The growing dissonance between two business models (SaaS and VC)

In our weekly investment team call earlier this week we decided to pass on two early-stage SaaS startups that were both on track to grow from zero to $100k in MRR in their first 12 months of going live. Both companies clearly had impressive traction, but in both cases we weren’t convinced of the market size and the opportunity to build a large, sustainable company. (We of course might be wrong, and maybe we’ll have to add both companies to our growing anti-portfolio list in a couple of years. I’ll keep you posted.)

Had I seen a SaaS startup with this growth curve in my first 2-3 years of SaaS investing (in 2008-2010) I probably would have asked “where do I have to sign?”. And chances are that it would have been a good investment. The reason is that at that time, growing from zero to $100k in MRR within 12 months was extremely rare and an indication of not only a great product and excellent execution but also a great market opportunity.

One could argue that I saw much fewer deals in general at that time and that, being an angel investor, I had lower ambitions than a VC. That’s true. But it’s only part of the picture. The other part is that even as recently as 6-24 months ago, we’d consider a SaaS startup with this growth pattern exceptional. Passing on fast-growing SaaS companies that are clearly successful and on to something is a pretty new and somewhat scary experience for us.

The driver behind this development is what my colleague Clément Vouillon has described as “The Rise of Non ‘VC compatible’ SaaS Companies”, that is the fact that compared to some years ago there are now many more SaaS companies that get to $1M, $5M, maybe even $10M in ARR. Arguably, there’s never been a better time to start a SaaS company. A much larger and more educated market, combined with vastly lower costs to create software, means that your chances of building a viable SaaS company have never been higher. 

For VCs, the question is how many of these companies can become large enough to make the (admittedly somewhat weird) business model of venture capitalists work. Large VCs need multiple unicorns just to survive. In SaaS, that means companies that get to $100M in ARR and keep growing fast beyond that mark. With a ~$60M fund, we at Point Nine may not need unicorns to survive, but we won’t generate a great return if we don’t have exits north of $100M either. And as much as I agree with this post on TechCrunch today when it says that starting and selling a company for $100 million dollars is an outlier event in terms of pure entrepreneurial probability, a big part of my daily motivation is to find some of these truly iconic companies that become much larger. I guess once you’ve seen it once (in my case with Zendesk) you get addicted and want to do it again. :-)

We've come too far

To give up who we are

So let's raise the bar

And our cups to the stars

Daft Punk, Get Lucky

(I’m not sure if I understand the meaning of these lines in the context of the song, but I love the song and had to think of these lines while writing this post.)

Coming back to our observation regarding the rise of bootstrapped SaaS companies, assuming our theory is right, it means two things:

1) We’ll have to raise the bar even further

There will be more and more SaaS companies that, based on the “pattern recognition” that we’ve developed in the last years, we’d like to invest in but will have to pass on. We can only make 10-15 new investments per year and we’re obviously trying to find the very best ones - the outliers among the outliers, if you will.

2) Picking might become even harder

If it’s true that there are indeed more SaaS companies that quickly grow to $1-2M in ARR but that increase is not matched by a similar increase of companies that become very large, picking the right investments will become even harder. To keep up with that challenge we’ll have to constantly ask ourselves if we’re still asking the right questions when we assess a potential investment.

What does it mean for SaaS founders? First of all, as mentioned above, we might live in the best time to start a new SaaS company that ever existed. Second, founders should ask themselves what kind of company they aspire to build and should only try to raise venture capital if they are convinced that they want to build what Clément called the “VC compatible” startup (check out his post for a little checklist). As Clément said, this is not about good or bad. The VC path is not better than the bootstrapping path. In fact, for the majority of SaaS startups it’s probably not the right one.

Not yet convinced that you shouldn’t raise venture capital? :) Let us know!

SaaS Funding Napkin, the 2017 edition

Today is January 10, 2017. That means that in ten days, this jerk will become the leader of the free world. Ugh. It still feels surreal to me. In less earth shattering news, the fact that it's 2017 also means that my "SaaS Funding in 2016" napkin needs an update.

As a reminder, in the original post I tried to give a "back of a napkin" answer to this question: What does it take to raise capital, in SaaS, in 2016? Today I'd like to take a stab at the (early) 2017 answer to that question.

Like in the 2016 version, the assumption is that the founding team is relatively "unproven". Founders with significant previous exits can raise large seed rounds at high valuations early on, so the "rules" are different for them. On another note, when I say "what does it take to raise capital" I mean "what does it take to have an easy time raising capital from great investors". If your company doesn't meet the (very high) bar pictured on the napkin it doesn't mean that you won't be able to raise money at all. It just means that it probably won't be easy, that you will likely have to talk to a large number of investors and that you may not be able to raise from a well-known firm.

So, what does it take to raise capital, in SaaS, in early 2017? I don't think a huge amount has changed since I created the first version of the napkin about nine months ago, but here are a few observations:

1) The bar keeps getting higher and higher

I already wrote about the rising table stakes in SaaS two years ago, and since then the bar has kept increasing. The SaaS companies included in Tomasz Tunguz' benchmarking analysis of exceptional Series A companies grew on average from $10k to more than $90k in MRR in their first year of commercialization and then to over $400k of ending MRR in their second:

Twilio, Workday, and Zendesk have shown that the best SaaS companies can get to $100M in ARR in 6-7 years and continue to grow at around 50-70% year-over-year after hitting that milestone. Slack, unbelievably, reached $100M in ARR just 2.5 years after launch. Slack is an outlier even among the outliers, but getting to $100M in about seven years and hitting $300M 2-3 years later is the type growth which the best investors in the Valley are looking for in 2017.

I didn't have to make a lot of changes to the napkin to reflect this since the growth rates that I had put into the 2016 version were already in line with the "T2D3 path". I've increased the Series B amount, valuation and MRR range, though, and because the expectations of later-stage investors trickle down to the earlier stages I've changed the ARR potential number in the "Seed" column from "$100M+ ARR" to "$100-300M+ ARR".

2) Being a workflow tool is no longer enough

Investors are increasingly questioning if you can build a large and long-term sustainable SaaS business by being primarily a workflow tool. The thinking is that every successful software product will eventually be commoditized because it attracts lots of people who will copy the product and offer it for a lower price. That concern isn't new, of course, but given how crowded most SaaS categories have become by now, investors are increasingly looking for additional ways to build moat around a business.

So if you want to raise capital for your SaaS startup in 2017, investors will wonder if you can become a true system of record, build a real platform/ecosystem/marketplace or build a unique data asset over time. The latter option will get particular attention this year, so I highlighted that in the "Defensibility" row of the napkin. The ability to gather large amounts of data from the entire user base, and use that data along with AI/ML to make your software smarter, is one of the big themes at the moment. For what it's worth, I know AI and Machine Learning are a hyped topic but I think the hype is justified.

You might think that some of the things that I've written here – getting to $100M ARR within a few years, thinking about $300M ARR at the seed stage – are just crazy. I won't argue with that. The vast majority of SaaS companies will never get to this level of growth or scale, and yet they can be successful and profitable companies that generate life-changing wealth for the founders and great returns for early investors. VCs need outliers to make their business model work, but that's not your problem. If you think you don't have strong potential to become one of these crazy outliers, maybe VC isn't right for you.

OK. Enough words. Here's the 2017 SaaS Funding Napkin!

(click here for a larger version)

Should you take small checks from deep pockets?

