VC Fundamentals Part 1: Sourcing
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Hello, acquired LPs, and welcome to another episode of the LP show. Thanks again, as always, for joining us. David, we embark on a new journey, sort of a new mini-series today for the LP show that captures a lot of other things we've talked about on the show, but we wanted to do a little bit more formalization. So what are we doing?

a first echo Ben, your thanks to all of you as LPs means the world to us. We are formalizing our VC fundamentals series, uh, here on the LP show. So we think, uh,

about this kind of stuff all the time is probably obvious and permeates all acquired episodes. Like, what does it mean to be a VC? How do you be one? How do you, what are the jobs that you do as a VC? How do you get better at them? How are you constantly learning? And we know many of you think about the same thing too, where,

Whether you are an investor or an aspiring investor, or like Sun Tzu says, know yourself, know your enemy. Even if you are an entrepreneur or working at a company, it behooves you, I think, to know some of the mindset and jobs to be done for VCs as well. Or in a less enemy framework way. Yeah.

know the incentives and the jobs to be done by your upstream, whatever it is. And in this case, upstream capital. So it's like, you know, if you're making sales, know where you're sort of what your customers motivations are. The best salespeople are the people that just solve problems for customers. And if you're a, you know, an operator and you can figure out what the, what a VC is optimizing for and deeply understand that, then, you know, you'll have, you

at the very least a better time pitching, but probably a better working relationship with upstream capital. And I think higher success rate too. We also recognize that venture, um, traditionally and still to this day has systemically excluded, um, you know, a lot of people who aren't white men. Uh, and so part of the motivation of wanting to do this is just to open up, um,

some of the knowledge on the inside of what it's like to do this job and have that be accessible to everyone. People who, um, who are interested in, in coming into our industry. We want to make that more accessible. Yep. So here's how we're thinking about it at the outset. Today's episode is going to be about sourcing, uh, sort of the first, uh, in the natural cycle of activity, uh, for VCs. The rough outline we're thinking is sourcing today. Next episode will be on picking and, uh,

and winning, winning in quotes, which will be a fun thing to discuss. Is that winning the deal, David? Yeah, winning the deal and trying to avoid the winner's curse, but really all about judgment. Next episode after that will be on company building, what happens in your relationship with companies after you win the deal and you wake up the next morning. I'm really excited for the one after that, which is portfolio management. This is something that

for the first, you know, seven plus years of my VC career, I spent literally zero time thinking about. And now I think is at least equally important with all the other aspects of, of being a VC. Yeah, this is one. So these first three sourcing sort of picking and, and, and obviously winning and, and,

company building our sort of front office for a VC. It's sort of what the founders see a lot, what the job of the VC is. And then the rest of them, starting with portfolio management, and I won't spoil the next two, are kind of back office. Believe me, all of our listeners are in huge suspense waiting for the last year. For sure. But yeah, like portfolio management, we did a great deep dive on it with Charles Hudson on what sort of portfolio construction looks like in seed and pre-seed. But I think that'll be a good chance for us to sort of go more formally into it.

Yeah. And then the last two we're thinking are going to be fundraising for VCs themselves. Every couple of years, they have to subject themselves to the gauntlet with LPs, just like you all. And then the last one, firm management, like how do you think about building, managing a firm, people, human capital, all aspects of a brand? It'll be super fun.

Yep. And listeners, we're not planning to do all six of these in one fell swoop here. We are going to sort of mix them in across a bunch of other topics on the LP show, but kind of have a every few episodes miniseries here. Well...

Should we dive into... Yeah, before we dive in, David, I just need to give a quick update to you. We have liftoff with the Falcon. Here we sit recording with, what did they say, Wednesday after the Demo-2 mission. And yeah, Falcon is away with 60 Starlink, I think 60, but Starlink satellites in the fairings.

in a very under publicized launch for SpaceX which is like crazy given how much publicity there was for a launch you know just a few days ago and here they are shooting up another Falcon 9 rocket with no fanfare so routine just a few days after the Dragon 2 crew test right was that was that the official name I know that mission was demo 2 but demo 2 that was it yes super cool

All right. Well, should we lift off? Let's do it. Okay. So first, everything we're going to talk about here, we're talking about from the perspective of early stage VC. Probably a lot of it applies to later stage and growth VC as well, but some of it won't. Stuff like friends starting companies. And secondly, disclaimer up front before we jump into sourcing.

