Some Unconventional Investing Rules

Before I became a VC in 2009, I was an active angel investor for about ten years. During that time, I got exposed to the age old debate about the relative importance of team, market and product when making an investment decision.

People always argued about these things (and probably always will). Some say the most important factor is market because team and product can always change, but if the market and the tailwinds are big enough, a company can make many mistakes and thrive. Others argue for team because a great team in a mediocre market will change markets. Still others argue for product, especially in today’s age where word-of-mouth is so easy to spread through social media. Product-market fit can be such a powerful force that it can compensate for a weak team.

During those ten years, I also developed some more unconventional investing rules that have served me well when I’ve obeyed them and punished me when I’ve gone against them. They are designed to guard me against my biases and adverse instincts (I think everyone needs explicit processes to protect themselves from known blind spots or vulnerabilities). I’d argue that it was the slow realization of these rules that changed me from a losing angel investor in my first five years to a successful one in the next five. These rules are important enough to me that I’ve printed them out on my wall to serve as a daily reminder.


Rule #1: Invest only in teams that don’t need you. 

I’ll start with the most controversial and most easily misinterpreted rule.

I came to this rule by making what I see as a classic mistake of entrepreneurs who begin to invest. When I heard a pitch, as an entrepreneur, I would get excited about what *I* would do that with idea. The wheels in my head would begin turning about how I might approach sales, what features I would develop as head of product, or what distribution partners I might sign up.

The problem? What I thought didn’t matter. Sure, I could advise the company and give the teams my ideas (bad or good).  But, in the end, it was *not my company* and my influence on it was very limited. Being an entrepreneur made me helpful as an advisor to the business but in many ways it made me a bad listener when it came to evaluating teams.

About five years into angel investing, I was beginning to suspect I had this problem (approaching investing solely from an entrepreneurial point of view). One day, I was talking about it with Marc Andreessen and he coined the fix for me, saying,  “I only invest in teams that don’t need me.” Once I started following that advice, investment decisions became more clear and my results improved markedly.

I want to note a very important subtlety with this rule. When I say “invest in teams that don’t need you,” that doesn’t mean that you won’t mutually *benefit* from each other and be materially better as a result of your collaboration. Take one of my investments, the gaming company Kabam. Kabam has a tremendously strong team and they have more expertise than I ever will in gaming. And yet, I believe that our collaboration makes each one of us better in a meaningful way.

So, only invest in teams that don’t need you, but don’t conflate ‘need’ and ‘benefit’.


Rule #2: Impatience is the enemy

Despite being a private market investor, I love the public markets. When I was considering working in the public markets as a full time gig, a friend of mine and a successful public market investor, David Siminoff, suggested that I read the shareholder letters from Warren Buffet from 1977 to today as a narrative. It took me awhile, but I read them all back to back. When read as a history like that, it gave me an interesting perspective on how a great investor like Buffet handled a wide range of economic conditions, from high inflation to low inflation, from economic expansion to recession.

Perhaps the most poignant lesson, stated again and again and again, was the notion that the biggest enemy in investing is our own impatience. We have a strong desire to *make money now*, and when unchecked, that leads to bad decisions. It namely lets us talk ourselves into investments that we shouldn’t really make. It lets us create excuses for teams that aren’t as good as they should be, or for markets that really aren’t there or aren’t as big as we’d like.


Rule #3: Know why you want to own something: FOMO or insight?

In my opinion, FOMO (Fear Of Missing Out) drives a tremendous amount of human behavior and certainly a lot of investor behavior. There is always the hot deal of the month that’s being chased by many investors, who, if honest, are leaning in partially because other investors are pursuing it as well. They fear missing out on a deal that might turn out to be great. And this fear drives their desire to become an owner in the business.

Knowing that FOMO is a big behavior driver in investing is great for entrepreneurs to exploit. And many do if they can create a kind of feeding frenzy around their deal.

Resisting FOMO is not easy and the reason that I have the rule on my wall is (1) denial — most people don’t want to admit they’re ruled by or vulnerable to FOMO and (2) perception — it’s really hard to know you’re captured by FOMO.

This may sound obvious, but it’s often missed. You need a reason to invest – a critical insight –  and not just fear that you might be missing out on a good deal. The tricky part is that it’s easy to convince/fool yourself that you have an insight when you’re really just fearful and rationalizing. That’s why, I think, you need a process to determine if you’re being driven by FOMO or insight.