So you’ve recently started a company, you’ve started to talk to angel investors and seed funds about your seed round, and suddenly a large VC appears on the scene and wants to invest. What should you do?

First of all, congrats. If a large fund wants to invest in your startup, that’s a great validation. Second, if you can get the brand, credibility, network and support of a Tier 1 VC into your startup early on, that can be extremely beneficial. So you should definitely consider it. It’s a complicated question, though, and you have to carefully consider the pros as well as the cons.

In this post I’ll try to shed some light on this question. As a disclosure and caveat, being a seed VC I’m not a disinterested observer, since we occasionally compete with bigger funds on seed deals. I’ll try to be as unbiased as possible, and if you disagree with my views you’re more than welcome to chime in, e.g. in the comments section.

Further below is a simple matrix that might be helpful to founders as they consider having a large fund participate in their seed round. But first, in case you’re not familiar with the issue, here’s a quick primer. If you know what the “signaling risk” debate is about, you can skip the next fext few paragraphs.

Some years ago, many large VCs – $200-400M+ funds that typically invest anything from $5M to $20M or more in Series A/B/C rounds – started to make seed investments, placing a sometimes large number of oftentimes tiny bets in very early-stage companies. The intention behind these investments is not to make a great return on these initial bets. Consider a $400M fund that invests, say, $250k in a startup. Even if that investment yields a rare and spectacular 100x return, it means only $25M in exit proceeds for the fund. That’s a lot of money for you and me, but not a lot of money for a $400M fund that needs around $1.2-1.5B of exit proceeds to deliver a good return to its LPs. If a large fund writes a tiny check (i.e. tiny relative to the size of the fund), there’s almost zero chance that the investment will move the needle for the fund.

So what is the intention behind these investments? The answer is access to Series A rounds. The idea is that one invests, say, $250k in 50 companies, watch them carefully and then try to lead (and maybe pre-empt) the Series A rounds of the ones that do best. Even if most of these seed bets don’t work out – as long as the VC gained access to a handful of great Series A deals, it’s money well spent. At least superficially it makes a lot of sense for large VCs to employ such a strategy. Whether it’s also a good strategy in the long run, or if it leads to brand dilution and eventually adverse selection, is a different question and beyond the scope of this post.

For entrepreneurs, more VCs investing into seed rounds means easier access to capital. And as mentioned before, founders who raise a seed round from a large VC also get the benefit of getting a brand name VC on board early on and potentially they can tap into the firm’s support network. So far, so good - sounds like a win/win.

The downside of taking a small check from a large investor is what’s called “signaling risk”. What this refers to is the situation that arises when you want to raise your Series A round and your VC doesn’t want to lead. In that case, any outside investor who you’re talking to will wonder why your existing investor – who as an insider has or could have a great understanding of the business – doesn’t want to invest. Everybody in the market knows that if a large VC invests small amounts the purpose is optionality, so if the VC then doesn’t try to seize the option, people will wonder why.

There might be good reasons why your VC doesn’t want to invest despite the fact that your company is doing well, and you might still be able to convince other investors to take the lead. But as you can imagine, it won’t be easy: Investors see large numbers of potential investments and have to decide quickly and based on incomplete information which ones they take a closer look at. That’s why they are highly receptive to any kind of signal. If they hear that the large VC who did the seed round doesn’t want to do the Series A, they might not even want to take the time to dig in deeper and might pass right away. As Chris Dixon wrote in a post some years ago, “If Sequoia gave you seed money before but now doesn’t want to follow on, you’re probably dead.”

Long story short, raising a seed round from a large VC has clear upside but also big risks. How should founders decide?

Let’s look at the data. CBInsights has some very interesting data which shows that statistically, startups that raised a seed round from a large VC have a higher chance of raising a Series A later on. What the data doesn’t tell us is whether that is (A) because these startups benefitted from having a large VC on board early on or (B) because they were better companies than the average seed startup in the first place. Since the analysis was based on ca. twenty Tier 1 VCs – Benchmark, Sequoia, Union Square etc. – I believe there’s no question that the subset of startups that received seed funding from one of these firms is of much higher quality than the overall average. These firms all have massive deal-flow and are the best firms in the industry. They know how to pick well. I’m sure both (A) and (B) play a role, but since we don’t know the relative impact of the two factors, the statistics don’t answer the question.

Another, maybe more helpful way of looking at it is this:

1) Does the VC act with conviction or does he/she just want a cheap option, as Fred Destin put it.

2) How confident are you that you’ll have strong traction by the time you want to raise your Series A?

Putting these two factors together gives you a simple matrix:

Here’s how to read the matrix:
 

• Top left: If the level of conviction of BigVC (at the time of the seed investment) is high and your traction (by the time you want to raise your next round) is extremely poor, there’s a chance that BigVC will put in some more money (to give you a chance to figure it out, turn things around, pivot,...). It’s not very likely, but since it’s easier for a large VC than for small investors to finance your company for another six months or so, having a large VC on board might be advantageous if you end up in this cell of the matrix. Based on this logic, my verdict for this scenario is slightly positive (that is, if you expect to end up in this cell, take money from BigVC).
• Bottom left:  If the level of conviction of BigVC is low and your traction is extremely poor, BigVC will most likely not give you more money and probably nobody else wants to invest neither. In this case, the fact that you’ve raised money from a large VC probably doesn’t matter, but it further reduces the chances of raising from other investors. My verdict: Slightly negative.
• Top middle: In the high-conviction / OK-ish traction scenario there’s a decent chance that BigVC will finance the company through a few iterations or pivots, something that is harder to do without a big investor on board. On the flip side, if BigVC does not invest in this scenario, that will create a very bad signal (as explained above) and greatly reduce your chances to raise from other investors. My verdict: Hard to predict, it can go both ways, so let’s say neutral.
• Bottom middle: If BigVC invested with little conviction and your traction is OK but not great, it’s very likely that BigVC will not invest further. This is extremely problematic as it creates a bad signal (as explained above) and greatly reduces your chances to raise from other investors. My verdict: Strongly negative.
• Top right and bottom right: If you have excellent traction, everything else doesn’t matter that much. If BigVC wants to lead or pre-empt your round, you might save a lot of time (but you might not get the best valuation). If BigVC doesn’t want to invest for some reason, you’ll find other investors, but it will be harder. My verdict: Slightly positive for high-conviction, slightly negative for low-conviction.

If you’ve read until here and you’re more confused than when you started to read, here’s the take-away of the analysis:

If the big VC who wants to invest in your seed round acts with little conviction, i.e. he/she really just wants a cheap option, you’re better off saying no regardless of what kind of traction you expect to have by the time you raise the next round. There’s very little upside but very strong downside. So if you have the opportunity to raise a small amount from a large VC and you know that the fund places dozens or maybe even hundreds of these bets, my advice is to say no.

If the big VC acts with strong conviction, there’s strong upside but also significant risk. In this case I don’t have a general advice, and the right decision depends on the level of conviction of the VC and on the value-add that he/she delivers. There are a few things you can do to to find out more about the strategy and value-add of the investor. First, ask the investor how many seed deals the firm has done in the last years and in how many of these cases they led or strongly participated in the A-round. Second, talk to a number of founders who have received a seed investment from the firm and ask them how it's like to work with the firm. Keep in mind that however you decide, it's an extremely important and irreversible decision - so think through it carefully and do your due diligence.

