On Taking Risk

As part of any entrepreneurial pursuit, founders and VCs engage in various mating rituals that are as much about judging risk as they are about judging opportunity.

Over the weeks and months of pitching, founders and VCs manage to assign some subjective meaning to various parts of the risk stack.

Risk stack for startups

During most of this process, your pitch is that each of these is either

  • solved,
  • understood, or
  • will be managed so as not to hurt your chances of success.

However, your reality is that risk along each of these axis, if not taken earliest possibly opportunity will GROW exponentially. Risk is good when quantified early and taken early. Unknown risk equals infinite risk for startups.

The risk stack is contained only by explicitly addressing each component of it as early as possible – before or at least at the first financing.

Another danger is that risk not taken turns toxic in startups. What I mean is the effects of that risk will start to influence other areas. For example, if user related risk is the highest risk not taken, lack of knowledge about how users perceive your product or interact with your product will quickly seep in to other decision-making. In this instance, not knowing the user’s ability to understand the value will invariably lead to sub-optimal decisions across design, features, and operations.

If there is anything I have learnt in the past few years in my experiments in small investments and working with early stage teams, it is that I am learning how to help founders figure out risk and perhaps help them take more risk as soon as possible.

My mission statement as an individual investor is that “Hello, my name is rohit. How may I  help you take more risk.”

p.s. Business model intentionally not part of the risk stack. That is a composite risk which merits more thought before I can say anything meaningful about it.


my values as an investor: an open letter to founders

dear founders,

over the past few years, i have invested small amounts of money where the founders have given me an opportunity to do so. for each such opportunity to share in their quest, i have learnt something – and i am thankful.

as i talk to the founder(s) and the team, i find that some teams are naturally curious and want to know why i’d invest and what my relationship to that startup would be. one word that rarely gets used in these conversations and questions is ‘values’. i have written previously about startup values and as an investor, want to make sure that founders talking to me about angel/seed investments understand my values.
my values are expressions of some simple viewpoints and actions i strive to live by and bring to the table as an investor. these are:

  • are you taking enough risk?
  • optimize for the long term – always.
  • do I identify with, understand, and agree with your mission, not just your idea, technology, products, and startups.
  • the small amount of money ($5K to $50K) i invest carries with it the ability to turn to zero or be padded with zeroes. if it enabled you to make an effort you couldn’t otherwise make, it will be well spent.
  • while i will make an effort to help whichever way I can, you should understand that:
    • i am not your product manager
    • i am not your rolodex. access without context means nothing.
    • i am not a visionary. i am investing in your vision which is tuned constantly, by every day interaction with your users, technologies, products, and your peers. chase what you see, not what i or others ask you to chase.
  • i have failed many times at many things. i have learnt from failures. successes taught me more, but failures caused me to learn more.
  • while you focus on user growth and customer associated metrics, don’t lose sight of personal growth metrics.  i pay particular attention to personal and inter-personal growth within your startup.

and finally, the most important metric for me – your success as a founder isn’t measured in dollars raised or valuation or money earned for investors, it is measured in how many other people did you make successful. this is my yardstick for a founder.


The best question VCs can ask you and you can ask VCs.

When founders and startups meet with Venture Capitalists, Angel investors, or potential advisors, most of the time is spent talking about the founder’s insights, technology, product, or the market they intend to innovate, disrupt, or create. In my experience across both sides of the money-table as a VC and as a founder, the hardest and the most insightful question is often not about the knowledge founders or startups have, but rather, what have they learnt. This concise question embodies just about everything the VCs want to know about you as well as your company.

What you “know” is the platform that you stand upon and the framework for building your product. What you “learnt” is the  valuable part that allows you to create something of value, hopefully – a lot of value – for your customers. This is where you have the opportunity to figure out something that others have not understood yet. Thus, ‘learning’ is your unfair edge in an otherwise irrational pursuit where the odds are against you most of the time till you trump them with your learning, not knowledge.

If knowledge is velocity, what you have learnt determines your acceleration, i.e. the second derivative.

