E230: What Great VCs Actually Do for Founders

0:00When we last chatted, you said that on the programming side, it had gone from Java and Python to English, the English language. Computer programming or writing software was always about automating what computers can do for you. If you go way, way back when, it was all about machine code or machine level programming, right? We invented compilers. Compilers allowed us to use Python and languages, which were a little bit more English friendly. I think what LLMs have done is fundamentally removed any syntax barrier that Python enforces or Java enforces. And you can just in straight, plain English describe what you want to do and get it done.

0:38There is no engineering roadblock in creating some kind of software or automation. If you are not doing it, I think you're falling behind. How are you using the English language in order to program processes to help your business? I built my own automations to go scan through LinkedIn, scan through X, and find those kind of social signals for people who might be potential founders. I'm meeting people who are so much earlier in their founder journey than I ever could have before. Vivek, I've been very excited to chat. Welcome to the How to Invest podcast. Thank you for having me. You've had some of my favorite LPs and people I know really well, so I'm honored to be here alongside them.

1:16Thank you for coming by. So you've been a VC for roughly a decade, also two-time founder. When you look at startups, you said that there's no such thing as investing too early in a startup. What did you mean by that? Well, I prefer to back founders and their ambition before it's a consensus, before it's been priced in by the market, before traction is obvious. And that's all I mean. I just love to engage with founders as they're thinking about their business, as they're starting to conceptualize what they want to build. And to me, that is a perfectly fine stage to partner with founders. It also has this really fun advantage of being able to collaborate with them, learn a lot more about their thinking process and how they make decisions, how they navigate complex data and the like.

2:10So for me, it is more about partnering with founders as they are so early in the journey, haven't really fully started. To me, that's when their alpha is highest, that the market hasn't fully caught on to those founders. And frankly, it's more fun. You're able to be part of the drafting process of how they conceptualize their business, how they start and how they grow into these kind of large unicorns. Yeah. And to me, you know, I don't think of that as an opportunity to meaningfully change the business. I don't think that's the role of a VC. We obviously provide input and some of what we see in the market.

2:51But eventually we are backing founders who have deep insights into markets that they really know their market better than others or have an insight into their market better than most. So my role is not to influence their business and their choices too much, but really become more of a thought partner, help them think through their business, the challenges, help them verbalize it, help them bounce their ideas off of me. And so to me, that is the opportunity for me to provide value, but also at the same time, learn so much about how they think. And as I look back at some of my most successful and favorite investments, it's been that where I've just been able to build that kind of a rapport with the founders over years, that that's lasted over many, many years, even when the company has gone on to raise significantly more capital, certainly outgrown me, but some of the bond that we form early on lives on.

3:54Especially as venture has gotten such a fraught asset class, it's the time where you can generate most alpha as well. Not every VC is engaging with founders before they have incorporated, before they have started companies. And I just think that's an opportunity to drive outsize returns for LPs as well. It's a basic economic principle of how do you capture a lot of value? You have to create much more value. How do you become a billionaire? You build a$20 billion company. How do you become a deca billionaire? You build a$200 billion company. It's pretty straightforward, but it starts with that.

4:32You have to be able to create that value before you capture it. If you're waiting for signal such as market traction and the likes of that, then look, every VC will say they create value and every VC says, they create value in before investing. And I think mostly every VC believes it. So I don't think they are full of it when they say that. But it's harder, increasingly harder to do that when the business is crystallized and when the company's already in market. You can make an introduction here or there. But I think that is far less meaningful to founders than true thought partners and true people who will truly challenge them on their assumptions.

5:13They find very few of those. And as a result, you see too, most founders crave the founder to founder networks and they want to engage with other founders because they find that in other founders. And as a VC, if I can provide that to them, that is my opportunity to provide value to them. Like value add, the term thought partner also gets thrown around in the venture ecosystem. What are the specific do's and don'ts for being a great thought partner to a founder? That's a great question. And I don't think I have the right answer. My approach to it is my role in those situations is not to change their minds or to influence their business.

5:56Because I believe this. I know less than founders in every instance. I just don't know enough about their business as much as they do. For me, being a really good thought partner is asking questions that make them think. and some of it is creating a bond, creating that trust relationship because founders naturally are inclined to be in sales mode when they're talking to investors. So you have to somehow get them out of that and start to become really candid and transparent with you first so that when you ask them questions that make them think they are truly inclined to think rather than give you the salesy answer.

6:35They always have the salesy answer for most questions, but I think there are enough questions that are thought-provoking and can challenge their thinking. And founders truly appreciate that. And at least my commitment to founders is if they pitch me at the least, that's what they get. They get a thought-provoking enough conversation that they can leave with enough to go back and think more about. I'm not going to be a silent listener only, or I'm not going to be a passive participant in a pitch process. I'm a very active thought partner in those pitches. Great investors are able to be, instead of when somebody comes to you with a problem, instead of making it a bigger problem where the founder now has to calm you down outside of net calming himself or herself, they also, they absorb that shock.