Building any business is hard

Judging from the number of Facebook likes and retweets, as well as comments on Twitter and elsewhere, my last post resonated with quite a lot of people. Some people thought it was provocative though, and some chimed in with good feedback:

@hunterwalk building ANY business is hard

— Jonathan Abrams (@abrams) March 5, 2016

Therefore I thought it would be worth following up on the topic to make sure that my message is clear.

The provocative sentence, I think, was this one:

"Building a SaaS business with $1-2 million in ARR is not that hard and not that valuable."

It's important to point out that I took it back in the next sentence ...

"Let me rephrase that. Starting a new company is always hard and most SaaS startups never get to $1-2 million in ARR. Every founder who accomplishes this deserves a huge amount of respect."

... and tried to explain the real point I was trying to make in the next one:

"The point is that getting to $1-2 million in ARR probably has less predictive value concerning a company’s ability to get to true scale than most people think – or at least thought some years ago."

As you can see, I don't disagree at all with Jonathan Abrams' s comment that building any business is hard. The reason why I wrote the sentence above, only to rephrase it in the following sentence, was that it was a reference to Josh Hannah's post about "nice little $40M eCommerce companies", which my post was inspired by.

To be as clear as possible about the subject, let me sum up my view again:

1) Building any business is hard. It requires a much broader skill set, more hard work and much more persistence than most normal jobs. (Let me refine that to "normal office jobs" - I don't want to get into an argument with heart surgeons or firefighters.) And since most businesses fail (at least when it comes to tech startups) it also requires a huge tolerance for risk.

2) Getting a SaaS company from 0 to $1-2M in ARR is hard. For the reasons mentioned in the original post, I think it has become significantly easier in the last 5-10 years but that doesn't mean that it isn't still very hard. Maybe a better way to put it would be "more likely" than "easier".

3) As hard as it is to get to $1-2M in ARR, getting to that level doesn't say much about a company's ability to get to $100M in ARR. For most companies which didn't raise venture capital this is completely irrelevant. If you're a bootstrapped company or raised only a small amount of outside funding and eventually get to a few million dollars in ARR that's an amazing outcome, and calling a company like this a "lifestyle business" is ignorant and stupid. If you're a VC-funded company, the prospects of getting to $100M matter, though – at least to some of your shareholders. :)

In case it's still not clear, maybe this funnel diagram helps to explain what I mean. :-)

What sucks about fundraising

Last week I wrote a post titled “What makes fundraising so stressful?” and asked founders to tell me which parts of the fundraising process suck. As of this writing, about 110 founders have completed the Typeform survey. The results are very interesting, and in some cases shocking. More on that below, but let’s start with the responses to the first question:

“Your optionality is an illusion”

More than 60 founders took the time to answer the additional free-form question (“What else has stressed you out?”). In their comments, many people emphasized and provided additional detail on some of the topics shown above, but several founders also pointed out additional issues. Reading through all of the comments has been very enlightening (and in a few cases humbling). Here’s a small selection of the answers:

"The big egos"

"Everything takes 4x more time than initially thought"

"Associates who constantly want calls without involving a partner who can actually get the deal done (or not)." 

“It's venture capital but I have the feeling no VC will take risks. There is always a reason not to invest.”

"Rejection from seed investors saying 'come back once you have X' (where X is in essence enough to raise Series A)." 

"Some investors haven't mentioned at all that they invested in similar company. I found that after the meeting."

"Startup/investor fit. Finding people who understand the business and can support / advise us going forward, vs. wasting time talking to people who don't understand the venture potential of the business." 

"Investors using their lawyers as bad cops."

"Radio silence and/or stringing me along, in service of ‘maintaining optionality’. Hint: if you do this, I won't come back to you next time I'm raising. Your optionality is an illusion."

"Had an investor back out after a long negotiation that culminated in a SIGNED term sheet. This is outright destructive, and all but killed the company."

The next question was “Which of the following things have happened to you already?”. Here are the results:




The final question was: “Anything else you want to point out? Any other input on what VCs can do to make fundraising less stressful for founders?”. More than 45 people answered this question. The comments included:

"If you are not interested, say it right away (I had some of the best meetings with VCs that said it out early in the conversation)."

"Don't waste our time or yours. Be very upfront about interest or not. Give succinct feedback, and don't sugar-coat why you're reacting the way you are." 

"Had an investor back out after a long negotiation that culminated in a SIGNED (but obviously non-binding) term sheet. This is outright destructive, and all but killed the company. Never, ever, ever do this to a young company. I literally hate this firm now. They are the worst!" 

"If you're transparent, direct, clear and fair, I will respect you and come back to you in the future. If you're weaselly, arrogant, or try to manipulate me, I won't."

What are the take-aways?

1) Founders understand that fundraising takes time and they can deal with rejections. But they hate being left in the dark.

The top issues, that is the issues which founders said suck the most, are:

• "Not knowing where I am in the process, i.e. no ‘yes’ but also no clear ‘no’"
• "Not understanding why VCs have passed"
• "Having to answer dumb questions by VCs who didn’t understand our business"

Interestingly these issues are precisely the ones that could be avoided if VCs did a better job. In contrast, things that cost time and energy but are a natural part of the fundraising process – creating a deck, preparing numbers, having many meetings, getting rejections – suck significantly less.

This theme – founders can deal with rejections, but they need clarity – is also what has been mentioned the most in the free-form questions and is the clearest take-away of the survey.

To my fellow VCs’ defense, if you get 300 or more inbound requests per month it’s very hard to give each founder a timely response, so unless an investor intentionally strings founders along in order to keep optionality (or the illusion thereof) I don’t want to blame him or her. But knowing that this is the #1 issue which stresses founders in the fundraising process, VCs should try very hard to become as responsive and transparent as possible. For us at Point Nine, these results served as a good reminder that we have to further improve our internal processes to make sure that each and every entrepreneur gets a swift answer from us.

2) Fundraising sucks across all stages

We also asked founders to tell us what stage they’re in. 59% said that the last round they’ve raised (or tried to raise) was a seed round. 30% said Series A, 11% said Series B.

The only question which showed a statistically significant correlation with the stage was the question about “Getting initial meetings”. For earlier-stage founders, getting initial meetings has been significantly harder than for later-stage founders. That doesn’t come as a surprise, and maybe it shows that there’s at least one thing which VCs are good at: Getting their portfolio founders meetings with other VCs. :-)

3) Backing out after a term sheet has been signed is much more common than we thought

In the world of private equity and M&A, signing a term sheet may have a different meaning but I’ve always thought that if a VC signs a term sheet it means they are fully committed to making the investment. And they ought to be. The purpose of the final due diligence that takes place after a term sheet is signed is to rule out “skeletons in the closet”. By the time you sign a term sheet, you should have made up your mind and should be done with your “commercial due diligence”.

Apparently that’s not the case. 14 people, a shocking 14% of the respondents, said they’ve already experienced an investor backing out after a term sheet has been signed. Unless these 14 founders had skeletons in their closets, that’s 14 too many. As one founder said in the comments, if this happens it can kill a company.

Based on these findings, founders are well advised to do more due diligence on their part before they sign a term sheet with a VC. One of the things you should do is ask the VC what kind of due diligence they’re still planning to do after the term sheet is signed.

Huge thanks to all founders who took the time to participate in the survey! If you want to dive in even deeper into the survey results, please drop me a line and I’ll send you the Excel sheet with the complete data set.

What makes fundraising so stressful?

