203. Raising Fund III, A Framework to De-risk Your Startup, & When to Explore vs. Exploit (Leo Polovets)

203. Raising Fund III, A Framework to De-risk Your Startup, & When to Explore vs. Exploit (Leo Polovets)
Nick Moran Angel List

Leo Polovets of Susa Ventures joins Nick to discuss Raising Fund III, A Framework to De-risk Your Startup, & When to Explore vs. Exploit. In this episode, we cover:

  • Give us an update on your investments at Susa since we last chatted?
  • How has the thesis at Susa evolved over the past couple of years?
  • Do each of the GPs at Susa have specialty areas of focus?
  • This year Susa closed on 2 new funds – Susa III a $90M early stage fund, along with your first opportunity fund to which investors committed $50M. What was the elevator pitch to LPs and what worked well in the first two funds that resonated with LPs, leading to the successful raise?
  • What would you have done differently in Fund I and Fund II if you could go back?
  • What it takes to raise a Series A… often founders will have a singular focus on the vanity metrics — they assume if they hit $2M in ARR they’ll attract the A round at an attractive multiple from Tier 1 investors. But, we’ve seen this play out and it’s not all that’s required. Why is a singular focus on ARR a poor approach to raising money?
  • Leo, you have an original framework here focused on de-risking the the major risks centers facing a startup. What are the high-level principles?
  • The 9 risk centers that you’ve identified include Product Market Fit, Product Quality, Team, Recruiting, Sales, Market, Funding, Short-term Competition, and Long-term Competition — can you pick one of these areas and walk us through an example?
  • What are the common mistakes founding teams make with regard to these risks?
  • Talk a bit about the balance between testing and execution?  How should founders balance figuring out the best path forward with running fast in the direction they think is best?
  • Increasingly our founders have been sending us dealflow, operating as scouts, making angel investments in early stage companies. Where do you stand on this — distraction that should be avoided or net benefit to those involved?
  • In what ways have you changed most as an investor since the early days?
  • One piece of advice for founders — what is it?

Guest Links:

Key Takeaways:

  1. Since Leo was last on the program, it’s been a very eventful 4 years for Susa – they wrapped up their first fund, raised 2 additional funds, doubled their team, brought on a new partner and made about 15 investments.  
  2. The thesis at Susa has evolved from companies that had competitive advantages primarily in data, to companies with competitive advantages in general. They’re drawn to startups that, regardless of what they’re building, as it grows over time, it gets harder for somebody else to catch up. 
  3. Part of their pitch to LP’s that lead to the successful raise was their concept of viewing venture as a flywheel. The goal is to invest in great companies, build relationships and develop strong references, as a result those founders introduce them to the next generation of great companies.
  4. If Leo could go back and do one thing differently in Fund I and Fund II, he wishes the check sizes were a bit bigger. He feels that those slightly bigger investments in the first couple of years, would have been really meaningful now, six or seven years later. 
  5. Having a singular focus on ARR is a poor approach to raising money because usually the numbers an investor throws out, is a proxy for something they’re looking for a founder to prove, within that time frame. This put’s the founders mindset on hitting a magic number, when really they should be focused on the fundamentals that will create the outcomes. 
  6. De-risking is essential to startups in general, not just for fundraising but for building successful companies in the long run. A key principle is determining what your key risks are and accurately self assessing yourself on each one. 
  7. The biggest mistake Leo see’s founders make is only working on the areas that they’re good at, while neglecting the important areas of the business that they’re not so good at. Spending time on those neglected areas is important and what ultimately creates successful founders and great companies. 
  8. Leo shares the importance of the “explore vs. exploit” framework. Maintaining a balance between exploring: gathering further information to broaden your perspective, and exploiting: executing based on the knowledge you currently possess. 
  9. Leo believes there’s a lot of value in periodically spending time outside of work to meet people or do things unrelated to your startup. It creates a good foundation for your future where you have more connections and resources in case specific challenges or opportunities come up. 
  10. In the beginning of his career, Leo approached venture a bit like value investing, predominantly focused on the near term numbers. Over time, he’s realized this approach is a very short term analysis and what really matters is the companies potential for greatness in the long run.
  11. One piece of advice Leo has for founders is to spend some time getting to know investors and picking your partners carefully. Being that these are long term relationships, picking a partner after one meeting is very risky. It’s important to slow down and really gain conviction that you’re making the right choice. 