7:25So there's a crisis going on in the company. A great investor will actually say, okay, this is a situation, understand it's bad. Here are some solutions instead of going into kind of victim mode themselves so that the other party has to do that. It's just a pattern of reinforcement behavior. If a founder gives you one vulnerability, maybe there's a new competitor in the market. And seeing how you react to this piece of news, whether you go into kind of, you know, the sky's on fire and running around like a chicken with your head cut off, or whether you think logically about it or rationally about it.

7:58I think as you kind of reinforce positive behavior with the founder, I think it goes deeper and the trust builds through those kinds of interactions. Absolutely. You know, I think it's the adage that VCs can be a therapist to founders is so true. The highs are the highest and the lows are the lowest for founders. And you have to be a little bit of a moderating force on both of those ends of the spectrum. So not let founders get too, too carried away with some great news. And you don't want to be a dampener necessarily, but certainly a moderator of both the highest of highs and the lowest of lows, which is such a natural part of the founder journey.

8:38And it's lonely. You can't share that with your employees. You can share that with your co-founders, but at the same time, the co-founders are going through the same emotions as well. So as a VC, you really have the opportunity to be a little bit more level-headed and truly finding a way to support even the most challenging situations for them. And you can't share with your employees because they're relying on you. They're outsourcing their courage to you. So if you don't have that courage or you show any vulnerability, that affects the spirits of the company. And there's a fine line. You obviously don't want to be putting on too much of a show or to the, because employees are, hopefully you have really smart people working in your company and they'll see through it all as well.

9:20And so if you're sugarcoating everything, I think that's, that's not good either. There's a fine line there, But if you're taking every single problem to your team and trying to solve it, I think people are going to view that as lack of leadership as well. And so you need to have other avenues to do that. The other part of being a great thought partner is paradoxically pushing back, giving negative feedback and pushing back on founders. Tell me about the best practices on that. The best in the business that do this, do this by asking questions instead of telling founders what to do. I think most people don't respond really well to being told what to do.

10:04But if you ask, especially founders, because they're just so entrepreneurial and so self-driven by definition. So it's about asking the questions that help them think and help them see the pushback or identify what a different path might be. And in cases, leaning on anecdotes or stories or pattern matching that we have the advantage of that founders might not. So any input or addition is usually from experience or some kind of pattern matching that we can draw on. But most of it, I try to emulate the best in the business who really just ask good, thoughtful questions that will help founders see a different path.

10:51And Ray Dalio, who I'm scheduling with, so I'm preparing for my interview, he has this great concept of believability within Bridgewater. Everybody had their believability. So even a first year analyst, if they had just graduated computer science from Stanford, and they were in a class on a very cutting edge technology, or form of engineering, they might be more believable than the CEO, or even in the VC. So everybody has their edge and being transparent about where you have an edge and where you don't also leads to your overall believability, because there's, there's a sense that you know where your believability lies.

11:27Yeah, absolutely. I mean, I'm on the board of a company right now that is consumer hardware, you know, very, very non-mainstream. But one of the challenges they face is in supply chain and certainly way outside my area of expertise and not an area where I should overly see my role as an influencer in their business decisions. But what I can provide is asking enough questions to educate myself. And as I do that, I think founders can see perhaps questions that they have not been thinking of or not been asking as they try to solve their supply chain issues. So if I try to position myself as an expert in that, I certainly lose credibility and not something I intend on doing.

12:13And part of being a great partner is not making it about yourself. I think VC is a business of high egos, unfortunately. unfortunately and a lot of those high egos try to make it about themselves and the more you can make it about the company the better so so so it's about being curious enough asking the right questions helping founders think about it differently and from different perspectives and different reference points I think if you can do that effectively and stay contextualized be a good listener I think that's the best thing you can do or best thing I found I can do as a VC I've recently changed my views on ego in the last couple of years.

12:55I used to think it was wholly a bad thing. And then I just saw with my own eyes, very high ego people succeeding. I started asking why. Why do you think ego could be positively correlated with success as a startup founder or as a venture capitalist? That's way more of a psych question than I'm an expert on. But if I had to venture a guess here, I think it's got to do with relentlessness and perseverance. And people with higher ego are going to be less open to just giving up. They can't see themselves fail necessarily and can push way beyond what is normal or reasonable even. And founders are by definition working on things that are unreasonable.

13:47that their expected value is negative in every situation. And so they're doing things that are irrational. And the only way they can do it is if they have this outsized ego, I can do this, the reason we will win, because I'm the best in the world at this. And so there is that need for some level of ego to be relentless in the face of what's obvious. The obvious fact is that most companies are destined to fail. and so for founders to be relentless, they have to have a high ego. And the same goes with VCs. VCs are taking bets on things that are likely to fail. We are creating portfolios of companies where 80 % of them perhaps are going to fail.