Really, this applies to everything in venture and in life, but I think especially here, there's no one right answer to how to source investments. There are a lot of rules, some of which we'll talk about.

All of those rules exist to be broken. You know, it reminds me, I've actually had two sort of mentors at various points in time in my career give me some version of this advice. One was Andy Ratcliffe, of course, one of the founding GPs at Benchmark. He retired and became a professor at GSB. And I was lucky enough to take one of his classes when I was there. And I sort of asked him...

you know, the question of like, how, uh, how do I, how do I be a great VC? And he gave me a bunch of answers that we'll talk about later in the show, but he's like, look, at the end of the day, you got to figure out what works for you. And like, uh, what works for you is going to work for you. It's not gonna work for somebody else. Yeah. And David, when you say rules are meant to be broken, like friendly reminder to everyone that venture capital is an asset class that is wholly made by outliers and non-consensus bets. So in a lot of ways, the

purpose of learning how things have been done before and how other people do things are that you can selectively choose when you want to be different and why. The other great piece of advice was from a former Sequoia partner, you know, basically just said the same version of the same thing that the best advice that Don Valentine ever gave him was that what led Don to Cisco and what led Mike Moritz to Google isn't going to be the same thing that leads a

leads him to whatever his big win is going to be. So always a good thing to keep in mind. Okay, so with that disclaimer, why is sourcing important? I thought this would be a good place to start because I remember back when I first joined Madrona as an associate and my first gig in VC. I don't know if you ever felt this way, Ben, but...

I remember thinking like, well, the real fun stuff and the real work is working with companies after you've already invested in them and being a board member and helping with strategic decisions and hiring. And that feels like meaty, you know, sourcing. Yeah, it's important. And new investments, of course, are important, but like,

That's just top of the funnel. Feels kind of like sales. You have a lot of conversations. A lot of them go nowhere. I just remember feeling like it was kind of the least interesting part of the job for me when I first started in VC. It also can be soul crushing because a lot of the times it is the...

Yeah.

it creates a negative emotion kind of for everyone, or at least for you in both scenarios, except for that very rare one where you're shooting the gap and you're both like, yeah, let's do this together. And that happens so rarely. Whereas once you start working with a company, then it's like, well, you're on the same team, like you're in the, you're in the foxhole together. But

I came to learn and again, not saying I'm right, but I think this is a pretty wrong mindset and an important myth to dispel. And there are a couple of reasons for this, but I think it's said no more eloquently than

Sequoia says all the time and what Doug Leone, I think, said on our episode, which is we're only as good as our next investment. And that is fundamentally the mindset you have to have as a venture investor, especially somebody focused on building a firm. No matter how much success you've had in the past, like there's always change in this industry. Success in the past may afford you the opportunity to see good investments.

investments going forward but if you get lazy and if you take your eye off the ball you're gonna miss some of those and somebody else is gonna come up and get them and then you're gonna start to fall behind like this is an industry of aggregating returns and very quickly disaggregating returns if you start to miss one or two the other important thing that like

Ultimately, what is a fund? A fund is a set of 20 to 40 investments. And the thing that determines what those investments will be is what the top of the funnel is. Like, it's a gigantic funnel, and there's no way that something's going to come out the bottom of the funnel that isn't in the top of the funnel. So the top of the funnel is crucially important because it is the governing factor on the whole world of things you could invest in.

Totally. Totally. And then the other final point on this is, you know, that I'll say, which gets a good reminder always to keep as a VC, which is that like the raw materials of our industry are entrepreneurs. And this

This is where you get your hands dirty and interact with entrepreneurs writ large. And you can't take for granted the fact that even, you know, Ben, as you were alluding to, like you're going to end up not getting there on most of these, on investing in most of these entrepreneurs you meet.