In theory, raising venture capital could roughly look like this:

1. You create an investor deck and send it to 5-10 VCs that you like (1 week)
2. You meet the ones that are interested and quickly figure out the 3-4 that are really bullish (1-2 weeks)
3. You have a few more meetings with those 3-4 VCs and answer their questions (2 weeks)
4. You negotiate with 2-3 of them and sign a term sheet with your favorite one (a few days)
5. You hand it over to your lawyer for the final due diligence and the legal paperwork (3-4 weeks)

So ideally it's a couple of trips to Sand Hill Road (or San Francisco or London or Jaegerstrasse) over a period of 4-6 weeks to get a term sheet, and after another 3-4 weeks you've got the money in your bank account.

In practice, things rarely go so smooth. More often than not, raising venture capital is a huge distraction for the founding team. Even if things go reasonably well, it usually means that one of the founders spends half of his time talking to VCs for several weeks – time that he or she can't spend on building the business. If things go less well, it's not only a huge time sink but can also be an extremely stressful experience.

Why is that, and does it have to be this way? 

To some extent, it's in the nature of things that convincing other people to give you a lot of money (and to commit to supporting you for the next 10 years) for a small stake in your risky early-stage startup is not an easy feat. The vast majority of startups fail, VCs can invest in only 1% or less of the startups they see, fundraising involves a lot of relationship-building, it's a complex process – that's all pretty obvious so I won't elaborate on that.

But the question is if fundraising really has to suck as much as I think many or most founders experience it, and what investors can do to make it suck less. (I've already written about what founders can do on their end, e.g. by having clarity about their numbers and by pre-empting most DD questions.)

To shed some light on that question I put together a short Typeform survey. If you are a founder or CEO and have raised venture capital it would be awesome if you could participate in the survey. It's anonymous and takes only a few minutes to complete (and thanks to Typeform, you can do it on your iPhone :) ). I will share the results in another post shortly.

Open the survey!


Thanks in advance!

Introducing Jenny Buch, Talent Manager at Point Nine

Once a startup has released the first version of its product, raised some funding, started to get the word out and is getting some traction, the biggest challenge almost always becomes hiring. No matter how great the founders are and how much good advice they get from investors and advisors: You need people to get shit things done. And before long, you need more people (AKA managers) to help other people get shit things done, too. Recruiting great people can be extremely time-consuming and difficult, but if you don’t manage to build a great team, you are guaranteed to fail.

Or, as Michael Wolfe put it in his awesome talk at our 4th annual SaaS Founder Meetup last week:

All companies start differently but end up the same:

Success depends on hiring and managing a great leadership team.

Given that hiring is the #1 challenge for almost all of our portfolio companies, it has always bugged me that we’re not better at helping our founders find great people. It’s not like we haven’t been trying it and sometimes we’ve been able to find someone in our network for an open position at a portfolio company. But I’ve always wished that we’d be able to provide much more help.

Jenny sent me two pics ... and
forgot to tell me that I should pick one. ;-)

That’s why we’re thrilled that we’ve hired an experienced recruiter with a strong network, Jenny Buch, to focus on this challenge full-time. In her role at Point Nine, Jenny will (besides taking care of internal HR issues) advise our portfolio companies on anything related to recruiting, culture, employee engagement and HR strategy and will help them hire awesome people. In her previous roles, Jenny has recruited dozens if not hundreds of people for fast-growing tech startups and we can’t wait to see her magic unfold in the Point Nine family.

Welcome, Jenny!

PS: Hiring a talent manager isn’t a new idea in the VC world, and large firms like A16Z have built big teams to support their portfolio companies in a variety of areas. We can't compete with that, but we’re a little proud that we’re one of the first (the first?) micro VC funds to invest heavily into this role. :)

What animals are WE hunting?

[This article first appeared as a guest post on VentureBeat. Thank you for publishing it, VentureBeat. I'm re-posting it here with a few small edits.]

Of all posts that I’ve written so far, the one in which I asked what kind of animals you’re hunting was one of the most popular ones. That begs the question: What kind of animals are we hunting?

Paul Graham wants to farm black swans. Dave McClure likes ugly ducklings, little ponies and centaurs. Almost all large VC funds are looking for unicorns, while some people argue that investors should hunt dragons and others talk about decacorns.

If you have no idea WTF I’m talking about, here’s a quick refresher. The term unicorn was coined by Aileen Lee about two years ago to describe those rare and magical tech startups that have reached a valuation of $1 billion or more. Since then, $1B valuations have become somewhat less rare and there are now several private tech companies valued at $10 billion or more, for which the industry has come up with another name: decacorns. Before unicorns were called unicorns, people used to call these rare outlier companies, which create massive returns for their early investors, black swans (or homeruns – back then, it wasn’t mandatory to borrow terms from the animal kingdom). Duckling is Dave McClure’s name for companies that don’t become quite as as huge, and ponies and centaurs is what he calls the ones that have reached valuations of $10 million and $100 million, respectively. Finally, a dragon is a company that returns an entire VC fund.

So – what I mean by the question in the title of this post is what kind of exits we are aiming for. It’s a question which every VC needs to think about: If you have, say, a $250M fund and your goal is to return $1B before costs, should you aim for one huge outlier, e.g. a $10B exit in which you own 10%? Or are you better off shooting for 20% stakes in 50 companies which exit at $100M each? Or something in between?

For large funds the answer is pretty clear. Although the number of smaller exits is of course much bigger than the number of large exits, the exit value is highly concentrated on a small number of huge winners. This power law distribution of venture returns, which Peter Thiel has spoken about extensively, is what makes it almost impossible to return a large fund without hitting one or more outliers. Or as Jason M. Lemkin put it: VCs need multiple unicorns just to survive.

But what about a small (~$60M) early-stage fund like ours? We spent a lot of time thinking about this question in the last years, and our conclusion – or, let’s say working assumption, because it’s still early days for us – is that (sticking to the terminology described above) we’re hunting for dragons, hoping for unicorns.

In spite of the growing number of unicorns in the last years it’s still exceedingly rare for a startup to reach a valuation of $1B or more. According to Aileen Lee’s research, only 0.14% of venture-backed tech startups become unicorns. We can make around 30-40 investments with our fund, so statistically the chances of hitting a unicorn are very low. That doesn’t mean that we’re not trying hard to beat the odds – and if you don’t believe that you can beat the odds you should never become a founder or a VC in the first place – but it means that our business model is not dependent on having a unicorn in every fund that we raise.

We’re small enough for not being dependent on unicorns, but – and that’s the big difference to angel investing – we’re too big for generating a great performance by piling up a larger number of small exits. If we tried to get to, say, $240M in exit proceeds in chunks of $10M (corresponding with e.g. 20% of a $50M exit) we’d need 24 of these exits. It’s not realistic that 60-80% of the companies, in which we invest at a stage when there’s often just a handful of people and a few thousand dollars in revenues, will go on to become $50M exits though. That’s why we need a few of the animals which in the beginning of this post have been called dragons and which we internally just call “fund-makers”: Investments which return an entire fund, which in our case means, for example, 20% of a $300M exit or 15% of a $400M exit.

The final question is if all of this has any practical implications at all. Isn’t it impossible to look at a seed-stage startup and predict how large it can become anyway? Those are very hard prediction to make indeed, but still, knowing what kinds of exits we need informs several important decisions that we have to make – how many companies we want to invest in, what ownership stakes we’re aiming for, how much capital we reserve for follow-on financings, and so on. It also makes it clear that we shouldn’t invest in companies which for some reason we feel don’t have enough potential to move the needle for our fund.