Transcribed with AI:

welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran and this is the full ratchet

Welcome back to TFR today Leo Polovets is back on the program for I believe the third time. Leo is of course co founder and general partner at Susa ventures which invests in early stage companies with strong compounding moats, such as proprietary data, economies of scale and or network effects. In today’s interview, we discuss the evolution of Susa over the past few years, what worked and what didn’t in their recent fund three capital arrays. What do you would have done differently if you could go back to fund one? Why a singular focus on ARR is the wrong way to raise a Series A, we discussed the key ways to de risk a startup and look more attractive to investors. We chat about founders that operate as investors or scouts for VC firms, and if that’s an appropriate use of time, and finally, Leo talks about his personal evolution as an investor. Here’s the interview with one who I consider to be one of the best young minds in venture Leopold vets.

We’ll pull the vets is back on the program joining us today from San Francisco. Leo is the co founder and general partner at Susa ventures Susa is a San Francisco based venture firm with investments in Andela Flexport, Robin Hood, scalar, steady outlier scope AR and expanse among others. Prior to Susa Leo was the second engineering hire at LinkedIn, and also worked at Google and factual before investing full time. Leo, welcome back.

Thanks, Nick. I’m really excited to be back. Yeah, can

you so we’ve talked about your background. I think a lot of people are familiar with you. But can you talk about maybe an update on your investments and also Susa? Since we last chatted?

Yeah, so I was looking back to it. I think it’s been almost four years since our last chat. So a lot of time has passed since that, although we’ve talked a lot off the podcast, obviously. Right. But yeah, it’s it’s been a pretty eventful four years. I think when we last talked, we Susa was just wrapping up our first fund. And since then, we’ve raised a couple more funds, we doubled the team, we actually had a new partner, Courtney start just a couple of days ago. So that’s been pretty exciting. We’ve made about 50 new investments in the last four years, because we do about a dozen a year, you know, a lot of those companies are, you know, still growing but becoming more and more exciting and big and formidable over time, you know, like we had a couple years ago invested in stored, which is the warehousing and distribution network in Atlanta. And like new front, which is a modern insurance brokerage in SF and a lot of other companies that were really excited about, you know, as they really started to take off. Excellent,

excellent. And how, how has the thesis evolved? Over the past few years? Yeah.

So when I first spoke with you, our thesis for our first fund was largely around companies that were using data as a competitive advantage. And when we started investing back in 2013, I felt like a pretty good thesis, my partners, and I had all worked at companies where data was a pretty critical piece of them, you know, building a big moat around whatever their product was, like, for example, I worked at Google and Google that historical search result data was really useful for them building a better and better search engine. And I think that’s what really kept in my head for a long time. And so my partners, and I really saw that dynamic. And we thought that that was just a good bet to make in the future that more and more companies would use data as like a key differentiator competitive advantage. And we bet largely behind that thesis for a few years. And then over time, what we realized was, you know, rather than than just data as a competitive advantage, what we’re really drawn to is just competitive advantages in general. And so it could be data could be network effects. It could be economies of scale, or sometimes brand. But basically, we like things were whatever the company was building over time, like whether it’s through data or network effects, the bigger the company gets, the harder it is for somebody else to catch up to. So we view that as a really critical piece of a company becoming huge over time, and, you know, being able to maintain its lead. And so that’s the thing we really look for these days. How

do you guys divvy up responsibility at the firm? I think you you mentioned that you just hired a new partner. I think you said her name is Courtney. You know, does she have a certain focus area or a certain set of functional activities that she does, how do you guys divvy that up and specialize within Susa?

I would say we’re fairly generalist, actually. So but the firm itself as generalists, so we’ll invest in almost every sector. So then hardware consumer, we’ve done enterprise that a little bit of Frontier tech. And for the four partners we eat have certain areas we lean towards. So for example, I’m probably the most into b2b and enterprise investing. Courtney really likes, you know, what people often call like dusty or unsexy industries, you know, my partner’s Chad and Seth, like, they’ll do more consumer marketplaces or tear tech. But even for any single partner, even if they lean, let’s say, towards frontier tech and consumer, like, they’ll still do some enterprise investments in hardware investments. And so each of us does, you know, a little bit of everything. And I think we feel pretty good about pretty much any partner can look at any startup and, you know, have a decent opinion on it. And then, you know, as the product as the startup progresses, through our process, more and more partners start meeting with the founders. And, and in the end, we basically have four people with different perspectives and different interests. But you know, all of us can give like an informed vote and opinion on any given company.

is the entry point still see?

