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Everything I Know About Venture in 500 Words
If I had more time, I would have written a shorter letter
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Deepwater hired Mike Olson as a new venture partner this week as we prepare to launch our second venture fund. I wrote a short note to him explaining all I’ve learned about venture over the past several years. Thought you might find is useful too.
Bezos wrote, “Given a ten percent chance of a 100 times payoff, you should take that bet every time.”
That’s venture in a nutshell, although you’re looking at more like a 1-2% chance of 100x rather than 10%. If there’s no chance for a 100x payoff, it’s not a good venture investment. For late stage, you’re looking for a 10x payoff.
100x opportunities tend to come with three common characteristics:
An idea that seems insane because it’s hard or crazy but is actually great.
A giant market that’s not totally obvious today but there are signs it could be huge.
Founders that are smarter than you almost to the point it’s uncomfortable to talk to them.
It’s painfully obvious when something isn’t a 100x possibility. Most ideas aren’t that crazy. Most markets are not that big. Most founders won’t intimidate you. There just aren’t that many 100x opportunities. 99% of pitches you see should be a no.
One of my favorite pieces of advice we got when we started: Don’t squint.
If you’re even slightly wavering in your belief of a 100x chance, say no and keep looking. Don’t waste your time trying to convince yourself otherwise. Investing is about finding a few great ideas in a career. Venture is no different.
On the topic of don’ts, here are a few more to live by.
Don’t love any idea going into a pitch. Your default mindset going into a pitch should be that you hate the idea and market. Make the founders convince you that their business has the three key qualities above, not that it doesn’t. Good founders convince.
Don’t promise to add value. There’s endless discussion about how VCs must provide value and how most don’t. The reality is simple: If you adhere to the rule of investing in founders that are smarter than you tackling crazy problems with huge markets, there’s no value add you can provide that will meaningfully change the trajectory or outcome of the company. The most honest VC pitch promises no value add to founders. Be helpful if you can. Encourage founders to think big. Believe in them, especially when times are hard. That’s the best value most VCs can add aside from money.
Don’t lament your misses. Given enough time in venture, you’re going to pass on 100x outcomes. It doesn’t take long. My first was about 15 months into our first fund. It’s the nature of the game. Don’t lament those misses. Identify what you missed and use it to improve your process going forward.
Don’t forget to swing. The 100x chance is rare, and conviction you’ve found a 100x chance should be even rarer if you’re disciplined. When you find something worth swinging at, swing. Write the check. Don’t let it atrophy. One or two great investments make a career if you hit them.
Disclaimer: My views here do not constitute investment advice. They are for educational purposes only. My firm, Deepwater Asset Management, may hold positions in securities I write about. See our full disclaimer.