(Thanks @jessefarmer)

This seemingly simple question is in fact quite complex. When a VC asks you this question, they are judging multiple things at the same time:

what does it tell them about your learning style and pace of learning
what does it say about your willingness to learn
what does it say about your willingness to fail while learning
how does it educate them about your market, your technology area, your competitors

And when VCs ask this question of their portfolio companies, they are keenly focused on the acceleration (or deceleration) of your company, not the somewhat static ‘knowledge’ you started off with when they invested.

I also think this is also the question founders should ask potential investors. Rather than talk about fund size, investing philosophy, market-trends,.. (all things you must know before meeting them), ask them the following two questions:

1. What have they learnt in the past 2 years.
2. What new behavior, investments, or market developments do they expect to occur given that learning.

If you hear answers that are rambling, unfocused, or evasive, it will tell you more than their past record or their current investing ‘thesis’.

When you hear clueful answers, it should signal to you that the VC asking this question is more likely to be thinking ‘long-term’ vs. ‘flavor of the day’. VCs that can discuss what they have learnt and how they see it influencing the next few years are rare and good for early stage startups.

p.s. The words ‘learnt‘ and ‘learned‘ are interchangeable here. i have a preference for using ‘learnt’, having learnt my english language skills reading newspapers and listening to the BBC in India and later during graduate studies in Canada. “learned” is the more commonly used form of the word in U.S.A.



Picking Advisors for Your Startup

Somewhere in the entrepreneurial journey from an idea to a startup, founders will often meet friends and colleagues to brainstorm and develop their ideas. In some of these conversations “Oh I think you should meet XYZ person who’d be great for feedback” event happens multiple times. Some of these people are potential advisors for your startup. Here are some thoughts on how to think about advisors at various stages of the idea-to-company odyssey.

Remember your Advisor’s job is to help you make non-obvious choices in the face of imperfect and sometimes non-existent data. Recruit accordingly.

The Six Cardinal Directions of Effective Advisors

1. The most important skill an advisor can bring to you and your idea is a way to improve your idea by asking you the right and often ‘hard’ questions. People who want to replicate the success they had even if in the same area as your startup by repeating the same approach/execution/recipe are not the right ones for you. Beyond the usual “Oh Its nice” or “Its great” responses, listen for something that signals that your idea made them think. If they then come back with questions you haven’t yet asked yourself, they may be a good match as an advisor.

2. Don’t confuse mentor with advisor. Mentors are a rare breed of individuals. They are good at asking questions and making you learn regardless of what they or you are working on. Conflating the two may not necessarily be good for you or your  startup.

3. How do they talk about failure and what they’ve learnt from the failure matters as much as what they’re successful at. Ask them what they have learnt in the last three years as a result of a failure that has now changed their thinking or behavior in a meaningful way.

4. Make sure you ask them if they have played the role (paid in equity usually) with at least one other startup. You want to ensure that they are not going to play ‘Product Manager’ for you with good intentions and potentially disastrous results. Advisors are not going to invent your product or your market or your product-features. They can be invaluable in pointing out the voids in your product strategy or feature-list or competitive dynamics. Advisors who are good at pointing out what doesn’t exist are often far more helpful than the ones who suggest a specific feature or two.

5. Ask them for a specific commitment of time, effort, and introductions you expect from them over the first year of your collaboration. Introduce them to your other advisors and create some opportunities for them to collaborate – enabling them to think beyond their usual domain is effectively delightful compensation for them beyond the equity you will give them.

6. Your advisors are not your investors. Keep these two roles separate. While there may be some overlap, they have distinct responsibilities for you and your startup.

The Entourage Approach

For certain startups and founders, an ‘entourage’ may be more appropriate which functions as early adopters and influencers in your marketplace. Perhaps the best example of this approach was about.me where @tonysphere and other founders were well connected and signed up 26 advisors to help them push to a million users within a year and an acquisition by AOL. If you’re not as well connected as the fine folks at about.me, this may not be the way to go. A weak entourage is baggage, not balloons.

Advisor Compensation

I will write about Advisor compensation in a future post but here are some guidelines for silicon valley startups:
for early stage (between idea stage and funding) formal advisors, expect to share about 1% equity which goes down to approx 0.25% for seed-funded startups and often between 0.1 and 0.25% for developing stage startups. Typically the equity vests monthly over a year without any cliff and there is no other compensation (e.g. cash).