Yeah, we’re very much seed focused, I’d say, you know, usually we’ll invest around a million dollars into rounds that are two to four, sometimes two to 5 million these days. The valuations are usually somewhere between like 10, and, you know, high teens was

funny. Perfect. And with the closing of the two new funds Susa three was a $90 million early stage fund. I believe you also did your first opportunity fund looked like the published commitment on that was 50 million. Can you talk about the elevator pitch to LPs? And maybe what worked? Well, in the first two funds that really resonated the LPGA are pitching,

pitching all pieces, definitely an interesting process. I think, in most situations, when we’re pitching, like, whether it’s a company or you know, for a job, people really look at what have you done recently. But in venture, it’s all about, you know, what did you do three or four or five years ago, because it’s so long, you know, and so it’s kind of funny, I feel like I’d never looked at a startup and say, Oh, you did a really great job four years ago. And so you know, I’m gonna give you a series B term sheet today, four years ago, it’s really based on what you’re doing now. But when we’re pitching a piece, a lot of the pitch actually is about, you know, here’s what we promised to do and find one, which was, you know, ended in 2016. And here’s how that’s going. And so I think, in terms of the things that resonated, you know, LPs liked how our first fund was performing and how the first half of the second fund was starting to track. We, you know, as you mentioned, in the intro, we were seed investors in Robin Hood and Flexport, and Adela and a couple other companies that literally excited to see the progress and the impact they’ve had. And LPS were excited about that as well. They were also really excited that we were basically executing the plan that we set out when we first started Susa. So even even in the very first pitches we had back in 2013, we had this roadmap of here’s how we see the funds growing over time. You know, here’s how many investments we plan to make in each fund here, the cheque sizes and the target amounts. And we ended up being very close to that plan. So for example, like in fun, too, you know, our plan, when we started was that the fund would be 50 million, we would write something 50k checks. I think the average check size ended up being something like 740k. So we’re really close. Wow. And so yeah, so LPS were, I think happy to see that sort of that kind of consistency and planning. And then I think the last part of the pitch that resonated with people was that we really view venture as a flywheel where our goal is, you know, we want to invest in good companies and great founders and help them along the way. And then those founders will introduce us to the next generation of great companies and, you know, hopefully provide like strong references and vouch for us as a good partner. And so this is kind of this flywheel where like, we’re investing in companies to help us get into more good companies. And hopefully, that gets stronger and stronger over time. And so part of our pitch was that we’ve done a pretty good job for, you know, a fund of our age, which is about six, seven years old, of getting that flywheel spinning. And so we’re definitely seeing that now we’re like, you know, the founder of Flexport, will introduce us to somebody else, and help us get into that investment. And then a year or two later, that founder will help us get into another investment. And so we feel like, you know, the founders who we work with, and the founders we get to meet are stronger than ever. I’m really excited about that.

Do you guys measure percentage of companies sourced via an existing portfolio company, or an existing maybe founder relationship?

We definitely look at this from time to time, so every year, so we’ll kind of look at where are our best deal sources? You know, where are we doing our investments from, you know, kind of what are the best uses of our time. And over time, referrals from founders have definitely become a bigger and bigger part of the competition of the startup to invest in. So when we started, basically almost all of our deal flows from other investors. And then over time, you know, as the portfolio has grown, we now invest in about 95 companies that are part of a Susa family. And, and these days, like we started fund three, you know, six months ago, that we’ve done about nine investments since then, and I think four or five out of the nine were basically founder referrals. So we definitely have seen that I’ve increased a lot over time. So that now almost half of the companies we invest in come through a founder we’ve worked with in the past.

That’s great. Yeah, I mean, we’ve seen, I think we just closed their sixth deal in Boston, of all places. And that was not a strategic geographic target for us. But we did a deal or two there. And the founders started recommending, you know, this small seed fund in Chicago to their friends. And, you know, a couple years later, we’re on our sixth deal. So, yeah, it does happen, that the referrals are great. That’s really cool. So you know, you mentioned 90 Plus portfolio companies. I’m curious how, how do you guys manage I think there’s three GPS at Sousa. Plus, you just added a partner, but how do you manage the body of work with all these different portfolio companies as they’re being added? I know that the natural goal is for that portfolio to cycle and people will graduate on to series A and Series B, and boards will change. But how do you manage the increasing amount of work as you make more and more commitments across a number of different funds?

Yeah, this is definitely a question that’s on our minds a lot, just because managing the fund at close to 100 companies is very different than when we had 50 or, or 15. What I’ve seen, as you know, as you mentioned, companies do graduate out over time. And that definitely helps because, you know, we’re not necessarily working with 100 companies today, it might be actively working with something more like 40 ish. And so that ends up being about a dozen per partner, which is a lot more manageable. And what each of us typically does is we’ll try to catch up with every company we work with, you know, roughly once a month or twice a month. And those are, you know, a little bit more structured, where we’ll talk about how the business is going, we’ll talk about if there’s any areas where the founder is struggling or wants help, or maybe areas where we can proactively identify where we can help. But then outside of those calls, or meetings, we’ll also we’re available on email, and text. And I think that stuff has ramped up over time, you know, because the kinds of the kinds of conversations that come up over texts that are more urgent, those will come up with co founders, but they’ll also come up with series A and Series B founders sometimes, where they just want to talk to somebody that’s known them for a while that knows where their company is at and the history and can advise them on some complicated situation. And so I think it’s still manageable. But it definitely takes up an increasing amount of our time, which is part of the reason we’re really excited to add a fourth partner and Courtney, because I think she brings in a great network that will help us, you know, find a lot of great companies to invest in and work with. But I think also she definitely improves the team’s bandwidth. And I think her perspective also helped us, you know, level up some of our practices that were more efficient, effective as well.