The very last thing I want to say, just to be sure that I’m not misunderstood, is that I have absolutely nothing against unicorns. :-) In fact, we love ‘em. We’ve found two so far, Zendesk and Delivery Hero, so we’ve seen the beautiful side of the power law distribution first-hand. So: Hunting for dragons, hoping for unicorns.

Announcing Point Nine Capital III

Today we’ve announced Point Nine Capital III, our new €55M fund. Investors in PNC III include institutional investors like Horsley Bridge Partners, Sapphire Ventures, Flossbach von Storch and Vintage Investment Partners as well as a number of highly successful Internet entrepreneurs. To our existing LPs: Thank you for your continued trust! To the new ones: Welcome on board!

When we raised PNC II, our goal was to build a leading independent European early-stage venture capital firm. While it’s still very early days for us, we think we’ve made good progress towards that goal in the last years.

PNC II was based on a couple of ideas and principles:

Live Berlin, think world
We saw a strong need for a Berlin-based seed VC because Berlin was starting to become a great startup destination, yet there was not a single VC that was headquartered in the city. At the same time, we didn’t want to limit ourselves to investing only in Berlin (or only in Germany for that matter) because we saw great startups being founded all over Europe (and elsewhere). Before PNC II we had already invested in Berlin-based companies like DaWanda, Delivery Hero and Mister Spex as well as in companies from Denmark (Zendesk), the UK (FreeAgent, Geckoboard, Server Density), Canada (Clio, Unbounce), the US (StyleSeat, Couchsurfing,...) and even New Zealand (Vend) and Japan (Gengo), so we were already used to this approach.

Focus on early-stage investments in SaaS, marketplaces and eCommerce
While we wanted to be pretty agnostic with respect to geography, we were going to be pretty focused when it comes to stage and industry. We’d only do early-stage investments (seed and early Series A) and would focus on three categories: SaaS, marketplaces and eCommerce.

Be “The Angel VC”
Both Pawel and I had a background as angel investors, and just because we raised a fund we didn’t want to give up our angel investor mentality. We wanted to combine a founder-friendly, no-nonsense, value-add approach with the ability to make bigger investments and do more follow-on financing.

Think long-term and give before you take
VC investing is an incredibly relationship-driven business. To be successful, you constantly need other people’s help and goodwill. What that means is that if you’re a newcomer, you should try to “give” as much as you can to as many people as you can in order to build long-lasting relationships.

Small is beautiful
Our original goal for PNC II was to raise €30M. We ended up raising a little more (~ €40M), but it was still a typical micro VC size. One reason for becoming a micro VC was, of course, that we wouldn’t have been able to raise a €100-200M fund, so it was an easy decision. :-) But we also felt that a €30-40M fund was the right size for a European seed fund: Big enough to invest needle-moving amounts in startups and have capacity for follow-ons, but not a size at which you need multiple unicorns just to survive, as my friend Jason M. Lemkin put it. (Not that we have anything against unicorns, but you know what I mean.)

Three years later

Three years later we feel encouraged by the early results of our strategy. Many PNC II portfolio companies have raised large follow-on financings from great investors like Accel, Acton, Balderton, Bessemer, Emergence, General Catalyst, Matrix, MHS, Storm, Valar and others. In many cases, valuation has gone up significantly since our initial investment, in a few cases as much as 10-20x and more. Again, it’s still very early and it will take another five years or so to see if we’ve done a good job with PNC II, but we’re super excited that so many of our portfolio companies are on a great track. We’re also extremely grateful for the appreciation that we’re getting for our work – from portfolio founders, other investors, our LPs and the bigger startup community.

Finally, we’re also extremely happy with the team that we’ve been able to build. Assessing an ever-increasing number of investment opportunities and managing a portfolio of around 50 companies wouldn’t be possible without the fantastic work of our Associates or our Operations Team. Thanks guys, you’re awesome. :)

So, we’re happy with our strategy, and we’re going to continue it with PNC III. We’ll continue to invest heavily in Berlin but will also continue to invest all over Europe and beyond. We’ll keep our “Angel VC” tagline, and we’ll continue to do our best to be a “good VC”. We’ll stick to early-stage, and while PNC III is a little bigger than PNC II, we’re not leaving micro VC territory.

In terms of sectors, we’ll stay focused on SaaS and marketplaces, although we’ll also keep exploring new areas like bitcoin, IoT or drones (interestingly, the investments which we’ve made in these new areas so far all fall under SaaS or marketplaces from a business model perspective). The one area which we got somewhat less excited about in the last years is eCommerce, mainly because it requires so much capital and because the margins are usually small. There are (very) notable exceptions, of course – Westwing is one of the best-performing companies of PNC I, and if Stefan Smalla ever starts another eCommerce company we’ll invest in it again in a heartbeat.

Copy & paste?

So a lot of things are going to stay the same, which explains why, when we told our partners at Horsley Bridge about our plans for the new fund, Kathryn said, with her inimitable wit: “Sounds like copy & paste”. That’s true, but I should point out that other things have changed and will continue to change rapidly. Some of the “pattern matching” that we’ve used to pick great companies 3-7 years ago doesn’t work any more because what used to be innovative a couple of years ago is table stakes today. Many of tomorrow’s unicorns might and probably will be based on technologies which barely exist today. Add all the changes that are happening in the funding ecosystem, and it’s clear that while we’ll stick to our core values, we’ll have to keep re-inventing ourselves to stay relevant. So don’t worry about us getting slow and saturated. We’ll stay hungry and foolish.

A closer look at the 6 things to pre-empt 90% of Due Diligence

Since last week's post about 6-7 things to pre-empt 90% of Due Diligence was liked/shared/retweeted quite a bit, I'd like to follow up with some additional details on what exactly SaaS Series A/B investors will look for when you supply them with the data and material that I've mentioned. In my post I suggested that you should prepare a key metrics spreadsheet, a chart with your MRR movements, a cohort analysis, a financial plan, an analysis of your customer acquisition channels and, if you're selling to bigger customers, information about your sales pipeline and details about your largest customers. Let's go through these items one by one and try to anticipate some of the questions potential investors will think about.

As a caveat, I'm going to mention some benchmark numbers but it's very important to note that none of these numbers can be viewed in isolation. There is not one number which will determine if investors want to invest. It's always about many puzzle pieces which together form a picture of the strength of your company.

Key metrics spreadsheet

• What's your visitor-to-signup conversion rate? Typically this metric is in the 1-5% range. If you're significantly below that, that doesn't have to be a red flag – there can be good reasons for a lower rate – but it may raise questions.
• What's your signup-to-paying conversion rate? In my experience, most good SaaS companies convert 5-20% of their trial signups into paying customers (but again, there can be exceptions).
• What's your lead velocity? Are you getting more and more new trials/leads every month?
• What's your account churn rate and more importantly your MRR churn rate? The best SaaS companies have an account churn rate of less than 1.5% per month and a negative MRR churn rate (which doesn't mean that you can't have a great company with somewhat higher churn or that you have to be at negative MRR churn at the time of your Series A/B).
• How fast and how consistently have you been growing MRR? Have you been adding an ever-increasing amount of net new MRR month over month?
• How has your ARPA developed? Have you been able to increase it?
• Are you able to sell annual plans?
• How long did it take you to get to $1M ARR? The best SaaS companies get there within 12-15 months after launch (but again, lots of exceptions ... there are companies that start slowly and skyrocket later).
• How much have you been spending on customer acquisition? As a rule of thumb, most SaaS companies should target a CAC payback time of 6-12 months, although in some cases there can be good reasons to spend significantly more.
• What are your CoGS and what's your Gross Profit Margin? As a pre Series A startup you're probably not great at tracking/attributing CoGS ... which I think is OK.

