking about it it seemed
like a business I was so frustrated from
this experience of having tried you know
for like two years to raise money from
from VCS and it sort of decided like to
held it you can't count on there being
capital available to you and so this the
business that I started seemed like one
that like like actually just maybe I
could do it without raising money at all
like there might be a path into kind of
there's enough cash flow it seemed
compelling enough that I could like do
that and it turns out that those are
exactly the kinds of businesses that
that that investors love to invest in
and and it made it incredibly easy so I
actually think like I mean Sam is very
kind and said I was an expert in
fundraising the reality is I don't
actually even think I'm very good at
fundraising it's probably something I'm
like less good at then then you know
sort of other parts of my job but I
think if you can if you can build a
business that's you know where
everything is like moving in the right
direction if you can like be to Twitter
guys look nothing else matters and if
you can't like you know be the Twitter
guys it's very hard for anything else to
make a difference for things to kind of
come together for you what why did that
VC say be like the Twitter guys when the
fail whale dominated the site for two
years because it's crying anyway does it
work yeah the other point I want to make
is bootstrap as long as
you possibly can I met with one of the
best founders in tech who's starting a
new company and I said to her well what
are you going to raise money
I might not and I go that is awesome
you never forget the bootstrap so I was
actually going to close on this but I'm
just going to accelerate it because
Parker I think just gave you the most
important thing you'll ever hear which
is what I was also going to say which is
so the number one piece of advice that
I've ever read and that I that I tell
people on these kinds of topics it's
always it's from the comedian Steve
Martin who I think is it absolute genius
wrote a great book on his startup career
which obviously was very successful the
books called born standing up and he
literally it's a short little book and
it describes how he became Steve Martin
and the heart of the book is he says you
know what's the key to success he says
the key to success is be so good they
can't ignore you right and so in a sense
like all this we're gonna have this
entire conversation I'm sure we'll keep
having about how to raise money but in a
sense it's all kind of beside the point
because if you do what Parker's done and
you build a business that is going to be
a gigantic success then investors are
throwing money at you and if you come in
you know with a theory and a plan and no
data and you're just one of you know the
next thousand it's going to be far far
harder to raise money the other so
that's the positive way to put it is
kind of be so good they can't ignore you
in other words you're almost always
better off making your business better
than you are making your pitch better
the other thing the the that's the
positive way of looking at the negative
way of looking at it or the cautionary
lesson is that then this gets me in
trouble every single time I say it but
I'm on a ton of flu medication so I'm
going to go ahead and just let it rip
raising venture capital is the easiest
thing a start-up founder is ever going
to do yes as compared to recruiting
right as compared to recruiting
engineers in particular as compared to
recruiting engineer number 20 it's far
harder than raising venture capital
selling to enterprise customers is
harder getting viral growth going on a
consumer business is harder getting
advertising revenue is harder almost
everything you'll ever do is harder than
raising venture capital and so I think
Parker is exactly right if you get in a
situation in which raising the money is
hard it's probably not hard compared to
all the other stuff that's about to
follow and it's very important to bear
that in mind
you know it's often said raising money
is not actually a success it's not
actually a milestone for our company and
I think that's true and I think that's
the underlying reason it just it puts
you in a position to be able to do all
the other harder things related to that
um what do you guys wish founders did
differently when raising money um and
specifically Martin you know you
mentioned this relationship between
money yeah so the single biggest thing
that people are just missing and I think
it's all of our faults we're all not
talking about it enough but I think the
single biggest thing entrepreneurs are
missing both on fundraising and how they
run their companies is the relationship
between risk and cash so the
relationship between risk and raising
cash and then the relationship with risk
and spending cash so I've always been a
fan of something that Andy Radcliffe
taught me years ago which he called the
calls of the onion theory of risk which
basically is you can think about a
start-up like on day one as having every
conceivable kind of risk right and you
can basically just make a list of the
risks and so you've got you know
founding team risk you know to the
founders or the founders can be able to
work together do you have the right
founders you're going to have product
risk you know can you build a product
you'll have technical risk right which
is maybe you need a machine learning
breakthrough or something to make it
work they're going to be able to do that
you'll have you know launch risk will
the launch go well you'll have you know
market acceptance risk you'll have