14:31And so we have to have this belief that we can invest in the next and support the next multi-billion dollar company, create a 10, 20, 30 billion dollar outcome. And to do that, you have to have some irrational ego, irrational self-confidence. If you define a healthy ego as being confident as in what your background has produced, you'll never build something world class because you'll always be on this linear relationship. But if you're like Elon Musk, which I think most people would agree has a high ego and you want to go to Mars and you believe that you could start a space company, it really requires that ego to succeed.

15:08And the way that I would look at it is a high ego will lead to higher ambitions and also a lower hit rate, which reminds me, of course, of what it takes to succeed in the venture asset class. So perhaps a VC is better off investing in a lot of high ego. There's something about this kind of power law aspect to ego that makes it a good match for the venture asset class. Absolutely. And, you know, I think that that takes a while to understand. early on, especially in my career, I don't think I fully understood the power law well enough. And I think it takes witnessing it, seeing it to truly understand what that means and is, and the kind of people who are going to accomplish that.

15:50I just think for anyone to believe, truly believe that they're going to create a multi-billion, tens of billions or hundreds of billions of shareholder value. You just have to have some really high ego. There's a George Bernard quote, the reasonable man adapts himself to the world. The unreasonable man persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man. So you believe startup ideas are overrated. Why are startup ideas overrated? I think if you look back at most successful companies, they've gone through many layers of pivots in what they are today.

16:34And it wasn't the original startup idea. And it wasn't that the startup idea wasn't good. It's that no startup idea is complete. The startup ideas are too abstract at the start. And that abstract doesn't create enough value. To create true value, you have to have relentless iteration. and the ability to pivot and be relentless in execution to truly eventually create something of meaningful value. So to me, a startup idea is a starting point. It's worth nothing if not matched with some incredible execution and some truly relentless iteration. And with iteration is when you start to truly get precise enough in what the customer value or what value you're creating as a company for customers, for users to eventually start to drive something meaningful.

17:32And I've seen this in my portfolio. And as I look back at other companies, seen this multiple times that the most successful companies have either pivoted dramatically or certainly gone through many, many, many layers of iterations to arrive at what was eventually product market fit. and product market fit doesn't come from a spark of an idea. It just comes from delivering to customers, listening to customer feedback and iterating on what your product is. And so to me, it is about the founders and their ability to truly understand the customers, truly listen to customer feedback, truly iterate on what customers are telling them both directly and indirectly rather than just leaning too heavily on what the original idea was.

18:22So you say startup ideas are overrated. Are customer pain points the thing that you're looking for? Is it the customer pain that's underrated? What is underrated? Yeah, I think the customer pain and ability to actually solve for that. And the solving for that is usually a lot more nuanced than just the idea itself. You have to solve it in a very precise way. So something that doesn't require deep habit change from customers. A lot of people think that they can change habits dramatically, which is just a false assumption. So you have to somehow fit within customers' existing habits, whether it's an individual or a company, and still be able to truly solve a problem, which requires a lot of ingenuity and requires a lot of trial and error in truly delivering it.

19:12So, yes, I don't think you arrive at a sharp enough customer pain point through just an idea. An idea is usually a framework of where there may be an opportunity, but the sharpness that you need in a wedge in understanding the customer pain point requires a lot of iteration. And then solving for it requires a lot, lot more. A popular startup meme is if I had known how difficult it was to start this company, I probably wouldn't have started. and I've thought a lot about this. And it reminded me of this concept by Balaji Shunavasan's previous guest, Balaji. He talked about this idea maze, which is you have to get through this maze of all these nuances, like you mentioned, all these problems that are like almost hidden underneath the big problem.

19:58And that two to three year journey or sometimes five to 10 year for hard tech companies, that is the competitive advantage. That is the moat. Most of the problems are not things that you've even thought about or even could think about before you were in the industry. So this idea ends up being the competitive advantage on which startups are built. Yeah, absolutely. My own framework for this is I think of most creative success as a product of the concept or idea, the effort and skill. And the concept is important, but it's worth nothing if there isn't meaningful skill or effort into it. And I think the effort is what you're describing of the two, three-year process, or in some cases, five-year process of iterating, going through that idea maze and arriving at enough of a nuance and enough of a moat in being able to deliver that solution.

20:52So yeah, absolutely. If we normalize skill and we normalize that the market is there and the skill is there, so the person has the IQ or the work ethic, what separates the entrepreneurs that are able to suffer through that two to three years of the five-year journey, how do you predict which entrepreneurs, given the same level of skill, will be able to do what it takes? Yeah. Well, I think that's... I look for a few different things in founders, to me, which are predictors. Number one is the scrappy people who are able to do a lot with very limited resources are able to move or are able to and are going to be able to move mountains and bend reality to suit them.