MRR movements

• How much MRR have you been gaining by acquiring new customers? Have you been able to add MRR by expanding existing accounts as well? 
• How much MRR have you been losing due to churn or downgrades?
• Mamoon Hamid of Social+Capital has coined the term "Quick Ratio" for the ratio between added MRR and lost MRR, and he's looking for companies with a Quick Ratio of > 4. If your Quick Ratio is significantly below that, is it trending in the right direction?

Cohort analysis

• How does your account and MRR retention look like for some of your older customer cohorts? Do you have low or even negative MRR churn?
• Taking a "vertical" look at the cohort analysis, are you getting better and better over time, i.e. do your younger cohorts look better than older ones?
• What's your estimated CLTV based on this cohort data?
• How does usage activity look like on a cohort basis? Is there a lot of "hidden churn" (customers who got inactive and are likely to cancel soon)?

Financial plan

• Is your plan both ambitious and realistic? Most investors are looking for T2D3 type growth, i.e. once you've reached around $1M in ARR you should try to grow 3x y/y for two years.
• Is your plan a coherent continuation of your historic/present numbers, both methodically and with respect to your key assumptions? Projecting a sudden, drastic improvement of your key drivers is understandably much harder to sell to investors.
• Are your key assumptions plausible, and what's the impact of somewhat more pessimistic assumptions?
• Did you sanity check the outcome of your model? If the result of your model is that you'll be a money printing machine within two years, that's usually a sign that you're underestimating future costs. :)

Customer acquisition channels

• How did your customers find you? Organic, paid, both? Ideally you have strong organic growth (which is strong proof of product/market fit) as well as some success with paid customer acquisition channels (which can be scaled more easily).
• How does your conversion funnel look like for different sources of traffic? What are your costs per lead and per customer for different marketing channels?
• How close are you to building a (somewhat) predictable and repeatable sales and marketing machine? Do you have a sense for the scalability of your customer acquisition channels? 

Sales pipeline

• How does your current pipeline look like? Do your short-term targets look realistic based on your "in closing" pipeline? Does your overall pipeline support your mid-term targets?
• How has your pipeline developed? Has it become stronger and stronger over time?
• Are you starting to get a handle on closing probabilities and closing timelines?

In the original post I said as a bonus tip that if you're an enterprise SaaS company, you should put together some additional information about your largest customers. Here's another bonus tip: Include information about your NPS (which is hopefully very high) and how it has developed over time.

Ideally, all these puzzle pieces together, along with the size and attractiveness of the opportunity you're going after and the strength of you and your team, will form the picture of a SaaS startup which has clear product/market fit, enthusiastic customers, strong initial traction, continuously improving metrics and which is on its way to building a repeatable, scalable and profitable customer acquisition engine.

6 things to pre-empt 90% of Due Diligence

The founder of a portfolio company recently asked me what kind of numbers and other material he'll need when he goes into his next round of fundraising. He wanted to make sure that when he starts talking to new potential investors, he'll have answers ready to most of the questions he'll be asked.

That was a great question. By putting together a comprehensive set of data you can pre-empt 90% of the questions which investors will ask you when they assess a potential investment. This has a number of important advantages:

• It saves you time because you'll have to answer fewer individual questions and requests in a piecemeal fashion.
• It can speed up the fundraising process dramatically if investors get almost everything they need at once (or almost immediately upon request).
• It makes you look better, because it shows that you're on top of things.
• Almost all of the numbers (good) investors ask for are things that you should be highly interested in anyway, since they are important for understanding and running your business.

What kind of numbers you should prepare of course depends on the industry and stage you're in. I'm going to assume that you're a SaaS company and that you're going for a Series A or a Series B round. In this case, the following things will help you pre-empt a lot of DD questions:

1) A spreadsheet with your key metrics, since launch, on a monthly basis. It should include funnel metrics (visitors, signups, conversions etc.) as well as key financial metrics (MRR, CoGS, CACs etc.). If you haven't seen it yet, I put together a template for a KPI dashboard some time ago, which should serve as a good start.

You are probably tracking most of these numbers already anyway, so you can use a copy of your internal dashboard, but make sure that it's clean, comprehensible and that you're using the right terms.  If your dashboard contains any ambiguous metrics, add footnotes with precise definitions to make sure that an outsider understands exactly what he's looking at.

2) A chart with your MRR movements, since launch, on a monthly basis. That is, a chart that shows your new MRR, expansion MRR, contraction MRR, churn MRR and reactivation MRR for each month since launch.

MRR movements in ChartMogul

If you have a very wide range of customer size, consider breaking down the MRR movement analysis by your customer segments, because in that case the aggregate numbers across all customers may not tell the full story. So if you're selling to both SMBs and bigger enterprises, consider showing one MRR movement chart for the SMB customer segment and another one for the enterprise customer segment.

Make sure to provide the raw data along with these charts (and any other charts you provide) to allow the viewer to do his or her own calculations.

3) A cohort analysis, showing each monthly customer cohort since launch and how the cohort’s MRR has developed over time. I created a template for that, too. If you're selling to both SMBs and enterprise customers, you should again consider doing a separate analysis for each of the two segments.

Also consider adding a cohort analysis which is based on an activity metric. Think about what your key usage indicator is, then run a cohort analysis that shows the development of that number over time.

4) A financial plan for the next three years. The plan should follow the same logic as your historic KPI dashboard and should be relatively simple. Don't hard-code many numbers and make it easy to understand which assumptions the model is based on. Here are a few additional tips, and here's a template for a financial plan I built some time ago.

5) An overview of your customer acquisition channels. That is, a breakdown of your website visitors, leads and customers by source and data about your customer acquisition costs. 

Try to add some data points or estimates on the scalability of your customer acquisition channels. I know this is very hard and sometimes impossible, especially for inbound marketing driven companies, but some projections are probably better than having none at all.

6) If you're selling bigger deals, detailed information about your current sales pipeline. This should include a list of all qualified opportunities, and for each opportunity the potential deal size (in terms of MRR or ARR), pipeline stage and, if you have enough historic data to make a solid guess, closing probability and timeline. If you're a low-touch sales, high-velocity, low ARPA SaaS company you can leave this out.

Bonus tip: If you're an enterprise SaaS company, put together some additional information about your largest customers. Think of it as a little case study, with some information about how the customer found you, how the sales process looked like and how the account has developed over time.

What do you think? Does this capture most of the data Series A/B investors want to know?

[Update 5/8/2015]: I wrote a follow-up post with some additional details on what exactly SaaS Series A/B investors will look for when you supply them with the data and material mentioned above.]

Introducing: The One-Slide Update Deck

When we start to work with a new portfolio company, one of the things we always suggest is that in addition to (sometimes lots of) ad hoc communication via eMail, Skype, Basecamp, etc. we set up a standing meeting or call, at least during the first 9-12 months following our investment. Typically it's a one-hour monthly call, and the purpose of these calls is to get us updated and to talk through current issues. Our experience is that these calls are a very effective and efficient way to discuss things and to find out how we can help. The last thing we want to do is be a burden on the founders, and so we try to be very respectful of the their time (even if we're not as efficient as Oliver Samwer with his famous "supercalls" - 12 hours, 180 companies, or something like that).

