Elizabeth Zalman & Jerry Neumann - Founder vs Investor - [Invest Like the Best, EP.351]

21:56Or on the other direction, if you graduate, it's like, okay, this one's not going to work. Then you are no longer founder friendly either because you just want your time back. That seems to be the experience. Do you agree with that? Do you think that that is this notion of founder friendliness is really just constrained to a period when the thing might work, but it hasn't yet? I think every person I've backed would say I'm the most founder-friendly VC they've worked with. And yet I refuse to say that about myself because I think it's intellectually dishonest. I need the founder to succeed if the company is going to succeed.

22:24But in the end, I also have a personal investment in the founders I back because I back people, not ideas. So you get this attachment, but I know that that's an irrational thing for me to do, to be attached to the person, not the company, because that's not the job. I think it's intellectually dishonest to say or founder friendly and tout that as some sort of plus for the founder. I don't think that's the job. I couldn't agree with you more. To Jerry's point earlier, right, he can't fire the founder at the earliest stage because then there's no company. So you sort of ride the founder until there's something there where you can see how it could be monetized and grow with some crazy growth curve.

22:57And then you can just put in the operational team to go and get that done. At that point, you don't need the founder anymore. Although from a branding perspective, I would say a founder adds intangibles and all that stuff. Yeah. I mean, founders are often the best salesperson. They're usually the person who has the vision. They're going to push the company more than any other. One thing I wish I had said more strongly in the book was that to me, it's crazy that founders think they're the show, that the people are giving money to the company and yet somehow they're not the pop star, right? Like the act goes on without.

23:23But that goes back to the point that I made earlier, which is that nobody tells the founder at a certain point, you need to change, you need to mutate into something else. And it is essentially getting over yourself and getting over your ego and realizing that this thing exists outside of you at this point. Yeah, I agree with that. I mean, I actually changed from a doer to a manager when I worked for a big company and nobody told me that there either. The difference being that they gave me the time and space to actually make that transition myself. But somebody actually told me, you need to stop working and start managing because people who work for you need somebody to manage them.

23:54I had no idea what that meant. And I think it is true that there's not enough education to people who are growing companies to let them grow also. Do you think, though, that it's a feature of a market system that nobody's really owed anything? When you become the manager at whatever company that was, you weren't owed that. Stuff gets sorted out because those that figured out that this is the case are probably more apt to be a good manager. They figured it out and they evolved and adapted. I guess I'm more of a humanist than a market system would imply. I mean, owed or not, I think it's... I would prefer to help somebody continue running their company through IPO just because I think it's good for them.

24:31Part of the reason I do the job, and I think part of the reason most VCs do the job, is because they want to see these things succeed. It's not just to see ideas succeed, but to see people succeed. And nothing makes me happier than to see people I've backed succeed personally. It's just a great perk of the job. I mean, it has nothing to do with me making money. I mean, it's correlated, but it's not causation, right? They succeed. I make money. They make money. But that person succeeding that I backed, it's just awesome. I'd love to talk about fundraising. It's where the two sides were so often really come together in this kabuki dance process.

25:02And the way I'd love to structure the conversation is advice from the investor to the class of founders and from the founders to a class of investors. If you had a captive, curious audience of every VC in the world or something in some stadium somewhere, and you could say, listen, I'm going to tell you something that's good for you to hear from the founder perspective vis-a-vis the fundraising process? What would you tell them? I would ask them to spend as much time as possible trying to perceive what it is that I'm actually building. Don't start asking me questions about market size or who I'm going to hire or what this feature does, but actually get to the core of the thing that I'm doing with elementary ABC questions.

25:42Because I think without that, founders get so frustrated in fundraising because they get this crazy whirlwind of questions that go down these diligence rabbit holes. But I think most of those are just masking the fact that investors don't actually understand what the founder's building because, especially at the pre-seed and seed stages, most founders have zero idea how to communicate what they're building. And so that's where things blow up. So just more zooming in on present reality. Present reality, just ask a series of questions. Even if you spend the first half hour of that call just trying to get to the kernel of, what is this thing?

26:14So that I could go and call my father, hire a teacher and explain it to him, that would be beautiful. I can't agree with that. I think I can't disagree more strenuously. It doesn't matter what you're building today. In terms of investment, your product today is just not what you're going to look like five years from now when I might actually get liquidity or 10 years from now. All I care about is what you are trying to build 10 years from now, right? So that's why I ask questions about market size or hiring or who works there, right? Because whatever product you have today is going to change. I mean, it's nice to know that you can build it, but I just don't think knowing what your product is today makes any difference to me investing.

26:50Now, if it makes you feel better for me to pretend that I care, that's fine and I'll do that. But why? Why would I care about the details of your product? You should be able to articulate in a sentence what it is the thing that I am building. Why? Because how else are you going to decide if you want to invest in it? I want to decide in what I'm going to exit. I'm not deciding on what I'm investing today. I'm deciding on what I'm investing in 10 years from now. Sure. But you should be able to say what that thing is. And you should ask me about market size and you should ask me about hiring plans and all that stuff.

27:21The question I always ask is, what do you want this company to look like in five years? Because that's what I care about. But you should also want to know what you're investing in. I'm investing in you. Right? I'm not investing in your product. Fair enough. I'm going to press rewind and replay on this conversation when I raise my next company. Sorry, Jerry, you don't get to know what it is. You just get to know about the market size. You said you invest in people, not ideas. So what does that process look like? Venture capitalists, people, product markets, right? Those are the three things that venture capitalists invest in.

27:52I've asked a bunch of people, which one you invest in? And the best answer I got was Andy Weissman from USV who said, why would I have to choose? That's sort of been my North Star. I do invest in ideas, but I don't invest in the product today. Because the product today, I mean, when you showed me the product for this company the first time, you're like, okay, just open a Docker container, bring up the command line, and then dump your biggest data set in. And I'm like, I don't have a big data set. Obviously, it wasn't my biggest data set. And it's not the product you sold, right? In the end, that's not what you brought to your customers.