But that doesn't discount the fact that they're still on an entrepreneurial journey, right? And like, they're giving you their time. You need to respect that. And like you said, it can be easy to get really jaded about this. But like, it only takes being proved wrong a couple times, which if you spend, you know, anything more than like six to 12 months in the venture industry, you will get proved wrong very quickly to start to change your mindset around this.

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Okay, so that's why it's important. So we're going to talk about broad strategies. And this is mostly firm driven. Although I think firms, VC firms, many of them do have room for different styles amongst partners and investors within them. So there's some drift here. But it's mostly going to be aligned with what your firm strategy is. And then we're going to get into...

actual brass tacks tactics of sourcing but at a high level then jump in if you feel there are others I think there's sort of three wide buckets of strategies that you can have for sourcing as a VC firm and those range from one end of the spectrum being completely generalist and opportunistic I

I will invest in whatever interesting stuff comes across my plate. Which is pretty synonymous with network driven, like because the things that come across your plate, if you're generalist and not sort of doing proactive work, you are going to be inbound driven.

And you can be a great generalist investor and do outbound work, but then you have to have an additional thing on your thesis that says, we're generalist investors and the way that we find companies is, and sort of define what you're... If you're a marketer, think about it as a gigantic funnel, what your omni-channel strategy is. We're on Facebook and we're doing content, but we don't have a Twitter approach. For a generalist fund, this might be...

be, you know, we are proactively meeting with senior execs at these two companies to figure out who the great people are at those companies that we may want to fund, but we're not going to meetups. Pick your battles there. The thing that I would say about generalist is it then requires one more level of, okay, but what's the, what's the way in which you intend to meet people? And the default, you know, a way to do this is why already know lots of great people that are going to start lots of great companies. And so like,

I'm going to invest in them. That's been, I think, the legacy of the venture industry for a long time. You know, I would classify, again, like I said, it's a little bit different partner to partner, but generally I would classify like say Founders Fund as a generalist fund, you know, grew out of the PayPal mafia and Peter Thiel. I think it was Brian Singerman who was on Invest Like the Best with Patrick. And he talked about his primary sourcing strategy and

is he just asks everybody he meets to send him companies and then he just starts to tune like okay who sends me good companies who sends me less good companies if you start sending me good companies i'll like pay more attention to you if you send me less good companies i'll pay less attention to you but like i'm open to i'm open to anything ben like you're saying that can work because he has an incredible network as do all the folks at founders fund okay so that's one end of the

The next, why don't we go to the opposite end of the spectrum and then we'll talk about the strategy in between. The opposite of the end of the spectrum is being completely thesis driven as a firm. So the classic example for me of a thesis driven firm is Union Square Ventures, USB, and they've kept evolving their thesis. But I think, I always think kind of

in my mind, classic USB, which was the mid two thousands, late two thousands when they were investing in, um, you know, in leading early rounds in, in Twitter, in Tumblr, in, uh, four square, uh, in Zynga and kind of these, you know, uh,

First real, real big, big breakout new internet companies after the smaller exit internet 2.0 of kind of Flickr and the like. Their thesis at the time was that they invest in large networks, I'm quoting, of engaged users differentiated by user experience and defensible through network effects.

So they have a very specific point of view on the world. This is not saying, which we'll get to in a minute, the middle bucket, which I would call thematic investing, which is like, I think that digital media is going to be a thing. This is like, it's not even, I'm looking at a specific sex.

It's that I have this very specific point of view and anything that jibes with my point of view is what I'm going to do. Even if I see things that are in a sector I'm interested in, if it doesn't meet that point of view, then I'm not going to invest in it.