Just like a regular Board Meeting, these monthly calls work best if the investors get an update before the call, so that the call can be spent discussing key challenges rather than spending too much time going through numbers and updates. And that brings me to the topic of this post: The One-Slide Update Deck.

Founders often ask me if I have a preferred format for updates and KPIs. And while I can point them to my SaaS metrics dashboard for KPIs, we've never had something like a template for other updates. So here's my attempt to create a super-simple deck which you can use to update your investors (or me!):

The idea is that in the beginning you create a rough roadmap for the next 12 months, broken down into key areas like Product & Tech, Sales & Marketing and Team/Hiring (see slide 1), plus a financial plan. Better yet, you already have a plan :-) and you discuss that with your investors to get everyone on the same page.

Then, every month you create one slide which shows progress and problems, as well as the original plan, in each of the three key areas, plus key metrics. I've borrowed the "Progress, plans, problems" technique from Seedcamp; the metrics are taken from my own SaaS dashboard template. So just one slide, once a month, with information you should already have anyway, and you should have a great basis for highly productive calls or meetings with your investors.

It obviously doesn't matter if you use Keynote, Google Docs or something else, and depending on the needs of your company you may want to emphasize different key areas or include other KPIs. So this isn't meant to be prescriptive but rather a suggestion or a starting point for founders who are thinking about reporting for the first time – if you are already providing more comprehensive monthly reports, don't change it!

If you want to take a closer look, here is a PDF and here is the original Keynote version.

Thanks to Nicolas, Rodrigo and Michael for providing valuable feedback on the draft of the slides!

A toast to all the great ones that we've missed

Picture taken by "nlmAdestiny"

One of the things that inevitably happens when you're in the angel or VC investing business for a couple of years is that besides a hopefully healthy portfolio, you're also building a growing anti-portfolio. As far as I know, the term "anti-portfolio" has been coined by Bessemer. Its meaning is described very well on Bessemer's website, and because it's so hilarious I want to quote it in its entirety:

"Bessemer Venture Partners is perhaps the nation's oldest venture capital firm, carrying on an unbroken practice of venture capital investing that stretches back to 1911. This long and storied history has afforded our firm an unparalleled number of opportunities to completely screw up.

Over the course of our history, we did invest in a wig company, a french-fry company, and the Lahaina, Ka'anapali & Pacific Railroad. However, we chose to decline these investments, each of which we had the opportunity to invest in, and each of which later blossomed into a tremendously successful company.

Our reasons for passing on these investments varied. In some cases, we were making a conscious act of generosity to another, younger venture firm, down on their luck, who we felt could really use a billion dollars in gains. In other cases, our partners had already run out of spaces on the year's Schedule D and feared that another entry would require them to attach a separate sheet.

Whatever the reason, we would like to honor these companies -- our "anti-portfolio" -- whose phenomenal success inspires us in our ongoing endeavors to build growing businesses. Or, to put it another way: if we had invested in any of these companies, we might not still be working."

What follows is a list of spectacularly successful companies which Bessemer saw and passed on, including Apple, eBay, FedEx, Google, Intel and others. (No need to send CARE packages to the guys at Bessemer though, they have more than 100 (!) IPOs under their belts).

I'm a big fan of dealing with failures openly, and I applaud Bessemer for being so open about their anti-portfolio. In the next version of our (meanwhile pretty outdated) website we should add a section about Point Nine's biggest misses, but let me already give you a sneak preview into my personal anti-portfolio:

The two "passes" which I regret the most are SoundCloud and TransferWise. The reason why these two ones stand out is that I had the opportunity to invest in them (at an early stage and at reasonable terms), spent some time looking at them and decided to pass. Since then, both SoundCloud and TransferWise have become "unicorns" or are on their way getting there. Congrats to the founders and early investors of these fantastic companies – Alexander, Eric, Christophe and Jan (SoundCloud) and Taveet, SeedCamp and Index (TransferWise)!

Another unicorn that we rejected is FanDuel. Congrats team FanDuel, Fabrice, Andrin!

As far as I know, these three are the only $1B-valuation companies that we've missed so far, but there are several other companies that we passed on and which are doing great. Most of these are probably worth well over $100M by now and they include:

• Wanelo
• Intercom
• Lovoo
• EyeEm
• Simply Measured
• OneLogin
• NewsCred (thanks for the pointer and congrats, Shafqat!)

The reasons for passing an all of these great companies varied and included concerns about market size, competition, defensibility, valuation ... all bullshit with the benefit of hindsight. :-) While I am of course trying to learn from all of these mistakes, I also know that it's inevitable that my anti-portfolio will continue to grow over time. And although that can hurt, I know that that is okay – at least as long as we're happy with our non-anti-portfolio.

Good VCs, bad VCs

Inspired by Ben Horowitz’ excellent “Good product managers, bad product managers” post and Stefan Smalla’s “Good leader, bad leader” masterpiece I’ve tried to put together my thoughts on what I think makes a great venture capital investor. Thanks go to my colleagues at Point Nine Capital for their invaluable feedback, in particular Michael, Mathias and Rodrigo, who reviewed an early draft of this post and provided lots of great comments.

This post represents our current thinking, which may evolve our time, and some parts are still work in progress. Feedback and discussion with other VCs and entrepreneurs is very welcome.

We’re fully aware that we don’t always live up to the ideal of the “good VC” described below, but as Stefan Smalla said in response to a comment on his leadership manifesto: “Nobody is exactly like that, but it's good to move towards that ambition. Inch by inch.”

A good VC does everything she possibly can to support her portfolio companies

A good VC is truly value-add

A good VC is available for her portfolio companies almost 24/7. If a portfolio founder needs her, she will do everything she can – roll up her sleeves, use her social capital, get on a plane – to help. A good VC is sometimes a recruiter, sometimes a beta tester, sometimes a personal mentor, and isn’t afraid of getting her hands dirty. Not scalable? Screw scalability. If a portfolio founder needs your help in putting out fires, the last thing he or she cares about is how this scales from a VC business model perspective.

A good VC doesn’t only react to requests from the founders. A good VC knows the current challenges of her portfolio companies and is proactively looking for solutions all the time.

Good VCs create firms where portfolio founders have equal access to all partners and not just to “their” partner.

Knowing that there are limits to the help she can provide to founders herself, a good VC tries to leverage the knowledge and expertise of other people. In particular, she facilitates knowledge exchange between the founders of her portfolio through various forums, online and offline.

A bad VC overpromises in the deal-making phase and under-delivers once the deal is done.

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“We view ourselves as a services firm. We try to earn our reputation and brand every day. We practice the art of adding value and we want to be the highest executing board member that founder has and we’re out there everyday trying to earn that reputation.”

Bill Gurley
General Partner, Benchmark Capital

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A good VC is humble and doesn’t try to run the show

A good VC is aware that there is a huge information gap between founders and VCs with respect to the founder’s business. He understands that the founder has thousands of hours of experience in his industry and with his customers and intimately knows the people on his team, whereas the VC’s knowledge of the startup is often much more superficial. He understands that many if not most of the ideas he will come up with are things that the founder has already considered and knows that while he can provide great input, advice and a different perspective, he should neither try to micro-manage nor try to make decisions for the founders.

A good VC knows that managing investors can be time-consuming for founders and tries to find the right balance between being close and providing value on the one hand and getting out of the way on the other hand.

A bad VC overestimates his insights, tries to micro-manage, tries to exercise control and becomes a maintenance burden for the founders.