Like, if you could go back in time, and do things differently for fun one and fun two, what would you have done differently? What would you change?

Well, I think the first thing is, I wish we had put the whole fund into bitcoin in 2013. But, but kidding aside, I wish in our first fun that checks were a little bit bigger. And so specifically, we have a $25 million fund, and we were targeting 250 K checks. But the checks that didn’t start out at 250 K, you know, at first, when we had only a piece of the fundraise that we were just starting out as venture capitalists, and, you know, our confidence was not, you know, it was not at an all time high quite yet, just because we were getting started. We started out with smaller checks. So we started out with 50k 100k, you know, over, you know, towards the middle of the fund that was 250. And then by the end, we are sometimes doing 500. And some of our best investments like Robin Hood and Flexport. It’s hard not to think of like, well, what if we just put in, you know, an extra 100k at the seed round. Because if we had done that, let’s say Robin Hood, it would be worth, you know, multiples of our fund right now. And so I wish we had done a little bit more upfront, especially, you know, in that first year or two, before we had our full confidence, because I think those you know, slightly bigger investments at that stage would have been really meaningful about six or seven years later.

Gotcha. Interesting. So I want to switch over to more of the startup side of things. We’ve talked a bit about raising capital from LPs and your fund history. But you know, you’ve written a lot about founders raising capital, and what it takes to to reach a Series A, and often founders, you know, have this singular focus on the vanity metrics. They assume if they hit, let’s say, $2 million of ARR. They’re going to attract in a round, and it’s going to be at a great multiple from tier one investors. But you and I both have seen that it doesn’t really play out quite this way. And the vanity metrics are not all that’s required. Maybe we could just start out Leah, why do you think you know, singular focus on ARR is a poor approach to raising money?

Yeah, I think a lot of this is actually sort of the fault of investors because a lot of times when they talk to founders and they They say something’s too early, the easiest thing for them to say is, you know, Hey, your 500k in revenue come back when you have, you know, a million or 2 million. And I think that puts into founders minds that those are the magic numbers to hit for a Series A or for whatever the next round is they’re shooting for. And instead, usually, those numbers in investor’s mind are a proxy for something else. So, for example, maybe they’re worried that you can’t hire a good executive team, or maybe they’re worried that you can sell personally as a founder, but you haven’t been able to train a salesperson to also sell even though they’re not a founder. And so when they say, come back at a million and a half Arr, the number is not the thing they care about, what they’re hoping for is that you can prove by them that, you know, you you can hire a good executive team, or that you can train a salesperson to sell where they don’t have to be a founder, but they use the number is a proxy, and then people end up aiming for the number instead of figuring out what it’s a proxy for.

Right, there’s a lot of underlying variables that contribute to, you know, the the end result, the lagging metrics, I talked to my team on a regular basis about how revenue is a lagging metrics, we should be, you know, focused on the fundamentals that are gonna create the outcomes that we are looking for with the startup companies that we support. So, you know, knowing that you’ve developed your own framework here, it’s it’s kind of focused on de risking the major risk centers facing a startup, what are some of the high level principles of this framework?

Yeah, so I think de risking is really key to startups in general, not just for fundraising, but for building a successful company in the long run. And I think the the biggest principles in my mind are, you want to think about, you know, the first thing you want to do is you want to think about what are the key risks for your company. And the early days, it might be around finding product market fit, or getting your initial customers, you know, later on might be risks related to scaling from 10 people to 100, or from 100, to 10,000. But you want to list some of those key risks, and you want to try to accurately self assess yourself on each one. So, for example, if you’re thinking about product market fit, you know, you want to think about, do you really have it? Do you have signs of it? You know, have you built products before that have reached product market fit? And the fewer of those questions that you can answer yes, to the more risk there is that maybe you’re gonna have a hard time finding it. And so once you once you figure out those risks, and once you exhaust yourself and figure out where the biggest gaps are, those are the things you really want to focus on in the short term. And I think that’s really important, because a lot of times, you know, let’s say you’re a really good product founder are really good sales founder, a lot of times you’ll focus on the things you’re good at, like product or sales. But in terms of both making the company successful, and in terms of raising future rounds, you what you really get more credit for is figuring out the things you’re not good at, you know, so if you’re an awesome salesperson, and you can sign five customers before building anything. That’s really awesome. But it doesn’t really prove you can build anything. And so when you talk to a future investor, they’re still gonna ask like, well, you know, can you hire a good engineer? Or like, Do you know how to design a good product? And so what you want to do is actually kind of put a little bit of a damper on the things that you know, you can do and try to address the ones that you’re not sure about. Yeah,