revenue risk a big risk you get into a
lot of businesses that have a sales
force is can you actually sell the
product for enough money to actually pay
for the cost of sale so you have cost of
sale risk if you're a consumer product
you'll have viral growth risk well you
get the thing of viral growth and so
let's start at the very beginning it's
basically just this long this long list
of risks right and then the way that I
always think about running a start-up is
also the way I think about raising money
which is it's a process of peeling away
layers of risk as you go right and so
you raise seed money in order to peel
away the first two or three risks right
the founding team risk the product risk
may be the initial watch risk you raise
the a round to peel away the next level
of product risk maybe you peel away some
recruiting risk as you get your full
engineering team built maybe you peel
away some customer risk because you get
your first five beta customers right and
so basically the way to think about it
is you're peeling away risk as you go
you're peeling away risk by achieving
milestones and then as you achieve
milestones you're both making progress
in your business and you're justifying
raising more capital right and so you
come in and pitch
somebody like us and you say you're
raising it be round you know the best
way to do that with us is you say okay I
raised the seed round I achieve these
milestones are eliminated these risks I
raise the a round I achieve these
milestones I eliminated these risks
now I'm gonna raise it be round here are
my milestones here are my risks and then
by the time I go to raise the seed round
here's the here's the state that I'll be
in and then you calibrate the amount of
money that you raise and spend to the
risks that you're pulling out of the
business and I go through all this in a
sense that sounds kind of obvious but I
go through all this because it's a
systematic way to think about how the
money gets raised and deployed as
compared to so much of what's happening
especially these days which is just oh
my god let me go raise as much money as
I can let me go build the fancy offices
let me go hire as many people as I can
and just kind of hope for the best uh
I'm going to be tactical for sure don't
ask people to sign an NDA we rarely get
asked anymore because most founders have
figured out that if you ask somebody for
an NDA at the front end of the
relationship you're basically saying I
don't trust you so the relationship
between investors and founders involves
lots of trust the biggest mistake that I
see by far is not getting things in
writing you know the my advice on the
fundraising process is do it as quickly
and efficiently as you possibly can
don't obsess over it for some reason
founders get their ego involved in
fundraising where it's a personal
victory it is the tiniest step on the
way as Mark said and it's it's it's the
most fundamental hurry up and get it
over with but in the process when
somebody makes a commitment to you you
get in your car and you type an email to
them that confirms what they just said
to you because investors have a lot of
investors have very short memories and
they forget that they committed to you
that they were going to financier they
forget what the valuation was that they
were going to find a co investor you can
get rid of all that controversy just by
putting it in writing and when they try
and get out of it you just resend the
email and say excuse me and hopefully
they've replied to that email anyway so
get it in
meeting in meetings take notes and and
follow up on what's important I want to
talk a little bit more about tactics
here on just how does the process go can
people email you guys directly do they
need to get an introduction how many
meetings does it take for you to make a
decision how do you figure out what the
right terms are when can a founder ask
you for a check
you wanna that was about it was like
that was like six questions a lot yeah
okay good it's the process what if you
describe what you describe cuz you'll
describe seed and then I'll describe
yeah yeah so yeah so SV angel it you
know invests in seed stage startups so
we like to be the very first investor we
normally invest today at around that's a
million to two million it used to only
be a million so if we invest two hundred
and fifty K that means there's five or
six other investors in that syndicate SV
angel has now a staff of 13 people I do
know due diligence any more I am NOT a
picker anymore I just help on major
projects for for the portfolio companies
that are starting to mature but we have
a whole team that processes we at SV
angel end up investing in one company
for every 30 that we look at and we end
up investing at about one a week I think
what's interesting is we don't really
take anything over the transom our
network is so huge now that we basically
just take leads from our own network we
evaluate the opportunity which means you
have to send in a really great short
executive summary and if we like that we
actually vote although I'm not in this
meeting anymore but the group actually
votes on do we make a phone call
that's how important time is in this
process and if enough of the of the of
the team at SV thinks it's interesting
then they appoint a person to make a
phone call to that founder usually
somebody on our team who has domain
experience if the phone call goes well
bingo we want to meet you fSV angel asks
you for a meeting we are well on our way
to investing if that meeting goes well
we'll do some background checks backdoor