For me, that process is a question I force myself to consider.

I ask myself, “If the company hit a rough patch (and most do), do I have insight into the business to be able to help?” When I ask myself that question, and I’m willing to be honest with myself, the answer about if I’m pursuing something because of FOMO can become more clear.

Two years ago, my friend and fellow investor Steve Vassallo (Foundation Capital), brought to my attention a deal in the finance arena. I spent two weeks working on it and I *loved* it. I was ready to bring it forward to my partners when I asked myself the “FOMO or insight” question, and I realized that if this company hit the skids, I did not have the insight to help. And, though it was tough because I *really* wanted to do the deal, I said ‘no’.

Only time will tell whether I was right on that particular deal, but I feel that the FOMO or insight question helps keep me honest.


Rule #4: In poker and investing, the goal is to make good decisions, not to make money.

This rule came from a three-day poker camp I went to seven years ago. One of the pros got up to the front of the room and asked the question, “What’s the goal of poker?” Of course, someone put their hand up and fell into the trap. “To make money” they said.  Wrong. “The goal is to make good decisions, not to make money,” countered the instructor. If you make good decisions — better, more consistent decisions than the other guy — then you will end up making money.

In poker, if you approach the game to make money as opposed to making good decisions, you can fall prey to things like going on ’tilt’ after a bad beat, feeling ‘lucky’, continuing to fire bluffs at an opponent who’s clearly shown you he’s willing to call you all the way down, or playing in games that you can’t afford. When you hunger only to make money *now*, then you end up making bad, mostly emotional, decisions.

To apply this to investing may sound heretical. But, it is my belief that the goal of an investor is to make good investing decisions and good operational decisions with their companies. If they do that, then money will follow (sure, not always, but more often than not). Yes, all investors are measured on making money.  But paradoxically, I think the best way to maximize that outcome is to focus on making the best set of decisions with your companies, rather than only focus, at every turn, on making money.

So there you have it. Four unconventional investing rules I’ve developed over ten years. As I said, they’re primarily designed to protect me against my built-in biases or vulnerabilities. My hope is that they’re helpful to you as well.

I’d be very curious to hear from you. What are some unconventional investing rules you’ve learned to live by, and that have served you well?

For every stage, there is a salesperson

Does this situation sound familiar?

Your product is about to go into beta. Your employees are all engineers or product people or designers. You, the CEO, are the lone business person. You know that you have to figure out monetization (you’ve been telling people your model will be “freemium” but you haven’t really done any work on nailing down the details). You’re not sure what your pricing structure should be. You might have a pre-beta list of email addresses you’ve collected from a sign-up page you drove people to. But, there are lots of things you don’t know and need to know:

  • What’s the profile of a typical customer and how do I source and qualify them?
  • Who to sell to (product manager? head of marketing? head of sales?)
  • What to charge and what pricing tiers to offer?
  • How long does it take to make a sale and what’s the ratio of leads/sales?

Basically, you don’t know squat about selling your product and what it’s really worth to the market.

The natural inclination is to hire a salesperson to “figure this out”. But this is where a critical mistake is often made, and I want to talk about a *generalization* I like to make about sales people when making hiring decisions.

I believe that there are two kinds of salespeople: Expeditionary Salespeople and Process-Oriented Salespeople. (In general, I’m skeptical of people who divide the world into two buckets, so I understand any skepticism that comes from my doing just that.)

They are both extremely valuable. But, they are valuable at very different times in your company’s life cycle. Hire one type at the wrong time and you’re almost certainly going to part ways or radically undershoot your potential.

Expeditionary sales
Expeditionary sales folks are fantastic in early, ambiguous situations. They don’t mind selling an incomplete product. They relish in calling nearly anyone that they think might have a need for what you’ve built and in learning about product/market fit. The great ones don’t just report back to engineering “the customer wants X, please build” but instead use judgment and knowledge about what you’ve already built to map to what the customer is trying to do (but not necessarily asking for). They can make up pricing on the fly if necessary. In short, they almost look a bit like business development folks, but the key difference is that they thrive on the game of getting people to open their wallet and spend.

Let me give you an example. At JotSpot, our first sales guy was named Eugene Levitsky. I hired Eugene right about the time we were going beta. We had 15,000 email addresses of people who were interested in getting access to our service when it was ready. We suspected we were going to be a freemium offering, but we had no pricing structures in place. We had let perhaps 100 people use what we had built.