I see this all the time. And I think, you know, some investors pass on investing, for obvious reasons, right. And then other investors just say that they’re not quite ready, or, you know, pattern recognition suggests that, you know, this doesn’t feel like it’s a good fit, but maybe they can’t identify the specifics. I like your, your approach here, because you, you kind of deconstruct like, all these different areas that make investors uncomfortable, and, you know, prevent startups from excelling and proceeding on. And I’d love it if we could deep dive into one. And maybe maybe you could walk us through an example. The different risk centers that that you identified, you just mentioned, product market fit. There’s also product quality team recruiting, sales, market funding, short term competition, long term competition. Leo, could you maybe pick one of those areas and walk us through an example?

Sure. So let’s take sales risk, for example. So one risk with a company is you’re building a product and the question is, can you actually sell it? And part of that is, you know, can you get a good price for it? But part of it is also can you get in front of the right people? Can you convince them of the ticket product is your pitch good. And in terms of assessing yourself on this, you know, I’m kind of the spec, the risk spectrum for sales, you know, at the very bottom might be that you’ve never sold anything, you have no idea how to sell something you don’t know how to pitch your product. So then there’s a lot of sales risk there. And then maybe a level higher would be you haven’t sold anything but you have some advisors that have and that can advise you or maybe even matters you have a co founder of is really good at sales. And so those are sort of ways to level up on that side and take some of the risk out of the situation. And then as you keep going, it might be that, you know, if you’re actually selling your product, that obviously there are risks that a lot. And then maybe the remaining part that’s left is, you know, you as the founder can sell it, can you teach someone else to sell it that you hire, and then once you can do that, I think that really theorists sales so that now you have something that can scale pretty well, because you don’t have to close every sale, you can hire, you know, two, or three or 30 salespeople to do the selling for you. And so, as you think about something like sales risk, you basically want to make an accurate self assessment of how confident are you that you can sell the product. And then if it’s slow, you want to do whatever you can to raise that confidence, which could be advisors, it could be investors, it could be consultants, could be employees, it could be you know, self self learning and reading, but just whatever you can do to decrease that risk in your mind that you can actually sell what you’re building.

I mean, this is like such an appropriate example. Because just recently, I think it was yesterday, I was emailing with the founder. And of course, we invested precede. So it’s, it’s very early, very early commercialization or pre commercialization. But this is like maybe the fifth time this has happened, I asked the founder for a view of their sales funnel, right? And I’m looking for something really simple, like, who are the sales targets? What’s the conversion percentage? What’s the estimated MRR for each? This is not rocket science, it’s just like, kind of a high level snapshot, which can help allow me to project out, you know, what’s the conversion adjusted revenue potential here over the next few months. And there’s so many founders that just don’t even have it, right. It’s shocking to me, some of them, you know, keep their key targets in their head, and they’re Chase Chase chasing. But it’s, it’s amazing to me when somebody hasn’t built even the funnel. And I think it’s, it’s worrisome, and indicative that, you know, this, this may just be reliant on their ability and their skill and their, you know, them keeping track of everything, as opposed to building a real sales muscle and a Sales Machine. And, you know, training the team on that, and projecting and forecasting, when these these closes, will happen, and when the revenue will hit.

Yeah, I think that’s, that’s a good example of exactly the kind of stuff that somebody will have to figure out in their first year or two. And so the longer they put it off, the more there’s a risk that they’re gonna get in a situation where that becomes a real bottleneck to the company. And maybe the company can’t even get past it. And so it’s great to figure that stuff out as early as often as possible. Because if you can’t get past it, you know, maybe you decide to take a different approach to the business, or maybe you decide to shut the company down. And if you can’t get past it, that’s great. And when you go fundraise, you’ll get a lot more credit from investors, and you’ll get a higher valuation from them as well.

I’m sure depending on the team that you’re working with, at Susa, the startups that you’re working with the the range of capabilities is, is probably different, right? For each founding team. Some people are probably really strong on maybe the recruiting side, and some people are really strong on building product. What are some of the common mistakes that you’ve seen founding teams make with regards to kind of these risk areas that that we discussed.