background checks get a good feeling
about the company the market that
they're going after and then and then
make the commitment to invest and then
start start helping get other value-add
investors to be part of the syndicate
because if we're going to have an equal
workload we want the other investors in
this company to be great angel investors
as well so I'll talk a little bit about
the venture stage kind of this year at
the series a stage you know that follows
so to start with I think it's fair to
say at this point that the top tier
venture capitalists pretty much only
invest in two kinds of companies at the
series a Stage one is if they have
previously raised a seed round and so
it's it's almost always the case when
we're doing a series a investment for
the company has a million or two million
dollars from seed financing you know
from from Ron and and folks that he
likes to work with almost always by the
way Ron just to be clear and folks he
likes to work with so first you know
they have a seed round so if you're
going to race series a the first thing
to do is raise C because because that's
that that's generally the the way the
the progression works at this at this
point every once in a while we'll go
straight to a on a company that hasn't
raised a seed round really the only
times though that that happens our when
it's a founder who has been a successful
founder in the past and is almost
certainly somebody we've worked with in
the past so we actually we haven't
announced what we just we just did one
of these we'll announce in a few weeks
where it's a founder who I was an angel
investor actually I think Ron was also
in the team's company in like 2006 and
then the company did its thing and then
ultimately was acquired by another big
company and then that team now is
starting their new thing so in that case
we're just going to jump it straight to
an a because they're so they're so well
known and they have a plan all lined up
for it but you know that's the exception
it's almost always preceded preceded by
a seed round the other thing is yeah I
guess I mentioned this already but we
get similar to what Ron said we get
2,000 referrals a year through our
referral net
work a very large percentage of those
are referrals through the seed investors
and so by far the best way to get to a
far the best way to get the best
introductions to the a stage venture
firms is to be able to work through the
seed investors already be able order
work through something like Y Combinator
ah this meeting about terms um what what
terms should founders care most about
and how's your honor to negotiate maybe
partnering sure well I think um probably
precisely because of what Mark said the
most important thing at the seed stage
is picking the right seed investors
because they're going to sort of lay the
foundation for future fundraising events
you know they're going to make the right
introductions and I think there's a
enormous difference in the quality of an
introduction so if you can get a really
good introduction from someone who
venture capital it's really trusts and
respects you know the likelihood that
that's going to go well is so much
higher than sort of like a you know a
much kind of a much much more lukewarm
introduction from someone they don't
know as well so the seed stage probably
the best thing you can do is find the
right investors and then how does the
founder know right well I think it's
really hard I mean so one of the best
ways I mean you know not to give a plug
for YC but you know YC does a very good
job of telling you exactly who they
think those people are and and can
really direct you towards and I actually
have found it to be like pretty accurate
in terms of like who you guys said we're
going to be the best people like dated
up being the most helpful as we were
raising subsequent rounds sort of you
know really provided the best
introductions and the people who maybe I
thought were you know seemed okay but
we're not you know like we're not as
sort of highly rated by YC like they
ended up being the case that they were
kind of like real duds in the seed round
someday we're going to publish out of
these people oh my god they're gonna be
a lot of upset people don't do so how
did you think about negotiation how do
you figure out what the right valuation
well so I started out I mean I like when
I was raising my seed round I really
didn't know and and I mean we had
conversations about this I I probably
started a little too high on the
valuation side and the so wise you guys
know like Y Combinator sort of
culminates in this thing called demo day
where
you get sort of all of these investors
at once who are looking at the company
and I started out trying to raise money
like a 12 or a 15 million dollar cap
which is like not quite the same thing
as evaluation but that's sort of roughly
equivalent and everyone was like that's
crazy you know that's that's completely
nuts they're like you're like too big
for your britches like that that's
completely just wouldn't work and so I
ended up sort of walking it down a
little bit and and within sort of the
space of a couple days said okay well
I'm going to raise at nine and then
suddenly for whatever reason that it
sort of hits some magical threshold on
the seed seed stage that it was below
ten that it seemed like there was like
almost infinite demand for the round at
edit like at a nine million cap so no
one would pay twelve but at a nine
million dollar cap it felt like I
probably could have raised like ten
million dollars and that the round came
together you know in in roughly about a