Eugene dove right in. He called on our first 100 users. He sussed out what they were using it for. He sensed when it was being used for something critical and started asking people for money (despite the product being in beta and us having no published pricing). He tested lots of different prices on the fly. He tried various pitches to convince people that what we were doing was valuable. In short, he made a ton of things up, he explored a huge range of prices and pitches, and he zeroed in on what worked. In the sales world, he was doing the equivalent of the rapid prototyping that great product organizations do. He was perfect for that stage of our business.

So, what are expeditionary sales guys bad at? Well, in general, they like *new* challenges. When something feels figured out, they get bored. They have greater resistance to traditional sales quotas and targets (but they know they come with the territory). They certainly don’t like formal processes because they feel “too rigid”. And, for the most part, they’re not thinking of how to build a massive sales “machine” with repeatable methods for identifying and qualifying customers, checklist-driven process for engaging with customers, and banging the phones or email queues to drive sales.

A time for change
There comes a time in the mid-life of your sales development, where you, the CEO, need to help transition from expeditionary sales to process-oriented sales. I’ve heard of the rare expeditionary sales person who can also take what they’re learning in the rough-and-tumble early days of selling and turn it into a more checklist-oriented, scalable sales process. But, I myself have not seen it. Most likely, you, the CEO, will have to pick the brain of the expeditionary sales person,  and take what they’ve learned to craft a more repeatable, scalable, process-driven sales method.

And, you’ll likely have to hire a new head of sales.

(For those of you wondering what happened to Eugene, Google bought JotSpot before we were ready to move to a process-oriented approach.)

Process-oriented sales person
At this stage in your company’s life, you probably have a product that fits the market reasonably well. But, your sales costs are too high, your process feels sloppy and unpredictable, and the sales cycle is too long. In short, you need someone who thrives not on figuring out new things, but on optimizing the process in front of them. You want someone that truly enjoys building a sales *machine*.

Process-oriented sales folks love repeatable, scalable methods. They love efficiency. They track their teams with detailed metrics. They implement software systems. They crave predictable growth. They think about building teams and managing groups of people to a target. And they come from highly process oriented sales cultures like Oracle, IBM or SAP.

So, where do things go wrong? Things get bad in a two primary scenarios

1) You bring in a process-oriented salesperson early in your company’s life. This goes very badly and there are several symptoms. The person expects the sales “script” to be figured out. They expect you to know the position/profile of the person you’re selling to. Engineering is constantly upset because sales keeps saying that they *would* be selling if only the product had some set of features that it doesn’t currently have (expeditionary guys are masters of selling what you’ve got, even if it’s not a perfect fit, instead of selling futures). This usually ends with the salesperson leaving.

2) You hang on too long to an expeditionary head of sales when it’s time to move to a process-oriented approach. This is typically characterized by the CEO feeling like there’s not enough predictability in the business. There’s resistance to the CEO’s questions about finding patterns for the repeatable profile of the people you’re selling to, and the timeline of leads to prospects to sales. The CEO wants greater reporting and visibility into the pipeline. This scenario should end in bringing in a new head of sales and moving the expeditionary person onto a special projects team (of one or two) that tackles the new products and initiatives that the process-oriented folks don’t know how to sell.

So, when you think about sales, think about these two types of salespeople and make sure you hire the right one at the right time.

For every thing, there is a season.
For every stage, there is a salesperson.

First, Fire Thyself

First, fire thyself

One of the hardest things for first-time founder/CEOs to figure out is what role to play as the company starts to grow.

All CEOs, founding or not, have a center of gravity. It can be sales, product, engineering, marketing, finance, etc. It’s the place they feel most comfortable, most grounded. It’s where they grew up in their career, or if they haven’t had much of one yet, it’s the place where they feel they have insight or instinct.

At the start of a company’s life, founding CEOs are often also doing the jobs of other “skill” positions (being the head of product, for example). But, inertia is a very powerful force. It’s very easy to just keep doing what you were doing. If you were a coder in the early part of your company’s life, it’s easy to just keep coding. If you were a product person in the beginning, it’s easy to stay deeply involved in product.

The error I see, far too often, is that founding CEOs do these skill positions way too long and don’t recognize the cost to the organization.

For example, let’s say a founding CEO is a really good product person. As the company adds its first few engineers, the CEO keeps playing the product role (in addition to, usually, the BD role, the sales role, and the marketing role). As the business grows more, the CEO realizes they need to add more bench strength by bringing in some senior specialists — let’s say a head of BD. Then the same happens for marketing. Then sales.