So I think a lot of the mistakes basically boil down to one principle, which is, people want to work on the areas they’re really good at, and most comfortable at. And then they tend to avoid or neglect the areas that are hardest for them, or that they don’t really know much about. And the way that manifests itself is, for example, maybe have a really good technical founder, and they’re great at building the product. And when a seed investor makes a bet on the founder of the company, usually the thing they really want to see is like, Okay, I’m confident you could build a good product, can you sell it? Or you know, is it the right product. And a lot of times, like, you know, good founders will basically identify that quickly. And they’ll really focus on finding product market fit, you know, having a good sales co founder, or, you know, trying sales themselves, because those are the things that are really risky for the company at that stage. Then I think the founders that struggle, they will spend, you know, their whole seed runway building an amazing product. And then they come out and they basically approach series A investors and they say, Look, we have this awesome product already for a Series A. And all the series A investors basically reply with, well, everyone knew you could build a great product, like this product is great, but you didn’t really prove anything new. And we’re still worried about the sales we’re still worried about if it’s the right product, like we’re not ready to invest at this stage, right? A lot of times the company is out of money at that point. So it’s a really tough situation. So I think the biggest mistake is, you know, only doing what you’re good at and then neglecting the important things that you’re not good at. So I think I think spending time on those look like the things is really important.

Yeah, every time I see a venture capitalist, write a blog post or share a tweet where they’re saying, founders should just focus on their strengths. It makes it makes my skin crawl, because I, I feel like that that can be good advice for roleplayers, you know, within an organization, but if you’re going to try and lead a venture back startup, you can’t just focus on your strengths, you you actually have to address the weaknesses, you have to put yourself in uncomfortable situations. And you have to learn about all aspects of the business. And to your point, I think, address risks in areas that might not be your expertise. But it’s required if you want to lead.

Yeah, exactly. Like, I think, a great product is amazing. And if you’re great at building product, you should definitely, you know, emphasize that makes that one of your core advantages. But in the end, you still have to sell it, right. And on the flip side, if you’re really good at sales, like that’s awesome, but in the end, you still need a good product or, you know, like a good enough product. And so if you don’t focus on that, you know, maybe you have a bunch of allies and contracts and commitments, but if you can’t build the product, it’s not gonna matter. What about

when you’re working with early stage companies, you know, trying to balance testing things in the market, whether they be sales or, or marketing efforts, or product capabilities, product features, product benefits. So the balance between testing and actual execution? Right, you know, how do you think about how founders should balance, figuring out what is the best path forward and then running fast in that direction?

Yeah, I think this actually kind of connects to people focusing on the things that are comfortable with, a lot of times, I think, people will go all in on something way too early. And it’s something that could be hiring a specific candidate, you know, it could be picking a target market, or a city to start in for, you know, a business that maybe go city by city, or maybe it’s you know, picking a marketing channel. And a lot of times people, you know, for example, if you’re doing a city by city business, maybe just start the city you’re in, right, or if you’re picking a marketing channel, a lot of people think, well, you know, I’ve made a lot of experience with SEO. So for this company, I’m gonna use SEO. And I think it’s a mistake to not explore a little bit first, before going all in on something. And so I think there’s sort of this good, like, explore exploit framework, which is, you don’t want to spend too much time on either of those things. So if you spend all your time exploring, and so maybe there’s, you know, you’re picking a marketing channel, and you spent eight months trying, you know, 50 different channels for a couple of weeks, that’s probably too much time and the exploring phase. But on the other hand, you know, if you are comfortable with SEO, and so you just decided to go all in on that, there’s a really big risk that maybe AdWords or maybe bulletin boards, or direct mail or something else would have been a much better marketing tactic for you. And you never figured that out, because you just went all in on the thing you know, and you’re comfortable with. And so I think it’s really important to be pretty methodical in terms of, you know, again, whether you’re hiring a candidate, or picking a marketing channel or doing something else, you want to experiment a little bit and do a little bit of research and look at maybe the top five or 10 alternatives, before you pick one to go all in on, you know, so like, don’t hire the first good candidate, you beat me time or beat 30. And then once you’ve done that, you have a really good calibrated sense of what a great person looks like. And then then you’re ready to make a good hire.