week at that point once I kind of hit
that threshold and so there seemed to be
and they probably fluctuate over time
but there seem to be these sort of like
thresholds particularly for seed stage
companies that that that investors will
think of as like this is what you know
like above this level is like crazy that
like doesn't matter and they're sort of
like a rough kind of range that that
people are willing to pay and so you
just kind of like you you have to just
kind of figure out what that is get the
money that you need
don't don't raise any more than you need
and just kind of get it done and you
know at the end of day like whether
whether you raise a twelve or nine or
like six it's not it's not a huge deal
for the rest of the company is there a
maximum amount of the company
you think the thumb should sell in their
seed round a round beyond which pops out
any of you feel like that's a better
question for you oh gosh I don't know I
mean um you know I think um I mean I
don't know the rules on this stuff I
think the tricky thing is it mean it
seems like they're kind of rough
particularly for like a series a you're
probably going to sell somewhere between
you know twenty and thirty percent of
the company because you know below
venture capitalists tend to be a lot
more ownership focus than price focused
so you might find that it's actually
sometimes when companies raise a really
big rounds it's because you know the
investor basically said listen I'm not
going to go below 20% ownership but I'll
pay more for it and so and and above 30%
probably sort of weird things happen the
cap table like it gets hard you know
down the line to sort of you know for
there to be enough room on the cap table
for everyone and so everything seems to
come in in that range so you know that
probably just is what it is
in most cases so at you know at the seed
stage I mean what I've heard there
doesn't seem to be any magic to it but
it seems like 10 to 15% is what what
people say but but that's mostly just
what I've heard I'm curious in yeah I I
agree with all that I think it's
important to get the process over with
but I think it's important for the
founder to say to themselves in the
beginning that at what point is my
ownership start to demotivate me because
if there's like a 40% dilution in an
angel round I've actually said to the
founder do you realize you've already
doomed yourself you know you're going to
own less than 5% of this company if
you're a normal company and so these
guidelines are important
the you know the the 10 to 15% because
if you keep giving away more than that
there's not enough left for you and the
team and you're the ones doing all the
work well actually we'll walk we've seen
it we've seen a series of interesting
companies in the last five years that
where they just you just walk oh simply
we want it we won't bit something the
basis of their cap tables already
destroyed outside investors already
owned too much there's a company we
really wanted to invest in but the
outside investors already owned 80% of
it when we when we talked to them and it
was still a relatively young company
they had just done two early rounds that
it just sold too much the company and
literally we were worried and I think
accurately so that it was going to be
demotivating for the team to have that
structure one more question before we
open up to the audience on for or on
could you guys both tell the story of
the most excitement you've ever made and
how that other the benefits other words
yeah others other than sorts for me
clearly it was the investment in Google
in 1999 and we got Google return out of
it but funny enough I met Google through
a Stanford professor David Cheriton
who's in the School of Engineering he's
still here he was actually an angel
investor in Google and an investor in
our fund and kind of the quid pro quo we
have with our investors in the fund is
you have to tell us about any
interesting company that you see and we
loved it that David Cheriton was an
investor in our fund because he had
access to the to the computer science
departments deal flow and we were at
this party of vivec ranadivé house in
full tuxedo
I hate tuxedos and davie anyone here
know David Cheriton because you know for
sure he does not like taquitos and he
was in a tuxedo but I went up to him and
we complained about our attire and then
I said hey what's happening in at
Stanford and he says well there's this
project called backrub and it's searched
and it's searched by PageRank and
relevancy and back in today PageRank and
relevancy everyone says oh you know
that's so obvious in 1998 that was not
obvious that engineers were designing a
product based on this thing called
PageRank weight and all it was was a
simple algorithm that said if a lot of
people go to that website and other
websites direct them there there must be
something good happening on that website
that was the original algorithm and the
the motivation was relevance so I said
to David I have to meet these people and
he said you can't meet him till they're
ready which was the following May funny
enough I waited I called them every
month for five months and finally got my
audition
with Larry and Sergey and right away
they were very strategic they said we'll
let you invest if you can get Sequoia we
don't know Sequoia but they're investors
in Yahoo and because we're late to
market we want an OEM deal with Yahoo
and and so I earned my way into the
investment in Google so I went on the
other side which is which is Airbnb
which we actually were not early
investors they were we did an arrow baby