28:20It was a seed of an idea. And I understood what you were trying to do, the driving motivation behind it. But I didn't need to actually use the product. At the very earliest stages, so when Liz was starting her second company, we had a series of breakfasts. Every few weeks, we'd go to breakfast, and she would run about 30 ideas by me. And I'd tell her they were all stupid. Actually, I didn't say that. I said it nicely. They were ideas that perhaps you didn't know enough about the market or that I'd heard before. I have sources of information you don't have, right? So I could help you. And I think you would probably winnow the list before you came to me.

28:48But then she came with the idea and I loved the idea, right? And of course, in the end, I had those breakfasts every few weeks because I knew that she would eventually come up with a good idea. But it wasn't like she told me an idea which I didn't like or didn't think would work. And I said, that's it. And I'm never talking to you again. So of course you invest in people, but you have to wait till they have the right idea. So I don't think it's a one or the other. I mean, I knew Liz would come up with a great idea, and I know she'll come up with one in the future. Why? Why did you know that? I don't believe in raw talent, or I do believe in it, but I don't think it's that useful in this regard.

29:16I think it's raw drive. I knew that she needed to come up with a good idea just because of who she is, right? She needed to start a company and have it be successful. So I knew that she would not rest until she found that idea. Do you think that the drive to win is the most important thing in terms of what you're looking for in a person? It's one of the most important things. Drive to win is super important. The problem is if drive to win is too strong or if there's no countervailing force to make you do reasonable things, then it can be destructive. So there's a tightrope you have to walk. What do you think about, from your own perspective in yourself, do you think drive to win is the thing?

29:48If you're building some attribution of why something worked, is it drive to win? I think you have to hustle until you fall over. It's not taking no for an answer. If somebody tells you something's impossible, the answer is that's great and you move on to the next person. It's just knowing that when I wake up in the morning, that I can do whatever it is that I need to do that day. So maybe it's unbridled confidence, even if I'm not a self-confident person, which is not the case. I'm just knowing that I can enact anything that I want to. I think with Liz, there's the drive to win, but there's also, there's a couple of stories in the book.

30:19One where we were doing a follow-on round and the contract came in. I read the contract and said, look, there's some terms in here that we didn't agree on, that we in fact agreed we would do something differently. And I called Liz to say so and she wasn't available. So I called the lawyer and he's like, well, that's just the way it is. I got super angry. I got super angry because I was like, wow, I did not expect Liz to screw me. That was totally, must have completely misread her. I can't believe this is happening. You know, a part of what I was looking for was somebody who was a team player. Here's his contract.

30:47The denouement was that I yelled at the lawyer for five minutes, which is what you pay lawyers for. I'm sure I got billed for that. I'm sure you got billed double for that. And then Liz called me like five minutes later and she's like, hey, look, I know we agreed to do something differently. So the lawyer was just freelancing. It's fine. We're going to do what I said we're going to do. And I said, all right, well, why are you whispering? And she's like, I'm going to shiver. But then I think that the flip side is the story Liz tells where she said, well, we had this opportunity to sell the company.

31:14We would all make money and the investors would just get their money back, right? So they wouldn't make money, which was a good deal for the founders. And Liz said, no, because she's like, that's not what we signed up for. She has the drive to win, but she doesn't have the drive to screw everybody else to win. Don't you think in that case, though, that is what the investor signed up for? Isn't that the nature of preferred equity? That's an outcome, which you are literally signing up for. Obviously, you want more, but there's nothing objectionable had they taken that deal. Well, Liz told me when I invested that she was going to make me money.

31:42So that's what I signed up for. But the contract said you will get your money back first and then... I mean, contracts are great fences. They keep you from going past the bounds of where you're supposed to go, right? That you agree on the bounds of things, but that's not the whole agreement. The agreement includes what Liz and I talked about before I invested, right? What does she want to do with this company? Where does she think this company is going to go? What she's trying to do for me as an investor. And it goes both ways. I mean, what I told her I was going to do, I think, is also not in the contract, but at least morally binding.

32:11Maybe that's part of the impasse here, which is the founder is doing one thing. The investor is typically doing some number of things, some number of companies. It's much harder, I think, for the investor to really deliver on, I'm going to help you in all these ways. You're one in a hundred, right, in a fund, and the partner is sitting on how many boards? Ten. And until you actually become, I think, to use your language, Patrick, no longer a call auction and something that can actually make money, I think you're sort of not ignored, but you're simply not the priority. And then once you become the priority, gloves come off.

32:42So there's an interesting symmetry here where both sides overpromise to get the deal done. But investors expect the founder to overpromise. And I think founders don't expect that the investor is overpromising, right? So the investor is like, oh, I'm going to do all these things. I'm going to be your best friend. I'm going to walk your dog for you. And the founder is like, wow, that's amazing. They're going to do my laundry. The flip side is the founder saying, we're going to be a billion dollar company. And the investor says, yeah, maybe. All right, back to fundraising. I don't want to lose the thread.

33:08So now you get PSA to every founder raising money. How many pitches do you think you've seen in person? Thousands? Yeah. You've got an N of thousands. What advice would you give to founders who are raising money from professional investors? My advice is tell me what you want to happen. Don't come in there and be like, here's what we have and what we're going to do and let's see what happens. It's tell me what you want to happen. Tell me what you want the world to look like in 10 years that makes a difference, that's actually meaningful. Because I want to buy into the vision. I want to buy into something big, not some small product, not some chat GPT overlay.

