There is a lot of focus out there on how to build relationships with VCs to raise money but there isn’t so much information out there about maintaining that relationship and common pitfalls in the earliest stages of a company once you’ve secured funding.
Having been a teacher and a school principal, structures are very important to me, so we have an onboarding meeting with every new portfolio founder to help set them on the right track. Additionally, we share what pitfalls we see early teams get into and we continue to update on these learnings as our knowledge grows.
Welcome to the 1517 Family
At 1517 we think of ourselves more like an anti-establishment educational institution rather than as a VC fund. You’re not going to find any Patagonia vests on our team, we’ll never have “associates”, we’re not concerned with doubling the size of our fund every time or moving up the stack (preseed forever!), and ideally not get on the wrong side of VCBraggs.
With our anti-establishment educational institution frame we think of our founders like learners and teachers. And in fact, recently we have named these cohorts our “Scholars in Residence” for founders who are just getting started and our “Faculty” who are our experienced founders who have certain milestones under their belts.
As a firm we do our best to act like switchboard operators, connecting our scholars to our faculty for sage advice and brainstorming. The pandemic turned out positively in some ways for us insofar as it got us to think differently about hosting more events online and now we have a weekly zoom call with portfolio founders who want to jump on and troubleshoot issues with each other. The amount of knowledge share on these calls inspires me and leaves founders with super relevant actionables from their peers.
We think of the future relationship with our founders as a very long term one. In fact, when we’re in diligence, one of our litmus test questions is, “Would I like to have Thanksgiving dinner with these people for the next ten years?” Even when our founders exit their companies, we keep in touch over a long period of time; first, because we care about them and second, because we want to be there when they are ready for their next thing.
For setting the tone of this long term relationship, we have an onboarding meeting with every founding team outlining the following things:
Philosophy: Everything Goes to Zero
The most important thing to share is our philosophy around investing — the most likely outcome is that everything goes to zero.
Let that sink in for a minute — zero. Not that we get our initial investment back, not that it becomes a huge company with large multiples, that it goes to zilch.
We will never go to our founders asking how they are going to return our initial investment because that is not the business we are in. We are well aware that we are in an industry where power laws are at play — meaning that one great outcome from our portfolio is most likely to set us up for success as a fund, not many smalls wins that will add up to a fund return.
This may sound really negative but what we hope it does is provide the courage to our founders to make bold moves, experiment, and try new things.
Peter said something very important during the Thiel Fellowship days, “Courage is in shorter supply than genius.”
We’ve taken that to heart and seen it ourselves — there are a lot of smart people out there but it takes something more to do something great.
We want our founders to feel unencumbered to make bold moves, swing for the fences, experiment by burning through cash to learn something, and overall have a great experience doing it and come away as leaders that they didn’t even know that they could be. We want them to think big and not be hindered thinking about getting quick cash back to us — we want them to execute on a big mission of great consequence.
We want to see a team go through the capital quickly, in about a year’s time, to learn as much as they can. And if the startup isn’t working out, no harm/no foul, it’s time to move on to what’s next. Because our portfolio is often with those who are early in their career, we see an obligation to helping people get onto their best personal path as soon as possible. We’ve seen teams try to eke out a small wage over many years as the ship is slowly sinking. This isn’t a way to run a company and it’s not a way to live.
There are a number of areas that we see teams mess up or get sidetracked early. In addition, if we notice particular skills lacking or potential personality quirks that may not serve them as they build the company, we bring these things up now rather than later.
Using the Wrong Ruler
Key performance indicators (KPIs) are extremely important to a business — but too often we see founders pressured into setting KPIs that aren’t worth measuring. If you’re weight lifting and hopping on the scale, a number will be there but it’s probably not the best indicator of your newfound fitness goals.
I once saw an update form that a venture firm required their founders to fill out each month — not only was it filled with bad survey design but it insisted on collecting KPIs. My mind was boggled, this team wasn’t even in pilots yet and was setting arbitrary things to measure so that they could look good on a form.
A startup’s job in the early days is to do a lot of “figuring it out” and collecting feedback and meaningful information from customers — not filling out VC forms. What a waste! And also, it could be really easy for a team to look bad when the KPIs aren’t working out, or look good when they are but they aren’t actually measuring the right things.