as a growth round we did the first big
growth round in Airbnb yeah at about a
billion dollar valuation in 2011 and I
think that will turn out to be I believe
that will turn out to be one of the
spectacular growth investments of all
time we'll see but I think it's going to
be I think this is really gonna be one
of the big companies so I'll tell that
story because it's not a story of pure
genius
it's a we pass it we didn't even meet
with them I don't think we met with him
the first time around or maybe one of
our junior people did but it was one of
these it's you know I said earlier that
venture capital is entirely game of
outliers right one of the key things
with outliers is the ideas often seem
completely nuts up front and so of
course the idea of a website where you
can have other people stay in your house
if you just like made a list of the
ideas that are like most nuts that would
be you're like right there at the top
and then and then very nice yeah good
good is hopefully it's very courteous on
my stupidity
well the second most stupid idea you
could possibly think of is it is a
website where you can stay in other
people's houses and so that uniquely
combines both of those bad ideas
so of course it turns out they've
unlocked an entirely new way to
basically software eats real estate
they've unlocked this just gigantic
network effect it's a gigantic global
phenomenon it's to be a normal see
successful company
so part was just coming to grips with
the fact that we had whiffed on our
initial analysis of the idea and that
the numbers were clearly proven that we
were wrong and the customer behavior was
clearly proving that we were wrong so
one of our one of our philosophies at
our firm is we're multistage the big
reason for that is so we can fix our
mistakes and we can pay up to to get in
later when we when we screw up early on
the other thing I'll highlight though is
the other reason why we pull the trigger
at a high valuation
when we did was because of our we had
spent time at that point with founders
with Brian and would show and with Nate
and there's a friend of mine in private
equity has this great line Egon Durbin
has this great line he says wouldn't
people progressed into the careers they
get bigger and bigger jobs and at some
point they get the really big job and
it's some people but half people grow in
a big job and about the other half
people swell into it right and you can
kind of tell the difference there's a
point when people just lose their minds
and one of the issues with these
companies that are sort of super
successful hyper growth companies is you
know you you know he's Airbnb was sort
of the classic case of these super young
founders who hadn't run anything before
so how are they going to be at running
you know this sort of giant global
operation and we just were tremendously
impressed and are today every time we
deal with all three of those guys how
mature they are how much they're
progressing you know it's like they get
more and more mature they get better and
better judgment and they get more and
more humble as they grow and so that
made us feel really good but not just
was this business going to grow but that
these were guys who are going to be able
to build something and be able to run it
in a really good way you know people
always ask me why do you think Airbnb is
such a great company it's funny we're
obsessing over air B&B but and I say to
people it's because all three founders
are as good as the other founder that is
very rare in the case of Google two
founders one of them's a little better
than the other one but hey he's the CEO
every company has a CEO I think I think
we just got the TechCrunch headline
everything I have every every company
every company has a CEO why am I saying
this when you start a company you have
to go find somebody as good or better
than you to be the co-founder if you do
that your chances of success grow
astronomically and that's why Airbnb
became so successful so quickly the
anomaly is Mark Zuckerberg at Facebook
yes he has an awesome team but but the
Mark Zuckerberg phenomenon where it's
mainly one person that is the outlier so
when you start a company you have got to
find phenomenal co-founders all right
yes so obviously the conventional
why you raise money because you need it
but the more I get off conventional
wisdom the more I'm starting to hear
another story about why you raise money
and I'm actually doing Founders Day it's
more to facilitate the big ends of who
are in the worst case to facilitate the
aqua hire instead of just fizzling out
them to nothing what extent is that
accurate thinking or flooding does
raising money help you with an EXO and a
choir well if you if you pick good
investors who have good rolodexes and
domain expertise in what your company
does they're going to add a lot more
value than the money and those are the
types of investors you should be looking
for oh yeah so the answer the question
is clearly yes but also in a sense it
doesn't matter because you can't plan
these things according to the downside
and so I mean that's the scenario you
are not obviously you're not hoping for
and so well the answer is probably that
shouldn't enter into the decision-making
process too much it might ah it might
enter into which investors raise money
from it probably doesn't enter into the
whether to raise money question that
much I don't think there's any advice
body will thank you sir about key boat
evasion so on not everything's like it
starts in software it spirals
what should honors do for capitalist
companies so this is I would double down