33:43I want you to tell me how this is going to change things. And if you can get me excited about the vision, nothing else matters. What as examples did Jeff from Trade Desk or founders of Datadog say anything to you that correlated with what they ended up doing? Oh, totally. Jeff was like, look, this is how every piece of advertising is going to be bought in the future. This way, what we're doing. And he overperformed actually, because I don't think in my wildest dreams, I would have thought they would be as successful as they are. but I believed that, or at least I believed that was possible. I invested in a lot of ad tech companies and each of them were different and each of them had a different vision of how things would be done in the future.

34:18And in each of those different visions, there was some billion dollar company at the end. And I couldn't believe in all of them simultaneously because they were different things, but that's part of the job of the investor, right? It's a portfolio. He was the one who was like, well, this is how it's going to be done in the future. And I was like, yeah, probably not. But you know what? I believe in you. And I think that if anybody could do it, you could do it. So yeah, I'm totally in. What else would either of you change about the fundraising process? I just want to respond to Jerry for a second.

34:44So you want every founder to just come in and make shit up? Is it making shit up? I think so. Telling your vision what you want to happen? I mean, most founders are not building you a flying car and getting all the cars off the road and reclaiming roads for trees and saving the planet. Most founders are building some chat GPT overlay. Oh, absolutely. Totally. The founders who come in and tell me, well, we've got this chat GPT overlay that can write advertising copy. I'm like, that's so boring. I don't care. And I've had like 10 of those already. That's not changing the world. I think if you said, we're going to completely change the way creative work is done.

35:17And then when I asked like, well, how are you going to do that? Like, well, we're using a chat GPT overlay. It's different, right? I'm not saying that's a good idea, but what is the focus? Is your focus the technology or is it what you're trying to build? Most founders are not good at storytelling. The reason why I am so successful at fundraising, as you know, is because I can tell a wild story. And I am outrageously good at reading somebody and being able to adjust the conversation. It's the question I want to answer. It's why I'm good at sales, right? But most founders are not. And so I actually wonder how many founders fail so many in the fundraising process because they can't articulate.

35:48You just very deftly took one narrative and turned it into something highly compelling. Most founders can't do that. You're right. I'm going to change the advice I give founders, which is become good at storytelling. No, seriously, I think you're right. You're totally right. And I think if you can tell a good story, not story in the terms of meaning something that's not true, but a story about what could happen. Something evocative. Absolutely. Maybe it's as simple as the people that are going to be able to build these big businesses are going to have to marshal resources. And the best way to marshal resources, hiring people with everything, hiring people, money, customers is storytelling.

36:22All right. Now I want to move to the next stage. So you've secured funds. Now you enter this relationship stage where there's an ongoing relationship, there's communication, there's board meetings, et cetera. I like this approach. Okay, now great. Give advice to the investor that you've now taken money from or give advice to the founders that you've now given money to about how to do that relationship well now that you are partnered in a long-term way. Tell me exactly what is on your mind all the time in plain English. I will learn how to take it if I can't take it. Just to be nuanced about it, why might you not do that with good motivations as an investor?

37:01I think that would be fine if it were me. If a founder was doing that with me, telling me all the raw detail about all the problems they had, it makes you nervous as somebody listening, obviously, because here's all these problems. Wow, big problems. I think I could deal with it, have dealt with it. But again, I can't fire the founder. I think later stage VCs might become nervous. And board meetings are three or four VCs from different firms, all trying to prove to each other how smart they are because they need the other people to think they're smart so they can get future co-investments with them.

37:27If you start bringing up problems, they're all going to start trying to solve your problems. And the last thing you want as a founder is for them, the investors, to solve your problems or attempt to solve your problems for a few reasons. One, they're not able to solve your problems, right? They're there one day a month for a couple of hours at most, and they don't know, have enough detail. Two, any solution they come up with, your problems, you've already thought of if you're any good because you're living this 24-7. And three, if they think you can't solve your own problems, they're going to find somebody who can.

37:56So my advice to founders has always been, you walk in with solutions. The board has hired you in a sense. They are invested in you to be the people who solve problems, not the people who come up with problems. If you have a problem, you walk in with a solution and tell them, look, we have this problem. Here's our suggested solution. Here's three other solutions we thought of but rejected. We can talk about it. And if you walk in with a solution, founders are like, great, this person can solve problems. If you want to be in charge of your company, you need to be in charge. So if I were walking into a board meeting and I were running it in the shitty way where I'm coming with all of my problems, which I wouldn't do, but I were doing that, I would not want those three investors to leave.

38:32I would want one of them to say, Liz, I got to tell you, you're running these board meetings like shit. I have lost all confidence in you because of blah, blah, blah, blah, blah. Here's what's going to reinstill confidence in us. I would love that. If I'm a founder and I can't take that message, I'm not going to last long anyways. I'm just not. I'm not good enough to run the company if I can't hear a hard truth like that? I don't think that anybody's not good enough to run a company. I think they can learn to be good enough, right? So the blog post I wrote about your board of directors is going to fire you was not a blog post I just wrote, right?

39:04This was taken from an email that I had sent to many founders over the years saying, hey, you're having trouble on your board. Here's some advice. And to a person, none of them took that advice because they're like, no, no, no, no, no. These investors just gave me a bunch of money. They love me. They love me. And they're not going to do anything bad to me. They love me. And this, of course, is not true, right? They didn't give you money, right? They gave your company money and they'd be more than happy to replace you with one of their buddies and have them run the company with all that money if you give them an excuse.

39:33I can be as frank as I want. It doesn't mean people are going to listen to me. Another story in the book, right, which is Liz and I were at this event and we were talking to a VC who was complaining about a founder that he had invested in who was doing things wrong at his company. And it was obvious to everybody that he was doing the wrong things. And the VC would say, look, look, no, you need to stop doing that and do this. You need to hire these people to do this and blah, blah, blah. And founder would be like, yeah, yeah, yeah, whatever. And the VC said, I called him every week, every Friday we had a call and I would tell him the same thing.