We encourage our teams to work very, very closely with their pilot customers to help start setting KPIs but keep things fluid to be able to experiment and learn as they grow.
Blaming, Instead of Fixing the Problem
It’s going to happen that you and your cofounder fight. It’s not an if, it’s a when. Michael and I have worked together for 11 years and during our second fundraise tensions were really high. We had a herculean feat to accomplish and not enough resources (time, money, energy, support) to do it. So we began to do what normal humans do under stress — we started fighting each other and pointing fingers.
Out of urgency, we booked a session with an executive coach (David Huffman out of San Francisco) to help put our fighting in perspective. One thing that is great about getting outside help is that that person can normalize what is happening for your team so that you don’t think it’s a personal flaw. David shared with us that every team fights, and especially under stress, and that what we were going through was totally normal — not something inherently wrong with us or a signal that we shouldn’t work together. Though we could only afford one session with him, it put us on the right track to focusing on what we needed to do to be successful rather than pointing fingers.
Over time we saw the same patterns with our founders, that under stress and being under resourced (not having enough time, money, energy, support) would make it hard for them to make decisions (because prioritization really matters when you’re resource constrained) and would further strain the team’s relationship. The things that kinda bugged you a smidge about your cofounder are now the things that cause a war.
The most important thing a team can do during these times is to hold the perspective that they must focus on fixing the problem, not the blame. We often liken this to surgery, if two surgeons are in an operating room, they have one job which is to have a positive outcome for a patient — if they start focusing on blaming each other for poor work, the body is dying on the table.
In our experience over the last eleven years, it’s not the technology that breaks, it’s the people. Take care of each other.
The Pick Two Mentality
There is a lot of bad advice out there that goes something like this “your startup, health, family, friendships and hobbies; pick two.” Meaning that you can’t have it all and that a natural consequence of launching a startup is that your friends, family, health, and hobbies must suffer. Will they suffer? Sometimes, surely. But we don’t think it has to be all the time and we encourage our founders to try to find balance when they can. Yes there will be times of sprint, but the long game is a marathon and pacing is extremely important.
It’s often in crisis where people realize that they have focused way too much on their startup to the detriment of other areas and people in their lives. Sometimes this looks like a death in the family, a relationship breakup, or noticing that one’s health is tanking. In those moments we’ve seen founders start to turn things around, but we like to set a precedent that all areas of your life are something that we care about and want you to have success in — not just you as a founder.
Your identity is more than and separate from your company — you are a friend, a sibling, a child to someone, a skier, an artist, etc. When you can get away from identifying as your company there is a lot more room for you to be yourself and you’ll be able to weather the ups and downs of startup life a little easier because it’s not about you anymore — as they say, mind the gap. Psychologist Nathaniel Branden discusses in The Six Pillars of Self-Esteem how moving towards meaningful goals is what causes fulfillment more so than attaining those goals — this is egoless ambition and what we ideally want our founders to strive for.
The Rules of the Game
Below are some tips on working with your investors and, in our opinion, what the ideal founder/investor relationship looks like.
You're the Captain of Your Ship
We recently helped one of our founders raise a seed round after we supported them with one of our Invisible College $50K investments and then our preseed investment of $250K. He came to us and said “Well, now that you all are authorities on my company....”
What on Earth was he thinking? He is a multiple-time founder and his previous investors had acted like authorities on his work. We set things right that surely we would have thoughts about how things are going and some ideas on direction, but the founder is the authority on their company, period.
Others have lots of experience but authority can only be for those in the trenches doing the work. We always say that if we thought we had to operate a founder’s company then we should have never made the investment and we stick to that.
We have recently started sharing more about founder and VC incentives because though they would ideally be aligned, they sometimes diverge and we think it’s important for founders to be aware of what might be informing some of the pressure or “advice” that they might be getting from other investors.
Investors are evaluated by their fund’s internal rate of returns (IRR) — that’s it, not on company hires, mission, etc — it really just comes down to this one number. IRR is a tricky calculation but it’s based on cash deployed into companies over time and the markups on those companies. In our Fund I portfolio it took about 4 years before there were any really significant markups on our companies. Most firms are bound to have an annual limited partner (LP - the investors in a fund) meeting and it’s definitely a bit nerve wracking for the first few years to know that your companies are growing but that the one metric you’re judged on really doesn’t bare fruit until much later. Waiting for the math to work can be worse than watching a pot of water boil or watching the paint dry.