in my previous comments on the the onion
theory of risk and the staging of risk
and cash which is the more capital has
to the business the more intense and
serious you have to be about exactly
what's going to be required to make the
business work and what the staging of
milestones and risks are because in that
case you want to line up you want to be
very precise of lining up it because the
risk is so high they'll all go sideways
right so like you want to be very
precise what you're going to accomplish
with your a round and what's going to be
a successful execution of a round
because if you raise too much money in a
round that will seriously screw you up
right later on down the road and the you
know because you're gonna raise the CVE
rounds you know and then the cumulative
dilution will get to be will get to be
too much and so you have to be precise
on every single round you have to raise
as close to the exact right amount of
money as possible and then you have to
be as pure and clean and
and precise with the investors as you
can possibly be about the the risks and
the milestones but this by the way is a
big thing that this this is actually I'm
really glad you asked a question it kind
of goes back to what Parker said like
look if you walk in if you walk into our
firm and you've got Twitter or you've
got Pinterest you've got something and
it's just viral growth and it's just on
fire and it's just going to go like
those are the easy ones like it's just
like let's put money in it and let's
just feed the beast and off it goes but
if you walk in and you're like I got
this really great idea but it's going to
take three hundred million dollars
staged out over the next five years
probably across five rounds you know it
has a potentially very big outcome but
boy like this is this is not Twitter
like this is going to be serious heavy
lifting to be able to get there we will
still do those but the operational
excellence in the part of the team
matters a lot more and one of the ways
that you convey the operational
excellence is in the quality the plan
and so that and back to the Steve Martin
thing be so good they can't ignore you
the plan should be very precise and
there are way if your capital equipment
intensive there are ways of borrowing
money in addition to venture capital
yeah sir you can kick in right you can
kick on a venture debt and then later on
lease financing but again that that
underlines the need for operational
excellence because if you're going to
raise debt then you really need to be
precise on how you're running the
company because it's very easy to trip
the covenants on a loan and Cerie easy
to lose the company and so it's it's a
it's a thread the needle process that
demands are just sort of a more advanced
level management than sort of you know
the neck snap chat bad side investors
that you shouldn't work with for your
company yeah it's a good question how do
you go working
what's the sign you should avoid until I
fester well it's the inverse of what I
said about a good investor if it's an
investor who has no domain expertise in
your company does not have a Rolodex
where they can help you with
introductions both for business
development and in helping you do the
intros for series a you should not take
that person's money especially if
they're in it just to make money and you
can suss those people out you know
pretty quickly
yeah I'm glad you asked that question I
bring up sort of a router point which is
if if your company is successful you
know we're talking about it you know I
think generally at least the companies
we want
the ones want to build big independent
franchise companies so we're talking
about a 10 or 15 or 20 year journey you
know 10 15 20 years you may notice is
longer than the average American
marriage it's a significant the choice
of key investors in particular investors
are going to be on the board for a
company I think is just as important as
who you get married to which is
extremely important these are people
you're going to be living with and
partnering with and relying on and
dealing with in position you know in
conditions of great stress and anxiety
for a long period of time and I the big
argument I always make is you know make
this make this all the time sometimes
people believe it sometimes they don't
which is like if everything just goes
great it kind of doesn't matter who your
investors are but almost never does
everything just go great right even the
big successful companies even the big
you know Facebook and all these big
companies that are now considered very
successful you know along the way all
kinds of went so you know hit
the fan over and over and over and over
again
and there are any number of stressful
board meetings of discussions and
late-night meetings with the future of
the company at state where everybody
really has to be on the same team and
have the same goals and be pulling in
the same direction and have a shared
understanding and have the right kind of
ethics and the right kind of staying
power you know to be able to actually
weather the storms that come up and one
of the things that you'll find that is a
big difference between first-time
founders versus second time founders is
almost always the second time founders
take that point much more seriously
after they've been through it once and
so it really really really matters I
always thought and I believe that it
does it really matters who your partner
is it really is like getting married and
it is worth putting the same amount of
time it may be not quite as much time
and effort into picking your spouse but