40:01And then after like four or five times, he just stopped answering the phone. Yeah. Whose fault is that? Yes, the founder is doing the wrong thing, but the VC's now lost his opportunity to change the founder's mind about what he's doing. And that means that he's completely powerless. He wasn't on the board. He couldn't do anything else. You need to be able to tell people things in a way that they can digest and believe and act on. In a way, VCs have to be storytellers as well. Here's a story about how your company becomes successful. Like a biased sample of highly disagreeable, highly independent people, which is a feature.

40:33That's what everyone wants. That's the kind of person that can build a big company. And so it just makes this relationship of passing ideas and advice back and forth very strange. I'm saying what's worked for me, but it hasn't always worked. One of the weird things about venture in general is I've invested in 100 companies in my life, and some of them have been really successful, and some have completely failed. But it's not a big enough data set for me to definitively say, this is what works, and this is what doesn't. And that's true of every VC. There's no VC who can say, this is what definitively works, because nobody has a big enough data set.

41:04So I can tell you what works for me, but are there places where it wouldn't work? Yeah, of course. Maybe each say more about what would be an ideal board meeting. I mean, tactically, structurally, we got to do this. This is governance function. We're going to meet quarterly or monthly or whatever it is. And there's going to be minutes and there's going to be a lawyer there. Maybe sometimes we need to run a professional board meeting. What have you learned about this? It would be option approvals and comp adjustments and that's it. It'd be 10 minutes once a year if I could get away with it in the bylaws.

41:35But you can't, right? Right, because the investors need to know how their investment's doing. They need to know whether they should continue having you as CAO. Like, this is their job. So they need for the board meeting to be more than that. You have to run a board meeting that's more than that. It won't be allowed to not do that. I don't know that there is a way to structure a board meeting such that it's about an update on the company and it doesn't descend into ego or advice or things that are not necessarily requested. I've been on boards like that, but I think it does depend on who is on your board.

42:04I mean, to a large extent. And unfortunately, some of the name investors, the people who are like, oh, that investor, they've been so successful, aren't always the best people or board members. What about a board that's really great? I've been in boardrooms that are, I mean, they're hard, there's tough truths, there's all this kind of stuff, but that you would walk out and be like, wow, that felt like a really good, I think if you polled everyone independently, like swear on your child's life, was that good or not? Everyone would be like, yeah, that was great. What made it great? What's the quality of conversation that's happening?

42:34Just extremely detailed revelation of what's going on and very honest discussion about really hard, ambiguous, uncertain decisions that are important for the company, which direction to take the business. We were talking about when at lunch as an example, where the founder brings, in this case, founders bring tons of incredible perspective. They're incredible operators and investors bring this reference class of experience of, yes, I understand, but I have seen a hundred of these. And there's a base rate perspective on this, very just Spock-like perspective. And you bring the Captain Kirk perspective and everyone emerges a little bit smarter about what's going on.

43:15We end up seeing reality, each of us, more clearly than when we started the meeting and seeing reality clearly is productive when you're building a business. And it requires respect and it requires research and it requires listening and it requires being nonjudgmental of somebody's opinion, right? A very even sort of playing field. A very clear agreement that people are prepared and knowledgeable to the extent they can be, and that this is in service of making this business great. I'd agree with that. I mean, I've been on boards like that. Not all boards I've been on are like that. I don't know that everybody understands what their job is on the board, board members-wise.

43:48I don't think founders do either. Yeah, if I'm being honest. I always feel like going into a board meeting, my job is to keep my job, which it literally is, and to fight against the investors. And I know my co-founders across two companies have also felt the same exact way, which is, am I still going to be here at the end of this meeting? And I wish, similar to explaining to a founder at the beginning of their career that they're going to have to turn into a manager, into an operator, into a businessman. Similarly, it's you're walking into a meeting and the idea, the kernel of the idea of this meeting is in support of the company and turning it into something great.

44:24And you are a piece of that. You are not the thing. I think a lot of venture investors, especially early stage ones, could do a better job preparing founders for the next stage in their company's life. One of the best compliments I ever had was a follow-on investor who'd been on a few boards of companies that I'd been on the board of because I had been an earlier investor said to me, you know what? I love coming onto the boards where you've already been a board member because things just go much more smoothly. I think, yeah, you know, that's because the board was me and the founder and the founder would come in and do this.

44:51And I'd be like, no, no, don't do it that way. Do it this way. And they'd be like, come on, it's just you and me. What would be an example of that, of that kind of hygiene? What do we want to look at, right? What kind of metrics do we want to look at? Founders will, anybody will look at the metrics that are going well, right? The vanity metric kind of thing, vanity metric problem. And you say, look, let's not do that. Let me look at what you're looking at to run the business, right? How are you running this business? How are you making decisions in your business, tell me those metrics, right? Because I would run the business the same way you would.

45:18So why wouldn't I want to see the same things that you were looking at? I mean, this is a very simple thing to think about, but they wanted to tell me how great the business was going and would find whatever metric there was to show that. I didn't want to see those. I wanted to see the metrics that they were looking at that actually made a difference. I mean, it's not rocket science. But those metrics are the ones that actually make me fearful about my job. And I think that's part of the problem is if you're making the founder fearful about their job, then of course they're going to come in either defensive or scared or the worst board I've ever been on.

45:48The founder would come in and we'd have all day meetings once a quarter and he would have every member of his management team come in and present for like an hour. And everybody was falling asleep. I just don't need to hear all this. It's not critical for me to know this today. The information he sent out before the board was a full binder full of information. It was so much that nobody really digested it. And yeah, I know it's our job and you'd flip through it and be like, okay, balance sheet looks good. He never focused on what the actual issues were that day. Let's take an example in which I can close customers, no problem.