Facebook Lessons for Startups & Founders

Facebook filed their S-1 with SEC on February 1, 2012 and triggered yet another round of discussions in the valley digirati and digirazzi alike.  From computations of founder stakes to opinions on investment, tech and popular media made sure no one missed any aspects of the filing.

So what does it mean (If anything) for current and future founders of tech startups? Success at this scale – adoption, financial success, and pioneering a new segment of communications is rare and deserves much praise. The founders in this case – from Zuckerberg to Parker, Moskovitz, and even the Winklevii deserve all the praise they get for playing a role in the success.

Your first few employee matter a lot more than you think

I would also like to point out the critical role played by the first tens of engineers (hackers if you will) in building Facebook. Less heralded and often ignored all together by the media, this corps of engineers in my opinion deserves as much praise as the ones grabbing headlines in the press. Without the efforts of this group, Facebook could not have made it – founder foresight/passion/skills notwithstanding. Referred to as ’employees’ this group is as much of a co-founder as ‘the founder’ himself. They took nearly the same risks, likely contributed as much to product, platform, and technology, and helped it get from its early success to a product whose expansion beyond .edu domain was one of the most eagerly awaited consumer product introductions ever.

For founders, the aspects worth emulating aren’t the ones highlighted by blogs and media today – try and focus on the early parts of the arc of Facebook’s success. You will find many of the traits espoused by Eric Ries and Steve Blank when you examine the first year or so at Facebook (2004-2006). Some of the ones that stood out for me:

Build fast, release early, Find your Market-fit.

Famous for putting out the first iteration of the kernel of ‘TheFacebook’ in a week, this is a great example of lean development and testing market-fit. It wasn’t the first iteration either – Facemash which was a hot-or-not style site/application that Zuckerberg built prior to Facebook at Harvard and saw immediate adoption. Remember that hot-or-not was a circa 2000 phenomenon and Facebook’s first iteration was in 2004.

Focus on Users; user-adoption, user-experience.

In 2005, the valley was hearing whispers about Facebook and how Accel “went and got the deal” at an unheard of valuation (remember we were just coming off the dark years of 2002-2003), no one talked about Facebook’s technology or its platform or how it may one day be the dominant social-connector and app-platform.  But the first line one heard about Facebook was how many users they had, how much time these users were spending on Facebook, and the rapid growth rate that was easily the highest for any consumer app. This was a dramatic contrast with Google where the talk was about the outstanding infrastructure and how that gives them a unique advantage vs. everyone else in search and advertising. Unless you are building an application that needs to invent new systems and infrastructure, stay focused on users. Adoption will enable you to invent a platform and plenty of technology once you’re successful.

Surround yourself with people smarter than you

Graduating from a Harvard dorm room to University Avenue in Palo Alto, Facebook continued to find and learn from some of the best in their domain – whether it was Zuckerberg learning from Don Graham (Washington Post) or the stellar list of its board members and investors, it didn’t just happen by accident. I am not saying Zuckerberg is not smart, I am saying one of his smartest moves was to find people smarter than him at that point in time about an aspect of his startup. For founders, the clear lesson is find and pitch the smartest people you can find. I suggest a simple approach to accomplishing it:

When you meet prospective VCs (Partners or Associates) or Advisors, ask them to introduce you to two other people that they think are the smartest in the business.  Be persistent and chase down these introductions, turn them in to meetings, and ask them to introduce you to two more in turn.  In a few months you should be able to meet with enough people to learn from and who can be potential investors, advisors, or informal-advisors to your startup.

Think long term

This one is the easiest point to state and the hardest to follow. I believe there is a fair value at every step for a startup  if they have taken angel/venture money. And  they must be responsible in considering any offers that come their way. I also believe there is much (realizable) value in finding a way not to take that offer. Each such situation is unique but do consider that if you can find a way to build more value, you will have a chance to deliver life-changing rewards for yourself, your team, and your investors.

You know what’s cool? A Billion users. 

Building a startup that delivers a Billion+ in profits eight years after starting is Cool. But do you know what’s really cool – that Zuckerberg’s efforts changed and enriched the lives of thousands of employees and millions of users. A founder’s measure isn’t the capital they return or create, it is the number of lives they touch, improve, and change.

If all you wanted to make was money, there are easier paths to realize that goal. Be a founder if you want to make a difference. Money will follow.