And what is that bar? So I mean, you just gave us a an HR example. But do you have a framework? Or do you have guidelines, as to, you know, when you decide, hey, we know what the direction is. And now, now, we should just execute instead of being in sort of this exploratory testing mode,

I would say, the bigger the decision, the more exploration you should do, you know, so let’s say you’re planning to spend, you know, $2,000 a month on marketing, and you have a couple million in the bank, it probably matters a little bit less, you know, if you try 20 channels instead of five. But on the other hand, if you’re planning to spend, you know, $50,000 a month, and it’s, you know, half of your budget or a third of your budget, you want to be really careful and make sure you make the best price possible. I think there are other factors at play, like, for example, how much better is the best choice versus the second best choice, you know, so if you’re hiring an engineer, you know, the first candidate might be a lot better than the the second best one. You know, for other decisions, maybe the difference is smaller. And so you don’t need to look around as much. And I also say like, the reversibility of a decision really matters. So if you hire an employee, that’s a big decision. It’s hard to undo it. It’s very, you know, it’s very messy for everyone involved, if you end up deciding you made a mistake. So I think you want to be more careful about something like that. On the other hand, you know, maybe there’s some SAS tool you’re thinking about, you know, for or managing marketing leads or something like that, there, maybe there’s a low switching cost of trying their tool. So you can just try a few quickly pick one. And if in a few weeks, you realize you made a mistake, you can just repeat the exercise and switch to another tool. And so I think there are a lot of these different factors like, you know, how reversible is the decision? How high impact is it, you know, how much variance is there in the quality of what you’re choosing? And all of those will inform how much time you want to spend exploring versus going all in on something?

Got it? Got it. You know, Leo, earlier, we were discussing founders referring deal flow to us, right, so existing portfolio company founders or other founders of the network, I think we’ve increasingly been seeing that founders are working on deal flow and operating as scouts and making angel investments in early stage companies and startups. What’s your stance on this? Do you think, you know, this is a distraction that should be avoided? Or do you think this is a net benefit to those involved?

Yeah, I think a lot of people feel like it’s a distraction, I think it’s actually a pretty good thing to, for founders to do. And you know, if they’re interested in it, first of all, I think for many people, you know, they have some hobby that helps them de stress or relax or that, you know, satisfies their curiosity. And, you know, maybe it’s watching documentaries, and maybe it’s reading books, or, you know, going to, you know, going to dancing competitions. And maybe it’s talking to other founders, and I think, you know, I feel like who am I to tell anybody how to spend their time outside of work. I do think also that there’s a lot of benefit to just meeting people seeing what they’re working on. And sort of betting a little bit on serendipity, where, you know, maybe you meet with 20 founders or 50 founders over the course of a year or two, and you talk to him about their businesses, maybe you give him some advice, maybe you Angel invest a little bit, if that’s something you’re interested in, and down the road, out of those 50 founders, maybe a few will end up being, you know, really valuable business connections, or, you know, they’ll have advice on some issue you’re having that you don’t know how to solve, but they’ve solved previously. So I think there’s a lot of value and just, you know, spending a few hours a week or a few hours a month doing things outside of your startup, or your VC fund or whatever you’re focused on. Because I think in a way, it almost is like an immune system for you know, for your future where you have more and more connections and resources in case specific challenges or opportunities come up.

I like that. I like that. Do you have folks in your portfolio that are active? I mean, without naming names, but active, you know, helping other founders earlier stage founders making angel investments, etc? Yeah,

absolutely. I would say, out of the 100 or so companies we’ve invested in probably 10, or 15 have founders that are angel investors. And, you know, I would say maybe five or eight of those founders are actually very active in terms of angel investing and mentoring. And their companies are doing great. So I think, you know, for what it’s worth, like, maybe the companies would be doing a little bit better or a little bit worse, if they were wholly focused on, you know, not doing anything on the side. But I think in general, the companies are doing great. So it hasn’t doesn’t seem to be a big impediment. I’m guessing it’s more of an advantage than anything.

So, you know, before we get to the wrap up questions, Leo, you’ve been at this for a number of years now? In what ways have you changed the most as an investor, versus the early days aside from just, you know, cutting different size checks?

So that’s definitely a big one. I think, you know, so my background is I was an engineer for about 10 years, and I’ve always been a very math and numbers driven guy. So it’s taken me, you know, it took me a few years to not overvalue numbers as much. I think in the beginning, I approached venture a little bit like value investing, where, you know, I would look at one company with, you know, 500k in revenue, raising at a $10 million dollar valuation, and another one with a million dollars in revenue raising at that valuation. And I would get really excited about the second one, just because I would look at it and say, Oh, this is, you know, a much better deal in terms of like the valuation to the revenue. And I think over time, what I’ve seen is, you know, that’s a very short term analysis. And a lot of the, you know, what really matters is like, Can this be a great company? You know, can this be a $500 million outcome or a billion dollar outcome or a $10 billion outcome? And for that, the near term numbers don’t matter as much. And it’s taken me a few years to really let that sink in, just because I am like a very numbers driven, numbers oriented investor. If

you had to give one piece of advice to founders listening, what would that be?