it is worth spending significant time
really understanding who you're about to
be partnered with yeah because that's
way more important than you know did I
get another five million dollars in
evaluation or did you no did I get
another two million dollars in the check
the marriage analogy is great I know at
SV angel our attitude is oom we invested
in entrepreneur we are investing for
life because we want to invest in if we
made the right decision we're going to
invest in every company they start then
once an entrepreneur are always an
entrepreneur so we we actually do
consider it a marriage were
vesting for life what one thing that I
that which is another way of saying what
Mark just said is I always look for in
that first meeting do you feel like you
respect this person and and do you feel
like you have a lot to learn from them
because sometimes you you meet with with
VCS and in the initial meeting you kind
of feel like yeah there's like slow on
the uptake or they don't get it or they
don't see it sometimes you walk in and
they have this like just such an
incredible amount of insight into your
business that you walk out of there
being like man I don't even if these
guys didn't invest that sort of hour
that I spent with them was such a great
use of my time I felt like I came out
with a much clearer picture of what I
need to do and where I need to go and
that's such a great microcosm of what
the next couple years are going to be
like you know like don't if if you feel
like you would want this person to be
really involved in the company even if
they didn't have like a checkbook that
they that they brought with them that's
probably a really good sign and if not
that's probably a really a really bad
sign be making activities of changes and
BC bank money or the lack of them what's
the constraint on SV angels kind of
gotten comfortable with one a week you
certainly can't do more than that that's
a staff of 13 so it's it's really the
number of companies run a few head if
you all works twice the number of hours
would you invest in twice the number
companies I would advise against that I
would rather just add value more value
to the existing companies maybe you
could take the role questionnaire for a
second uh maybe you could you talk a
little bit about conflict policy right
now or not conflict policy well SV angel
actually does have a written conflict
policy but most when we end up with a
conflict it's usually because one
company has morphed into another space
we don't normally invest in companies
that have a direct conflict if we do we
will disclose it to the other company to
both companies and keep in mind at our
stage we don't know the company's
product strategy any
why we probably don't know enough to
disclose but our conflict policy also
talks about this really important word
which is trust in other words we're off
to a bad start if we don't trust each
other and and with SV angel the
relationship between the founder and us
is based on trust and if somebody
doesn't trust us then they shouldn't
they shouldn't work with us yeah so this
is actually so let me go back to the
original question I'll come back to that
so the original question is this is the
thing we talk about most often in our
firm so this is kind of a the the
question is at the heart of I think how
all venture capital operates which is
the question of constraints so the big
constraint on a top-tier venture capital
firm the big constraint is the concept
of opportunity cost so it's the concept
that basically everything you do means
that there are a whole bunch of other
things that you can't do and so it's not
so much the cost and we think about this
all the time it's not so much the cost
of we invest five million dollars in a
company the company goes wrong we lose
the money that's not really the loss
that we're worried about because the
theory is we'll have the winners that
will make up for that in theory the
costs that we're worried about is every
investment we make have has two
implications for how we run the firm
every investment we make number one
rules out conflicts so our policy for
sure on venture and growth rounds is
that we don't invest in conflicting
companies and so we can only invest in
one company in the category and so if we
invest in my space and then Facebook
comes along a year later like we're out
we can't do it right and so we basically
lock every investment we make locks
locks us out of a category right and the
nature that's a very complicated topic
when you're discussing these things
internally in these firms because you
only know the companies that already
exist right you don't know the companies
that haven't been founded yet right and
God help you have you invest it in you
know an early company that was not gonna
be the winner and you were locked out by
the time you know the winner emerged
three years later and you just couldn't
make the investment so that's one issue
is conflict policy the other issue is
opportunity cost on the time and
bandwidth of the general partners and so
going back to the concept of adding
value
you know we're for a typical typical
firm or fairly typical firm with eight
general partners each general partner
can maybe be on ten ten to twelve boards
in total if they're completely
fully-loaded so it's basically Warren
Buffett
a lot about investing is you basically
wanna think of it as a ticket that you
have a limited number of holes that you
can punch and every time you make an
investment you punch the hole and when
you're out of when you're out of holes
to punch like you're done you can't make