46:20I can expand customers, no problem. I can retain them, but my issue is pipeline, right? And so I'm going to come into a medium to say, hey, I'm struggling with pipeline. And here are all of the ways in which I'm thinking about generating more pipeline. I've got humans, I've got content, I got marketing, and I map out this whole strategy, but I'm still not getting pipeline. There's only so much time you and I can eat up in a board meeting talking about how to create pipeline. Because to your point, every way to create pipeline has already occurred to me and it's already being done by the company and by the team.

46:47And so if you spend more than, I don't know, five, seven minutes on that as the existential problem for the company, where do we go next in the board meeting? You're going to beat me up because I haven't made headway on pipeline? Not if you've talked to me about it before the board meeting, right? You've talked about this, right? You call up one of the investors before and say, look, you know something about building pipeline. What should I do? And if you ask me outside the board meeting, what should I do? You don't have the group dynamic. I know it's, you're just thinking about it. Whereas when you walk into the board meeting, you're supposed to walk in, here's the things we considered.

47:14And I'm reporting to you on what I think we should do. And if you don't know what to do, you really have no idea. All right. Well, that's a problem. Bringing this back to something very tangible. I'd love to talk about terms, investing terms. This is an interesting scenario where surely investors have some upper hand, some degree of upper hand, because they've just done it a lot and they're familiar with terms and it's not typically a founder's end of times negotiating a contract with a bunch of investing terms is very small and investors is very large. So let's just talk about, I'm curious how you think about educating the world at large from both perspectives in a productive way about what terms matter, shenanigans to look out for, things of this nature.

47:57I think I might take the standard venture capital line here and say my term sheet's very fair. The terms are extremely ordinary terms. There's nothing fancy. I'm not trying to make money on terms, trying to make money on the company succeeding. So you should just take my terms and go for it. I pick terms apart one by one. I rank them based upon what's important. Typically option pools are overinflated. I spend an extraordinary amount of time on the language that governs the board of directors and who owns what seat, right? I care less about valuation. At the end of the day, if you do it right, somebody once said to be valuation is everything's a rounding error.

48:34I think that person is right. And then I think about actually the long view, which is if you set the stage properly in your pre-seed or seed docs, you can just copy paste those docs all the way through to the end of the company. So I try to think about what are the ways in which I can make them as founder friendly as humanly possible right up front so that we've set the standard now. When I advise founders on terms, especially somebody who, when I'm not investing in the round, so there's no conflict of interest, your board composition obviously is always negotiable and super important. Option pools, are they pre or post money?

49:06Also important. I mean, I think the more that you can share whatever is happening with the investor. So if the option pool is post money, you're both getting diluted. All right. That means that the investor is not going to push for an oversized option pool like they might if it were pre money, stuff like that. What is the biggest shenanigan that you've seen, having seen a lot of term sheets? For me, it's actually when the contract doesn't say what the term sheet said. The term sheet is obviously much shorter than the contract. The contract can say lots of things. Actually, that example was from when I was a founder.

49:35We had a term sheet, we got a contract, which was not what the term sheet said. And then we had to argue for two months as we were running out of money about like, this doesn't agree with what you said you were going to do. That's just super annoying. Oh, I mean, I've had so much shit pulled with term sheets. I've had, I think to Jerry's point, there's valuations changed in the middle of the deal. Term sheets pulled three days before the close, lead investor deciding to give away a portion of their equity to some other charitable fund that they work with, telling me maybe a day before the close.

50:06So much just bad, juju. Maybe we'll talk about something very different, which is when things are going right, which is what I'll call the growth stage of a business. So you've entered into some zone of success where you've built something people want, to use Paul Graham's term. And now you're faced with a new set of challenges, which is everyone wants growth. But I think one of the things that's hard to understand unless you've experienced it is that growth is really, really hard, especially if it's so fast that the new people at the company outnumber the old people three to one or something because you're just hiring so fast.

50:38All these things are breaking as you're growing really, really fast. What have you learned about the investor founder dynamic during this phase of a company, which of course everyone wants, in this case, it's like very positive. Everyone wants to get to this phase together. It's the whole point. But I think still there are hard parts of managing growth together. So what have you learned each about being in this stage of a company and the relationship between founder and investor? With founders, there's a certain amount of fear once you get to that point that they might lose what they've built, right?

51:06They've found a product that people will buy and they want to make sure that at this point, they're not taking the risk with the company, right? An existential risk with the company. Whereas the investor will be like, look, you need to keep taking risks. You need to hire people not being sure if they're the perfect person. You need to spend money not being sure if it's going to work because as soon as you have a product that is successful, that people want, your competitors can see that product, right? So you're going to have competition pretty quickly. And if you don't take the growth, then they're going to take it.

51:33You need to keep going. You can't slow down and be like, okay, let's solidify our base and not take that kind of risk going forward. You need to keep taking the risks. What happens in growth? It gets messy, messy as fuck. And so Jerry says, go spend all this money, go hire all these people, go scale like crazy. Well, most of those hires are going to fail. And guess what? The company is tripling in size and nobody is talking anymore. And so maybe I actually need to hit the pause button internally so that we can actually figure out how to talk so that we can then go scale even further. And so if I'm doing what Jerry says, which I should be doing, I also now need to clean up the mess internally.

52:07And there's all this stuff going on that I actually don't want to share with him because then he's going to say, well, you're doing a really shitty job. How is it that you guys don't know how to communicate? You've been communicating all this time. I feel as if there's so much more pressure now. There's more pressure in times of good than in times of bad because there's so much, there's just money sitting on the table and everybody can smell it and they can see it and they want it. That's totally true. I think the one thing I would disagree with is I think a lot of investors will look at what you think of as a bug, that it's this messy that people are coming in, they can't do the job, I had to fire them, and think of that as a feature.