Oh, that’s a good question. I would say, you know, it’s a really interesting time where I think for a founder, the fundraising environments probably never been better. There are a lot of angel investors, there are more and more seed funds. There’s more sources of capital. And as a result, what we’ve seen is a lot of kind of the hottest funding rounds and going really quickly, where may just takes a week or two from when the founder starts pitching to when they have the whole round decided. And I think given how much capital there is, you know, one piece I have for founders is to really spend a little bit of time to get to know investors and you know, pick their partners carefully. There are a lot of great partners out there, there are a lot better, okay, and there’s some that are not very good or bad. And I think when you do a whole fundraising round in a week or two, and maybe meet a lot of investors once, maybe twice, you don’t really have time to reference them with other founders that worked with, you’re taking on a big risk, because you’re going to work with these people for, you know, two or five, or maybe 15 years. And, you know, picking a partner for 15 years based on one meeting, you know, if you get it right, that’s amazing. But if you get it wrong, there’s a lot of downside. And so I think it’s important just to, you know, it’s good to slow down a little bit and get to know people and make sure you’re making the right choice. And is

our founder reference checks is that sort of the primary tool that founders should use to help make their decision? Yeah,

I would say founder reference checks are a great tool, you can talk to a few founders that investors worked with, see what those founders experience was, like, you know, see if the investor actually delivered on the promises that they made to the founder, you know, they weren’t empty promises. I think another form of diligence is just to have meaningful conversations with a potential investor about, you know, some challenge you’re seeing or some opportunity you’re seeing, and, you know, seeing how that investor responds, right? Like, did they tell you what to do? Did they give you advice? Do they connect you to somebody? You know, are they are they hard to talk to? Or are they easy to talk to? Or, you know, I think there are a lot of these factors. And for some of them, there’s maybe a clear right answer in terms of what a good investor is like. And for some, for some aspects, you know, for example, how direct somebody is where there’s not a right answer. And, you know, maybe one founder of prefers an investor that’s more soft spoken, and, you know, gives like gentle advice, and another founder, for somebody that’s, like, really direct and doesn’t beat around the bush. And I think you want to get to know investors and try to figure out, are they the kind of person you want to work with? Because, again, you’ll be working with them for years to come when things go? Well?

We are what resource? Have you found to be particularly valuable that you would recommend to listeners?

I think, well, first, I think Twitter is great, it’s a great chance to talk to other operators, talk to founders, you know, talk to investors. And you can actually have these like one on one conversations or asking clarifying questions or get advice. So I think it’s a really amazing resource if you invest time in it. In terms of books, I would say, you know, to that I really like one that is more recent, is the high growth Handbook by Eli Gil, I think there’s just a lot of great operational advice about all kinds of aspects of building a company, and you know, across the different stages of building a company. And another book I really like is a book called Traction by Gabriel Weinberg and Justin Marez. And that may be feeds into the derisking conversation that we had, and the fact that people sometimes go all in on the thing they’re comfortable with. And traction really talks about how to pick a good marketing and growth channel, and how instead of picking the thing you’re comfortable with, or maybe the thing that seems to have worked for your competitors, it’s more about, you know, a structured process for coming up with some good candidates for growth channels, coming up for good tests for each channel, and then figuring out like, which ones to go all in on. And so I find it really useful for, you know, especially for founders that don’t have any sales and marketing experience. I think it’s a, it’s a great way to learn about how to approach that whole section of running a business, which is really critical.

Love it. We actually had Gabrielle on the program some time ago, but to talk about traction, great recommendation. Leah, what do you know, you need to get better at?

Well, I guess, I actually am not sure how to get better at this, which is a little bit frustrating. But as I mentioned earlier, I’m really numbers driven. And so I’m really good at analyzing data, you know, facts, numbers, I’m less good at assessing people. I think this is probably an artifact of me being an introverted engineer. And so I think that’s something I can definitely get better at that crutch I’ve used that is actually very effective as having partners that are good at that has been a really great asset, where, you know, when we when we talk about a company at the team level, my partners are really good at assessing the founders. I’m really good at looking at the numbers. And you know, each of us has different strengths and weaknesses, but combining you know, four perspectives together makes a much better decision than if one of us is making the decisions single handedly.

Love it. Love it. I was talking to avi Don Ross recently and I think he was your name came up and I think he said there is no problem that Leo can’t solve

the assessing people

he’s a believer and then finally here at Lea what’s the best way for listeners to connect with you?

Yeah, I’m I’m very active on Twitter. So I’m out pull events, LP O L O V ETS. Also many emails Leo and Susa ventures if anybody wants to email me to chat about anything. All right,

well, he’s Leo pull events of Susa ventures Leo, thanks so much for the time. This was great fun and always appreciate your insight on early stage investing. So thank you.

Thanks so much for having me, Nick. It’s always a pleasure to chat with you and be on the show.

That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us