A good VC goes all-in and avoids conflict within the portfolio

A good VC doesn’t invest in two or more companies that are directly competing against each other.

A bad VC, instead of going all-in into one company and giving his undivided attention and support to her portfolio company, tries to hedge her bets by investing in several companies in the same space.

A good VC tries to maximize the size of the cake vs. his slice of the cake

If a company wants to bring on board other investors, whether in the same round in which the VC invests in the company or at a later stage, a good VC helps the founders to attract great co-investors. A good VC also does this pro-actively – suggesting to invite value-add co-investors to a financing round whenever he sees a great potential fit for a company.

A bad VC worries that if co-investors join a company, he will get a smaller stake in the company. So he discourages founders from working with other investors, maximizing his stake in the company rather than trying to do what’s best for the company as a whole.

A good VC doesn’t take unfair advantage of the founders she invests in

A good VC uses simple term sheets. A good VC may negotiate hard, but she doesn’t try to screw founders by sneaking in hard to understand provisions that can hurt founders. A good VC tries to keep contracts simple, knowing that in an industry where the bulk of returns is produced by the best outcomes, there’s not much value in trying to protect herself against everything which can go wrong anyway.

A good VC also doesn’t overly use leverage, which she might gain over portfolio founders in different situations throughout the company’s life.

When a bad VC negotiates a term sheet, she spends way too much time (and legal fees) on micro-optimizations of all kinds of unlikely scenarios. She may even try to fleece the founders by imposing terms that are unfair, unusual and hard to understand.

Whenever she gets leverage over a portfolio company, e.g. when the company runs out of cash and asks its investors for a bridge financing, a bad VC exploits her leverage to improve her position.


A good VC treats every entrepreneur with utmost respect

A good VC respects the value of the founder’s time at all times

A good VC rarely re-schedules meetings with founders and is almost always on time. In meetings with founders, his phone stays in his pocket.

A bad VC re-schedules meetings with founders all the time, often at the last minute. Once the meeting finally happens, he often arrives late. In the meeting, he will start to check his email (or Facebook feed) on his phone the minute he gets bored.

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“If anybody is not on time I will fine them $10 a minute. That comes from my experience as an entrepreneur. When you are an entrepreneur you are living and dying with your company. You are working extremely hard and the last thing you need to do with your time is to sit in the lobby of a venture capital office.”

Ben Horowitz
General Partner, Andressen Horowitz

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A good VC handles “passes” professionally

Knowing that she has to pass at least 99% of the time, a good VC has built a team and established a deal assessment process that ensures that founders get timely responses. A good VC also tries to give an explanation on why a company is not a match for her, although unfortunately time constraints may make detailed feedback impossible in every case.

A bad VC takes forever to respond to inquiries, and often she doesn’t reply at all. When she passes on a potential investment, she doesn’t try to give the entrepreneur useful feedback. A bad VC also often delays the decision forever, trying to keep her options open.

Side note: This is the area where the distance between reality and ambition is the largest for us at Point Nine. We're trying to get better, but with ~ 200 potential investments to evaluate per month, it's tough.

A good VC only signs a term sheet when he’s going to make the deal

A good VC only signs a term sheet when he’s going to make the investment. After having signed a term sheet he only bails out if really bad things come up in the due diligence, which happens extremely rarely. A good VC also tries to be transparent in the deal evaluation phase before, trying to give the founders a realistic assessment of his interest level and timing requirements.

A bad VC sometimes signs a term sheet to secure the option to invest – at a point in time at which he is not yet sure about his intent to invest. A bad VC often also conveys a misleading impression as to how close he is to making a positive decision and how fast he can move.


A good VC aligns her interests with the interests of her LPs

A good VC is incentivized by carry, not by management fee

A good VC optimizes for higher carry and lower management fee. A good VC also invests most of the management fee in a way where it leverages her ability to make great investments and helps her portfolio companies (e.g. by building a team of associates and advisors and by providing resources to the portfolio) rather than drawing a large salary. A good VC invests heavily into her fund and doesn’t view the GP commitment ⁽¹⁾ as a burden.

A bad VC wants to make a lot of money even when she doesn’t make her LPs⁽²⁾ a lot of money. She tries to minimize her GP commitment while trying to maximize her salary.


A good VC is focused, courageous, humble and desires diversity

A good VC is focused

A good VC is focused on one or more investment theses built around expertise in a certain stage, geography and/or industry.

A bad VC invests broadly across all stages, geographies and industries. Rather than knowing a lot about a few things he knows nothing about everything, which prevents him from providing effective portfolio support and from seeing the best investments in the first place.

A good VC is courageous

A good VC makes bold moves. She has strong opinions, and although she values other investors’ opinions she often invests in companies which many other investors have passed on. A good VC also isn’t afraid of admitting mistakes and failures.

A bad VC’s main driver is FOMO (“fear of missing out”). She doesn’t have the expertise or courage to think independently, but as soon as other investors want to invest in a deal she gets excited. If an investment fails, she tries to produce a PR story to make it look like a success.

A good VC is humble

A good VC knows that luck and serendipity play a big role in investing. He knows that he has to constantly prove his value and that he’s only as good as his last investments. A good VC also doesn’t have a big ego, is a great listener and says “I don’t know” very frequently.

A bad VC, after having made one or two lucky shots, thinks he’s a genius. A bad VC has a big ego and is one of those people who make Board Meetings inefficient because they love to hear themselves talk.

A good VC desires and appreciates diversity

A good VC wants to work with people and invest in founders from a wide variety of languages, cultures, color, origin, gender, religion, age, personality and orientation. He knows that “these people can open up new markets and new geographies, and create potential outsize investment returns from opportunities that others may overlook or not want to risk going after”, to quote Dave McClure.

A bad VC prefers to invest in people who are like him.

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“Our Commitment to Diversity stems from an irresistible desire to explore, from a burning curiosity to learn more about the world, from a moral imperative & intellectual humility to help both others and ourselves become part of a larger, more enlightened global community and global family.” 

Dave McClure
Founding Partner, 500Startups

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A good VC invests for the long-term and gives back

A good VC invests in long-term relationships

A good VC optimizes for the long run in everything she does. She knows that you “always meet twice in life”, as the German saying goes, and tries to create win-win situations.

A bad VC tries to gain short-term advantages over other people, sacrificing relationships and long term gains.

A good VC shares knowledge (but keeps private information confidential)

A good VC openly shares knowledge with startups and investors, knowing that the tech community is not a zero-sum game.

A good VC never, ever shares confidential information like pitch decks with people outside of his firm, unless the founder explicitly gave him permission to do so.

A bad VC is secretive when it comes to sharing knowledge with the community – and leaky with respect to confidential information.

A good VC wants to make the world a better place

A good VC cares about others and knows that there’s more in life than financial returns alone. Whether it’s investing in clean technologies, giving to charity, doing community work or something else – she has a strong urge to make the world a better place.  When she’s made money she doesn’t forget that as much as her wealth is the result of decades of hard work, it’s also the result of being born and raised in the right place and having had opportunities that billions of people on the planet never have.

A bad VC has an exaggerated sense of entitlement, a lack of compassion for the poor and forgets that there are other things in life.


And last but definitely not least…

A good VC delivers sustainable superior performance.

A bad VC doesn’t.


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1) GP commitment = the investment made into the VC fund by the fund’s managers, often called “GPs” (General Partner)
2) LPs = Limited Partners, the people and funds which invest into VC funds