52:39If you go in there and say, I hired 100 salespeople, 80 of them didn't work, I fired them, investors will be like, great. Yeah. But if that's, for example, my executive team, right? And we know that at least 50 % of exec searches fail and 50 % of them fail, I'm going to get blamed for those failures for sure. I think it depends on how you pitch it, right? I mean, I think investors have a bias towards action, at least the ones I know, right? So if you're like, that person wasn't doing it, I fired them. They'll be like, okay, well, you should have told us first, but good job. So we're back to storytelling.

53:08Well, isn't that the truth? It is. There was once at one company where I paused all product development because we had stopped talking to each other and it was features, bugs, the product wasn't working anymore. And I purposely did not tell the investors because what was I going to say? Hey, we're just not going to sell anything for the next month because we're falling apart. I would have gotten blamed for not being able to see that. But how was I going to see that? Sports teams are losing. They say it's a rebuilding year. People buy that somehow. See how long I keep my job there. jerry's written maybe the most popular post ever about moats sources of sustainable competitive advantage in business and at some stage of a company this becomes very relevant and in order for a company to be a 40 billion dollar company like a trade desk or something that is the outcome everyone is after usually a moat has to start to emerge and early on i've heard a lot of founders say geez just shut up about these moats like i'm just trying to make a product that people want and sell it and not have everything break.

54:07At what point, this is the next step as a part of growth, but even past some successful growth. Do you think it's appropriate for the founder and investor to start thinking about this concept together of, okay, are we architecting this thing in such a way that our behavior will naturally start to dig this moat? So I actually think it's something you can think about from the very beginning. The funny thing about that post was it's not actually about moats. It's about moats as a side effect of proving that as a startup, you probably won't have a moat when you start, right? So I categorized all these moats and said, look, each of these moats is you build over time.

54:39When you first start, if you have a real moat that's value adding, as opposed to if you show up with a patent, that value is something you brought to the table, not something you're creating in the company. If you show up without one of those things, then you won't have a moat to start and you have to build a moat before you become successful. Because once you're successful, like I said, people can see that you're successful and they'll just copy it. Different kinds of companies have different ways of building moats, So if you're a company with a new technology, that's what you hope will be your new moat.

55:03That's a hard thing to build a moat on, right? People, it's easy to copy new technologies. If you're a company that's building a new market from scratch, well, that's a much easier place to build a moat because in building the market from scratch, you end up knowing something about the market that other people don't. And they can see your product, but they can't see what you know. It's something you can talk about from the beginning. How are you building this company? What is your company going to look like when you're successful? And at that point, what do you know that other people don't know or have that other people don't have?

55:28I talked to so many early stage founders now and they haven't done any research on their predecessors, especially in the open source community. They're like, well, I'm open source. So that's how I'm going to get widespread. And they forget the fact that they're going to need to monetize one of these days. And they don't know who HashiCorp is, or they haven't gone and studied how anybody has done any sort of prior art. And so they aren't able to model all of the different ways in which they might build a company to be successful. Just thinking back to my last two companies, I don't think that anybody ever posed that question to me, which is what are all of the ways that we might go to market here and let's go and attack them.

56:03I think we were simply in search of anybody that would pay us a dollar. People focus too much on the early product and not on what the company could become. How can you have this conversation? We are going to build this company in such a way that we could build a bunch of ways, but we're going to pick the way that creates a sustainable, differentiated position for us. You've done this so many times. How do you do that well with the company early on, even pre-product or something? I do accept Liz's criticism that I am not as direct as I could be. It is one of my failings in life. But generally what I do is I'll ask the question.

56:37I just keep asking the question and make the founder think of it. This is usually before I invest. Because once you've invested, you're like, okay, they're like, great, I can't talk to you for three months because I've got to build my product. So this is a before you invest. All right, what is this going to look like in five years? How are you going to keep people from copying you? If you're successful, aren't you in the end going to undermine your own success because other people will pile into the market? How do you prevent this? So these are just questions you ask in the pitch process. It's probably iterative and you force the founder to think about these things so that they have thought about them.

57:06I mean, then when they start building a product, that's part of their thought process. Hopefully you can impress the importance of it enough that they will keep it in mind once they've got your money, because once they've got your money, they don't have to listen to you for a long time. You see so many people build companies that have a great product, but no way of keeping people from copying them. There's an investor that I think you're familiar with. They asked us when we were pitching them for my first company to write out a series of hypotheses that must be true in order for us to be a big company.

57:32And there were pricing hypotheses and market hypotheses. It was a mental exercise that nobody had forced us to go through. This firm said no ultimately, but it actually changed the way that we were thinking about going to market. And it was hugely, hugely valuable. And I never use the word value when it comes to investors. And this was in this case. And I wish that more people asked me for that. Yeah, that's a good idea. I'm going to steal that. Can you write a blog post about that, Jerry? Well, Liz has to write it. She did it. I can send it to you. Yeah, do. I want to see it too. I just feel like some open sourcing to be done of these docs.

58:02In the same way that NVCA has a standard for terms. Sure, it would be cool for them to be like, here's the things you should probably think about before you're starting down this path, especially venture backed, where the big outcomes are the only acceptable ones. There's so much theory when it comes to venture-backed startups that founders don't have exposure to, all this theory about company building. And that's actually the value that I do think investors bring, which is the pattern matching that you're describing, right? Here's the data set of 100 companies that look just like you, and here's what they tried and where they succeeded and failed.

58:28And let's integrate that into your thinking. That's what I always crave that I never got from my board. What feels the most different to you both about these two archetypical roles? Like you've been a founder. I think you think you're a better investor. Maybe objectively, that's just the facts. And you said, I think at lunch, you would not ever want to be an investor. Just like the feeling of it to you, what defines the difference between these two roles most distinctly? Somebody once asked me what I do for a living. I told him I was a professional gambler. And then my partner told me I didn't have to come back to school night anymore.