21:40I think that is the number one characteristic that I'm looking for in founders. Now, there isn't any exact science to predicting that. I think you learn from some past experiences, but also the vigor with which they approach the particular problem. the second and this one to me is really important is true intellectual honesty i i meet with so many founders who are unable to be intellectually honest with themselves and and if they're unable to be intellectually honest with themselves they're constantly going to be fooling themselves about where they stand relative to the market and where they stand relative to customers and they're looking for metrics that support their story and support their case rather than looking for true product market fit.

22:30And I think the founders that are truly intellectually honest with themselves are those that are going to be chasing product market fit with a relentlessness that other founders are not. And I think if you are that, it becomes meaningfully easier to stay the course because you are now listening for the right metrics rather than trying to craft a story. and you are seeing incremental gains in customer adoption or in customer pleasure or customer love that you just wouldn't if all you're trying to do is tell the story better. So to me, it's a combination of am I a founder who is going to move mountains and change reality or bend reality to suit me and vigorously, intellectually honest with myself.

23:19And if you don't have those two capabilities, I think you just can't be a good startup founder. So to me, going back all the way, the reason I like to invest early and the earlier the better almost is because I think that's the part of the founder lifecycle that you can truly evaluate that. Well, once the founder starts to get into true company building and storytelling and treats investor conversations as pitches, it becomes increasingly hard to truly determine or truly understand who they are as people behind all of that. And I think you can do all of that when you're talking to them without a slide deck.

23:55You're sitting in a room across from a person and having a conversation. I think that's when you can determine and ascertain a lot of that. I had this thought experiment that I've thought about for probably over a decade, the Nepo kid. So a kid, nepotism comes from a lot of money or a lot of connections. And he goes and he pitches this terrible idea to VCs. So let's say Airbnb for docs. No offense to Rover or any company. But let's say he pitches this. I believe that with enough meetings and with an openness to enough feedback, that could actually turn into a high quality top tier startup idea.

24:33We'll put teams aside. But in terms of just idea, if you just have some semblance and some connectivity, you can actually iterate yourself into a tier one idea. What do you think about this? Support for today's episode comes from Square. It's all in one way for business owners to take payments, book appointments, man staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here.

25:03They use Square and everything just works. Check out is fast, receipts are instant, and sometimes I get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly, whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid.

25:33Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com. slash go slash how I invest. That's S-Q-U-A-R-E.com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Yeah. I mean, the mom test is essentially a variation of what you're describing here too, right? If you go to your mom for feedback on your product, you're not going to get any good feedback.

26:11And so, yes, I think founders who are truly open and truly seeking that feedback are the ones who are going to refine their idea well enough. So I like that framework of the Nepo baby. Interesting that you bring up Airbnb for dogs. I don't know if you know this, but my partner at PSL started Rover.com. And Rover.com started and has grown. It got acquired recently for two and a half billion dollars. That's hilarious. I take back my example. I just wanted to generally understandable meme. I feel like Uber for dogs is itself a meme, but I take that back. Two and a half billion dollars is a great outcome.

26:50And congrats to your partner. Obviously, the Nepo baby thought experiment implies that you're super connected. And obviously, I know both of our backgrounds, we come from the opposite of a Nepo baby. But there is something about that in that in the pre-seed stage, if you surround yourself with the right information diet and the right people around the hoop, you will get better and the market and your advisors will pull you into a great idea. That requires another assumption to be true. One, that this Nepo baby is truly open to that. I think if the Nepo baby is so defensive of their idea, or so defensive of their, if anyone's defensive of their original idea, then they're not going to be open to that refinement.

27:37and there's an assumption that they're surrounding themselves with the right network of people who are going to push them rather than yes-manning them. And I think if you have the right combination, yes, absolutely, then you have the position to refine yourself. But I don't think you see that very often of people from that position of power being that open to... Yeah, we see me and my business partner, Curtis, I've talked a lot about this. And I hate overly determined or overly simplistic model, but does seem like second generation family office, essentially a nebo baby, they fall into one of two camps, like extremely driven, wanting to continue legacy or basically debauchers want to spend, you know, get cars and go party there.

28:29There doesn't seem to be much middle ground. It's kind of crazy. I'm not sure why that is, but it seems to lead to these polarizing results. And we've seen both. And I've talked to people in both camps. But there is, to be in defense of nepho babies, there is a good chunk of second generation that is extremely impressive. And, of course, they have the DNA, the connections, all these things that make them super successful. And not to be underplayed, they also have the ability to take risk so much higher than someone who's not in that position, right? So I think that they can just also give it their all and don't have to worry about a paycheck for a long, long time and can take much, much deeper risks.