Navigating Venture Capital
Yesterday I was lucky enough to give a seminar at Princeton’s East Coast Startup Summit. The summit is for a few hundred students interested in entrepreneurship. So, drawing on my own personal experience of having absolutely no idea how VC worked when I was a student, I decided to give a talk on how to effectively navigate the fundraising process. Rather than focus on a history lesson of VC, I went straight into helping them understand basic financial concepts, the angel/accelerator/seed-stage/mid-stage/late-stage equity investing landscape, what VCs are looking for, etc. One of our newest portfolio companies, Science Exchange, was nice enough to let me include some slides from their pitch deck as an example of how to pitch your business. At least in my research, there are surprisingly few presentations like this available online. Hope it’s helpful!
Why LinkedIn’s Graph is Broken
I don’t think anyone loves LinkedIn. To me, I find it to be a completely worthless professional tool. There are quite a few blog posts detailing all the frustrations that come from being a LinkedIn user (here’s a link to my favorite one), but I’d like to focus on the underlying “connection” mechanism and why I think this results in an overall misguided product.
Connecting on LinkedIn is the same as on Facebook: a “friend” request is sent and approved. It’s a two-way connection. But this renders LinkedIn useless as a professional address book, one of its core value propositions. It is difficult and cumbersome for me to use LinkedIn’s two-way connection mechanism to keep track of the people I have meaningful professional interactions with. As an illustration, everyone’s professional experiences leads to a Venn diagram:
Here’s an example1. Ben Horowitz is a founding partner of a great VC firm, Andreessen Horowitz. I’ve met him multiple times, sat in board meetings with him and I read his (excellent) blog posts. He is someone I am professionally interested in “following.” I am interested in his career history and trajectory. At some point in the future I will probably reach out to him. But I highly doubt he has any interest in putting me into his address book (if he remembers me at all). Maybe he would, out of social pressure, connect with me on LinkedIn. But that action makes LinkedIn less useful to him. I’m just clogging up his address book. His “real” address book, the one he maintains and takes care of, is somewhere else.
In contrast, Twitter’s “following” mechanism solves this problem. Anyone can follow anyone. If two people are mutual followers, great! They’re connected and can direct message each other. As it stands, a lot of people in the startup world use Twitter as their professional networking/discovery tool. I could see a new product or platform being built using this model that also includes professional tools, such as resume features2. Companies focused on specific professional verticals, such as Behance, are using this approach.
Accelerator Adverse Selection
Yesterday we had a brief conversation about adverse selection (as it applies to insurance). A hierarchical example was brought up by one of the USV partners: that the best entrepreneurs can raise funding without needing to go through an accelerator (and thereby give up ~6% of their equity), and that the best entrepreneurs that apply for accelerators go to Y-Combinator, and that the next best group goes to a second tier incubator, etc.[^1]
I disagree. I spend a fair amount of time going to demo days and meeting with entrepreneurs who have either just completed an accelerator or are considering entering one. And, since I hope to be an entrepreneur reasonably soon, I’ve thought quite a bit about how I might deal with the incubator question.
Here are two reasons for an entrepreneur to join an incubator that do not indicate adverse selection[^2]:
- Community. For me, the most intimidating thing about starting a company is that you (and your one or two other co-founders) are completely alone. Having a good working environment[^3], such as in an incubator with a host of smart, passionate people also working on a nascent idea, has both psychological and productivity benefits.
- Lack of personal capital. Maybe when I’m 35 I will be able to bootstrap a company. By that age, personal capital is somewhat of a proxy for previous and potential further business success. But not at 25. And as the initial raise is the hardest, getting some runway from an accelerator isn’t a bad option.
Another dimension is geography. FWIW, I would choose Techstars NYC over Y-Combinator because my personal and professional network is in New York (as well as the Community factor of being in a Techstars single office). If not every “top-tier” accelerator applicant is willing to move out to Palo Alto then there cannot be a total hierarchy of incubator talent.
[^1]: For context, USV has invested in a few YC-alums but never from another incubator. I attribute this to having a small sample size.
[^2]:Much has been written about the other reasons for joining an accelerator: access to mentors, network, VC’s, brand, etc. And, unless you’re new to the startup scene, I can see why not already having some of these areas already covered is a bad sign.
[^3]: This applies to every company, from startups to Yahoo.
What is Fermi.VC?
I have chosen the name “Fermi.VC” in the hopes of what it will become. In short, it is derived from two things:
- Enrico Fermi was one of the most brilliant physicists of the 20th century. A Nobel laureate, Fermi pioneered work in nuclear and particle physics. “Fermions,” the class of elementary and composite particles obeying Fermi-Dirac statistics, are named after him. He developed early nuclear reactors and, ultimately, the first atomic bomb. But on a lighter note, Fermi was well-known among his peers for enjoying problems of estimation. “Fermi problems,” as they are now known, typically involve making justified guesses about quantities that seem impossible to compute given limited available information. As a venture analyst (and previously a student of physics), this is exactly how I approach companies and industries. Early stage investors aren’t able to look at vast quantities of hard data, often to my frustration. Instead, we must have some initial assumptions: an understanding of where we are today and where we’ll be tomorrow. Only then can we estimate the potential for a company’s growth to within an order of magnitude.
- Fred Wilson, one of my bosses, is quite famous for his daily blogging at AVC.com. I don’t expect to achieve anywhere near the kind of readership Fred has amassed. So, this blog is “For-Me.VC” - i.e. Fermi.VC