59:01I think you need to sort of embrace the fact that you can't control what happens. The nature of the bet is that you don't know what's going to happen. And there's nothing you can really do about it. You put your money down and you can kind of steer things a bit, but it's sort of like steering a roller coaster. So when I was a founder, it didn't feel like that. An investor feels like somebody who is coming in, doing some actuarial analysis with a little bit of emotion sprinkled on top and just trying to read somebody and then saying, OK, I'll place this bet and then moving on and creating a portfolio of bets.

59:31And a founder feels like a single minded mission. I don't know. The quality of it feels totally different. One feels almost plug and play and one feels hyper dedicated. We've come to the end of the canonical journey, which is selling a business or going public or selling to a strategic or something, something good, hopefully. We could talk about something bad too, which is winding down an unsuccessful business. We'll talk about both. What are the things for people out there that haven't been through this experience? What is the prior art here? What have we learned from all the exits done well or poorly?

1:00:03For me, when I think about exits and I don't think about exits much when I invest, partly because it's so far away. But I always ask myself if this company can go public someday, because to me, that's the only good exit. It's not really true, right? I mean, there's plenty of great exits that are acquisitions, but if you're building to go public and be independent, be it your own standalone company, then somebody might acquire you. Whereas if you're not building for that, then at least in the tech side of the business, the chance that somebody acquires you is much lower, I think. So you should always be looking towards a, how do we build this company to be a standalone successful company that can last 100 years?

1:00:37I think about exits all the time as a founder. Every time a term sheet, a fundraiser is actually an opportunity to exit. Is this valuation right? Do I want to double down again? Is the right time to exit? Is this offer real? Can I be pragmatic about how tired I am? Or whether or not this company can be a standalone company or should it be tucked away? I think about it constantly. It's interesting because the only time that when a founder tells me that they have potential acquisition offer where I feel excited about it is when I feel like that founder's done. They just can't keep going. They need to stop.

1:01:07And then I'm like, great, better an acquisition than having you just give up. What do you think about secondary sales? I'm old school. I think it's a red flag. I get it. I understand that if you've been working for five years at a below market salary and you need a little bit of money to take out and buy yourself a house or whatever, I get that. I understand that. I'm good with that. But I think the general were raising a series B. One of my mentors at a previous job, we would buy companies and there'd be an upfront payment and an earn out. And I asked him once, well, how big should the upfront payment be?

1:01:38And he said, well, big enough that they don't worry, but not so big that they don't worry. Okay. That makes sense. And I think for secondaries, I feel the same way. Okay. A little taking some money off the table is great. Taking so much off the table that you no longer have to worry is probably not great for me. As an investor, I don't usually get the chance to sell in a secondary like that. I think for me, it's been particularly difficult because I'm often in the same position or I was in the same position as the founders were. I didn't have a lot of money. I mean, I put 80 % of my net worth into my business, my investing business, and I was living in a rented apartment and they're taking money out to buy a house in some fancy suburb.

1:02:10I'm like, great, I'm still living in my apartment. Why are we different? So I don't know. I'm not really for it. I'm happy to make exceptions, but I think they should be exceptions. I think founders get tired and I think fatigue is shitty for making decisions and I think you want the founder. I don't know if it's worry so much. To me, it's skin in the game. I want to take enough money off the table where I can put my kids through college and I can buy a house and I can feel comfortable, but also that I still have a vested interest in the outcome of the company. I believe that founders should put co-sale rights all the way into the very first set of documents they possibly can and fight for the highest number possible.

1:02:46Most VCs don't tell founders that. But I didn't even know that this possibility existed until one of my co-founders spoke to a buddy of his on our Series A. So this is 2019. And he was just like, oh, yeah, dude, look at what I pulled off. It's not a well-known thing. There's always an information asymmetry, right? So if the founder is like, oh, I really want to sell a bunch of stock in this raise. My question is always, well, gosh, what do they know that I don't know? I had one founder, company was going public, and we all had an opportunity to sell some of our stock in the offering. And I said to the founder, I'm like, you selling any stock?

1:03:18He's like, nope. So I held my stock. And he was right. What should we know about the ways that VCs work together behind the scenes? We talked entirely about this access relationship between founder and investor. We really haven't talked about VC to VC relationship. Anything of note that you would highlight there? It depends on the time, right? So when I first started investing again, about 15 years ago, everything was done in a syndicate, right? So I'd find a company, I'd bring other people in, and I have to do that because I'm a small investor, but bigger funds would find an investment and they would bring me in.

1:03:51They'd bring in a whole bunch of people to help bring in different expertise. And also it was a way of risk sharing, right? So if you're doing half the round and you can then invest in twice as many companies, right? So you're sharing, you're pooling risk. I think there's also a certain amount of, I believe in this company sort of, but let me pull in somebody who actually knows this market and see if they believe in it. and let me pull in the people who are most likely to bid against me and have them bid with me so that we can not have to compete to get this company done. That was true then. I think for when money became a bit easier in the venture market, funds decided they needed to own the whole round.

1:04:23And I saw a lot fewer syndication opportunities because people were like, well, why would I bring in anybody else to take part of this round when I could put as much money as I want into it? I'll take the whole thing. So it definitely depends on the time. It's actually more fun when I got to invest with other people. And I'm a solo investor, so it was nice to have other people around the table. I think about it a little bit differently. I think VCs talk all the time to each other constantly. I think a founder is always at a disadvantage in a board meeting or with investors on their cap table because they're always talking behind your back.