any new investments and that's very much
how venture capital operates and so the
way to think about it is every open
board slot the one of our GPS has at any
given point in time is an asset of the
firm that can be deployed against an
opportunity but every time we make an
investment it takes the number of slots
that we can punch down by one so it
reduces the ability for the firm to do
new deals and so every investment we
make forecloses not just the competitive
set but other deals where we'll simply
run out of time and so and this is sort
of a big thing of like well it goes back
to when I said earlier like this
company's pretty good it seems fairly
obvious it's going to raise venture
funding why didn't you fund it well on
its own if we had a limited capacity we
probably would have like it'll probably
make money but relative to getting
blocked out of the competitive set and
relative to not having that open board
seat for up for an even better
opportunity we pass on that basis a lot
build an MVP to launch attraction same
time you know that's our seed will that
happen for MVP or even pre-launch and
pre traction so instances where you do
is email Community Action what the deals
look like once you make that judgment
it's looking this mewtwo investment no
contract what would convince us which is
what usually convinces us is the founder
and their team themselves so we invest
in people first not necessarily the
product idea the product ideas tend to
morph a lot so we will invest in in the
team first if it's if it's pre users the
valuation is going to tend to be
corresponding lower unless one of the
founders Johanna for us it's almost
always if there's nothing at the time of
investment then it's almost other than a
plan it's almost always the founder who
we
worked with before or a founder who's
very well known by the way the other
thing worth highlighting is you kind of
in these conversations in all these
conversations you kind of the default
assumption is we're all starting
consumer web companies or consumer
mobile companies there are you know
other categories of companies
capital-intensive is one that's been
brought up but I'll just say like for
example enterprise software companies or
enterprise these days SAS you know
application companies or cloud companies
it's much more common that there's no
MVP right it's much more common that
there are a cold start and it's much
more common that they build a product in
the a round and there's no point to have
an MVP because the customers not going
to buy an MVP the customer actually
needs the full product when they first
start using it and so the company
actually needs to raise five or ten
million dollars to get the first product
built but in almost all those cases
that's going to be a found a founder
who's done it before I think it's time
for you guys I will get you boys on here
um gosh I think so
so in in our board we're fortunate that
we have there's myself and my co-founder
and a partner from injuries and Horowitz
which I think probably removes the fear
probably creates a little more trust
because it sort of removes the fear that
like you know someone's going to come in
and just like fire you arbitrarily
because like it's time for a big company
CEO kind of thing but in most cases I
think if you if you trust if you trust
the people that you're working with it
shouldn't really be an issue because
they're so they're so few mean things
almost never come to like a board vote
and by the time that they do it's like
something's deeply broken at that point
anyway and and most of and most of the
the power that VCS have comes outside of
the board structure it's protective
covenants that are built into the
financing round so it's like you can't
you know take on dead you can't sell the
company you can't there are certain
things you can't do without them
agreeing to it anyway so it's probably
like less of a big deal than the people
make it out to be what what I found sort
of is is that it seems to me that is a
founder if things are going well at the
company you have sort of unlimited power
visa vie
your investors like almost unlimited
like no matter what the board structure
is and no matter what the covenants are
in the round like if you say listen I
want to do this I think this is what we
need to do even if it's like a good
investor a bad investor even the bad
investors be like you know like let's
let's do let's make it happen because
they want to like ride this rocket ship
with you and when things are going badly
it does not matter what protections
you've built into the system for
yourself like you know at the end of day
like you need to go back to the trough
to get more money and you know if like
things aren't going well like they're
gonna have all of the cards in their
hand and they're going to get to
renegotiate all the terms and exactly
they'll change all this is what happens
actually when a company gets in dire
straits it actually doesn't matter what
the terms of the prior rounds are they
all get renegotiated this is I think the
fundamental rule of reason other than
ever
things going well under control in its
company in for money things run by the
investors I've been on boards for 20
years public and private I have never
been in a board vote that matter it's
always been
never never about many discussions many
controversies many issues never of it's
the decision has always been clear by
the end and it's either been unanimous
are very close to unanimous and so I
think it is almost all around the
intangibles and almost not at all around
the details okay thank you guys very
much
you