We’ve been steeped in this for 11 years — we know that great things take time, so we’re able to be patient and keep our investors patient as well. But some investors want quick exits or are more concerned with getting markups on their books to show that every year is better than the last. Because of this, there is often pressure on founders to raise the next round too quickly or raise too much money because in the short term it looks really good on their books (the math starts working) to have the markup, but it’s not always what is right for the long term future of the company.
As our founders grow their companies we’ve also seen general frustration at the game of fundraising. It’s important to us that we set expectations for what investors up the stack will want to see so that they aren’t surprised. Generally we think of raising a seed round as showing that you have full contracts with customers and are starting to scale while testing new verticals. At Series A, $1M in ARR has been a good benchmark but user growth is also a huge factor.
One of our founders said something really apt the other day, “VCs invest in narratives that can grow with minimal backable proof.” And I think this is really well said and is true that narrative matters and just enough proof behind that narrative gets you there. This is neither good nor bad — it’s just the rules of the game.
One side note about working with your investors, don’t use them as a security blanket. I’ve seen it a handful of times where founders, and mostly solo founders (I think because they don’t have a full peer to bounce ideas or debrief with), use their investors as a mechanism for managing their insecurities. This needy behavior can look like regularly sending very long emails explaining the minutiae of something and can come off as looking for praise, frantic texting (often adding urgency where it isn’t warranted), or making the same ask (often for more money) again and again and not accepting the answer. Not a good look. When founders come to me with genuine and recognized insecurity and want to talk about it, game on. I love to dig into how to get unstuck in this sort of way but when it comes out in annoying behaviors it gets old.
How We Work Together
At 1517 we are a bit like Grand Central Station. You’re not supposed to hang out in the station long, you’re supposed to get on a train and go. Our jobs are to help you to point yourself in the right direction, talk to experts who can help you, offer our insights and feedback, and ask insightful questions.
To do all this best, we need to hear from founders. We are not the type of investors who are going to be insecurely texting our founders about their markups every week or questioning every move — but we need to hear from our founders regularly so we’re in the loop. So for us, we have reviews with our founders every other month as a mock board meeting to go over high level objectives and check in. As our companies mature we taper off on these meetings.
Working with us looks a bit like this:
- Get docs signed/wired monies in.
- If the round is still open immediately intro the founder to more firms.
- Kick off our onboarding meeting within a week.
- Recommend our applicable founders to the Thiel Fellowship.
- Every Friday we have a founder call for peer support.
- Super active FB group for making hires, asking questions, etc.
- We like to get a monthly update from founders.
- Every other month mock board meetings (these taper off after the first year).
- Some of our favorite questions to ask are:
- “What have been your biggest learnings about X? What’s new in your field?”
- “What key decisions do you need to make in the next couple of months? What firsts are you about to go into?”
- “Knowing what you know now, what would you tell your previous self about starting this company?”
- Retreats and workshops ongoing.
- 24/7 access to our team.
We get super excited by the counter intuitive details, inside tidbits, and fun random facts that our founders share. It’s a gift to work with mission driven people so we’re available to our teams 24/7.
And lastly, all of these touch points and information helps us to make an informed decision when it’s time to discuss follow on funding. We had a founder in the past who only talked to us when he was raising money and would dodge meetings otherwise — it felt very parental, like only coming to us for a $20. We passed on all follow on opportunities and it turned out that this poor behavior was happening in other areas and eventually the company folded. We think about decision making theory a lot at 1517 and having the most up to date information (including being able to create mental models of founder attributes that you can only assess over time) gives us the best chance of making a great decision for our investors. Generally we back founders through the Series A funding round and then create Special Purpose Vehicles (SPVs) to continue financially working with our companies that are hitting it out of the mark. Just recently we raised a $6M SPV in under two weeks for one of our founders. We were thrilled to have the opportunity to invest more and the founder was thrilled to have one of their earliest and friendliest investors back in for just under half their round.
We could only have the conviction to put together a vehicle like this because of our relationship with the founding team and growing company.
If working with a fund that supports those on a renegade path with mentorship, a very active community of founding peers, and long term capital appeals to you, please reach out through our contact form! We’d love to hear from you!