1:04:52And they will never, ever, ever, ever vote against each other. It's always against the common. That's true. I mean, I think probably at least a third of my conversations are with other VCs and not about anything specific, but just generally, because there's a lot of deal sharing. If I invest in a company, I need other VCs to invest after I do. I need people to come into the companies I invest in. There's a lot of, do you know me? Do you trust my opinion on companies so that you can put money into them? And I think that carries over into the board, right? I'll work with you again, Liz, and I'll work with any of my founders that has done well again, if they want to, but I'm certainly going to work with these other VCs again.

1:05:26That certainly affects my decision-making. I don't want to piss them all off. Well, no, I have with this book maybe, but. Super problematic over the top. I think it's true. And the reason that they all vote as a block is because they've talked about it beforehand. There's a great scene in the book about Twitter, Cameron, what it's called, hatching Twitter or where the VCs go and have breakfast and discuss what they're going to do. And then the CEO shows up and they fire him, right? Because they've decided beforehand amongst themselves. Shouldn't be surprising that that happens. What have we not talked about that you wish more people knew?

1:05:56One of the things that I like to tell my students, I teach a class on entrepreneurship is that failing at a company, if your company fails, you haven't failed. Starting a company seems risky, but it's not that risky, right? I mean, I started a company, I was a co-founder of a company, we raised venture capital, my board fired me and I was escorted out of the building because I was intransigent. And - What did your intransigence look like? They were kind of like, well, maybe you should work from home. I'm like, no, thanks. I'll keep working from here. They're like, well, maybe you should work from home.

1:06:23I'm like, nah, that's all right. I'll just work from here. But the thing that I thought at that time when I left that company was, that's it, I'm done. Nobody's going to hire me again. Nobody's going to give me money again. Nobody's going to do anything with me again. I'm just disgraced. And that turned out not to be true at all. I mean, literally two weeks later, one of the investors in the company, not somebody who was on the board, but one of the other investors called me and said, hey, I need you to come in and consult with me on this company. They need some help. And when I went and did that, and then they had lunch, when they were like, okay, so what are you going to do next?

1:06:50They wanted to invest in my next company. I'm like, I just got fired from this company. And it's just not like that in this world, right? Having the experience of going through it is so valuable. I mean, so many people in work get wrapped up in work and it is their entire identity. And founders, especially, I think speaking personally, forget that they have a personality outside of this and a life outside of it. And it's easy to forget that. And I think people calling Jerry up after he got fired and saying, hey, you still have value, come help me is an example of that. Yeah. I wish more founders went to therapy.

1:07:21So that they understood that they were somebody independent of the thing that they were building, that they didn't have to work seven days a week in order to prove their value to the universe, that it's okay to shut down. We don't want that. Of course not. What else is most interesting to you both now as you think forward? Are books behind you? You've written the book, said a lot of interesting stuff, some of which we've talked about today. What now? It's interesting to me how people have misunderstood some of the things we've said, or people have taken from the book what they wanted to hear. So Liz forwarded me an email of how a founder center and said, oh, thank you so much.

1:07:57I never knew that I could negotiate away preference. I do think there's a lot of education to be done. I am a believer in this project of people going out and starting companies and working for themselves and building things. And I think it's really a driver for, every VC says, is a driver for innovation. But more than that, I think it's the best way for any individual to self-actualize, right? So I really want more people to be able to do this. And so I'm interested in trying to figure out how to make it a better career path for people being founders, for everybody. If I had to do my life over again, I wouldn't have gone to college.

1:08:27My co-founder, my last company dropped out, my CTO at I think 19, and drove out to Silicon Valley and grew a beard so that people didn't know how young he was and got a job and is amazing. My father certainly didn't tell me when college started that this was a place for me to explore and try on ideas and go gangbusters. And I didn't discover that until I became a founder. And I was like, wow, I am sitting here with the smartest people on the planet, just batting around ideas for a job. And people pay me for this. And so I think, Jerry, to what you just said, there's so much possibility for it as a career path.

1:08:59And I wish more people knew that it existed. You don't even need to be a coder, right? You can be a marketer, be a storyteller, you can be a designer. It's just super cool. I was in the Dublin airport yesterday, and my boyfriend and I started talking to this guy who turned out to be a network administrator for a giant pharmaceutical company. And they had acquired a company in the south of Ireland, and he was there to go integrate their systems. And he was talking about how bored he was. And he was talking about all these different jobs that he had tried on in Tampa and at a university. And I was like, man, you should come and get a job as like a senior support engineer or a solutions architect at a startup, and you would never be bored again.

1:09:34And I wish that he had known that that opportunity existed for him. And in a way where he wasn't necessarily risking a 401k or stability for his wife and his dog. Interesting that the overlap is that there was more awareness that there is a more creative, less boring path for almost everyone. Oh, yeah. I mean, I spent my first half of my career, well, maybe a third of my career now that I'm old, but it was working for big companies. They never let you forget that you're just a cog in the machine. And the last thing in my life I wanted to be was a cog, right? So when I went off and worked for myself, it hasn't always been easy, hasn't always been a ton of money coming in, but I never once considered going back to work for a big company again.

1:10:12Liz, I've had the chance to ask you this traditional closing question before, now I get to ask you, what is the kindest thing that anyone's ever done for you? I was stepping down as CEO, and it was the most difficult call I ever had to do with the company, and there were 100 people working for me at the time. And the day before, I had told my head of recruiting, who was also one of my best friends, and he came over that morning at 7.30 a.m. with his rescue dog, who is the love of my life, and I was on the Zoom call giving my going away speech, hysterically crying, and he was sitting on the floor next to me with the dog holding my hand so that I didn't have to be alone.

1:10:50I'm like, I'm gonna cry. So I didn't have to be alone when I was doing that. Amazing. Guys, this has been really fun. Love this format. I appreciate the spirited discussion. Thanks for your time. Yeah, this was awesome. Thank you. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

1:11:43Thank you.