But the last thing to go is usually the CEO’s “comfort zone” skill (what they grew up in their career doing and, in this example, product).

Founding CEOs usually don’t give up the role for a few reasons:

  • They’re incredibly picky. They know what they want (they’ve been doing the job) and they don’t believe any one else can do it.
  • It’s hard for them to spend money on something that’s already getting done.
  • It’s WAY too easy for the CEO to undervalue the opportunity cost of remaining head of product themselves.
  • It’s hard to recognize how much better the product would be if someone were focused on it full time instead of them multi-tasking.
  • They fear that they won’t know what value they’re adding any longer if they give up their skill position.

If you’re a founding CEO, I believe that you are doing your company a disservice if you don’t fire yourself from your skill position. Your goal, crazy as it sounds, is to free up 50% of your time by constantly firing yourself from whatever skill position you’re playing.

Why do I think this is important? Two reasons:

1) As the founding CEO, you’re one of the very, very few people who can hold the whole business in your head. You understand all aspects of the company. You know its founding. You know what the original insights were that led you to start this business in the first place. You have memory of your early mistakes. You know the history of all the product decisions you’ve made. You likely have an intuitive sense of customers, what it takes to entice and sell them, and what messages they respond to.

In short, you know the whole business like no one else does (your co-founders might be able to as well, but they’re likely going deeper into their skill positions). That’s what makes you unique and irreplaceable. That’s your highest value-add.

2) Given that you’re one of the only ones who can hold the whole business in your head, you need time to THINK. You need time to be able to consider where your business is heading. You need time to read. You need time to talk to customers. You need time to respond to a new, interesting opportunity that no one else has time for.
Slack time has tremendous (and tremendously underappreciated) value. A CEO with slack time and the drive to use that time to continually consider the future of the business is a fantastic combination.

With the whole business in your head and half of your time free, you can:

  • Spot new big opportunities earlier. Given slack time, you can synthesize new information you’re getting in the market, in what you read, in conversations you’re having, in letting your mind wander, and you can use that to spot new, big opportunities earlier than others.
  • Think longer term about how you want your business to look in one, two or three years. Skill positions don’t have that luxury.
  • Think about how your company might get killed.
  • Think about your *business*, not just your product. (Product-oriented CEOs confuse these two sometimes).
  • Consider if you’ve got the right people leading the skill position roles.

So, I encourage all founding CEOs to ask themselves the question — how would I free up 50% of my time? It probably involves (a) getting comfortable that getting slack time is actually very value-creating for the organization, and (b) hiring your replacement for the skill position you’re spending your time on.

Go ahead and fire yourself. You’ll be really glad you did.

The Caller ID Test

When you take venture money, you’ve got to assume you’re signing up to work with someone for a period of years. The relationship better work because more likely than not, you’re going to go through some rough times together.

One quick test I think about (and I encourage entrepreneurs to think about as well) is to ask the question, “if I see this person’s caller ID on my phone, am I excited to pick it up or do I let it ring twice, take a deep breath and then answer the phone?”

Sounds trite, but it’s a good shorthand way of thinking about the issue of compatibility.

Another thing I feel I’ve learned over the years is that “every interaction is prologue” to the way a person will behave the in the future. What does that mean? I used to give people a lot more benefit of the doubt in early meetings if things didn’t go well. Let’s say the person didn’t pitch well. I used to have thoughts like “maybe they were nervous.”  If they got defensive when being asked tough questions, I used to consider that perhaps they were feeling unfairly pushed in front of a group of people.

I’ve come to realize that you’re much better off not making excuses for the person. In 99 out of 100 cases, if someone had a bad pitch, they likely don’t pitch well generally. If someone stumbled on a set of tough questions, then they probably aren’t good under pressure.

I know it can sound harsh, but this is a far simpler way of making decisions (and, IMHO, far more accurate). Make fewer excuses for people and you’ll make better choices about who you work with.

Lest you think this is about investors evaluating entrepreneurs, it should *definitely* go the other way. If your VC is late for your meeting, they probably don’t run on time. If they’re late replying to emails, that behavior will probably continue.

People are as they seem from the first interaction (for the most part). When deciding if you want to work together, make fewer excuses for them and remember the called ID test.

You’ll be much happier you did.