Do you know how good a job they did sticking to that? Because when you get really tight like that, where you put more than, say, two constraints on something, where you're like, it has to have network effects, it has to have engaged users, it has to differentiate through user experience. I mean, every time, you know, it's a...

what, n cubed problem, right? Where you're sort of then zooming in and every time chopping off, I don't know, a large percent, 90% of the possible ones that fit within all the previous criteria. I think they were pretty disciplined to it. And Fred Wilson actually has written a lot about this, and I really respect his thoughts on it. And he's pretty upfront. He says, like, if you are right, if you are right about your thesis and disciplined, you're

That is probably the way that you are going to have the most success and make the greatest returns. And it's the right timing. So the thing is, you know, when they had this thesis, you know, all this sounds kind of like, duh, now like invest in large networks of engaged users differentiated by user experience defensible through network effects, right?

Think back to, I think it was 2006, maybe when they invested in Twitter, 2006, 2007, around then same time for Zynga. Like people weren't thinking about this, like, you know, network effects. If you said that to most people on the street, they'd look at you like you, you know, had two heads. You talking about like the big broadcast, like ABC and NBC, the big broadcast. So you're a tech investor. Yeah, exactly. Um, so they just nailed the time. They were right there.

and at the right time with this. And so even as a very small partnership, you know, I think it was just Fred and Brad, uh, during most of this time, they were able to lead and, um, to source, uh, and lead investments in these huge, huge companies that would drive massive outcomes for them. You need to have be very certain on your point of view on the world, uh, to, to do this.

Yeah. It's like the more you zoom in, the more sort of a high conviction you have to be in your, in your theses. And yeah. Yep. So that brings us to the middle bucket, thematic investing. It's not a smiling curve or an inverted. I was thinking of an inverted smiling curve because there are examples. You can have great success as an investor and as a firm with all three of these approaches, but most,

large venture firms, I think, fall into the thematic bucket. Thematic and generalist, there are a fair number of generalist firms out there, but I think most are in the thematic bucket. And the thematic bucket is...

Kind of we alluded to it earlier, like there are swim lanes. Those swim lanes might be as broad as enterprise versus consumer. It might be like developer tools. It might be like future of work. It might be like you can get as specific or as wide as you want. But those are we as a firm have these areas.

buckets, these themes, different partners and different teams, sub teams within the firm focus on different of these buckets. And then we all aggregate it up together into a firm. Yeah. David, you're the only one who can see me. But the reason I'm sort of grinning over here is I don't want to blow his or her cover. So I don't, I won't say which VC it is, but a great sort of top returning VC told me we're absolutely thematic. We have, I don't know what they have five to seven themes that they invest in, but they're

really that's so we can say no more easily. Like if we like something, we'll invest in it. We definitely believe in these handful of themes over anything else. Like we came up with them because that's the things we think are going to be the future, but they're broad enough intentionally to let us squint or not squint to count something in that theme. You know, that's funny. I actually hadn't quite thought about that, but I suspect there are a lot of

firms and even more investors within firms who say they're thematic driven may even believe that they're thematic and they're investing but really they're generalists and they're just looking for a intellectual justification to stand behind

When you think of these themes, there are things like future of work or computing at the edge or like, is this boom arm on this mic? Like if I invested in that boom arm company, could I call that the future of work? Maybe because like I wouldn't have classified it as that a year ago, but the world's changed enough that like you can sort of squint your way into saying to the extent that I can make a hardware investment and I would make it. And I don't know, maybe there's something special about this boom arm where it's

it's a bit kind of a bad example but you can illustrate how far yeah you can sort of squint in these thematic areas yep so that's kind of high level strategy and then like we said those tend to be set at the firm level i think what did jake call them in our uh interview with uh jake zaper from emergence cap they have three priority themes oh yeah um

Oh, shoot. I can't remember what he called them. I'm sure Jake is probably yelling into, uh, into his AirPods right now at us. Jake go to sleep. He probably needs it. Um,

Okay. So then in tactics, I would say there are, we're going to cover a whole bunch of different sourcing tactics here. Broadly, you could put them into four buckets and they're applicable kind of no matter what your strategy is, you can apply all of these tactics to different strategies. First one is inbound. So this is...

are coming directly to you, either as a firm or as an individual investor. Second, obviously, is outbound.

you are going directly to entrepreneurs. And there's a great, great quote from Catherine Gould, who was one of the legendary VCs from a few generations ago, was one of the co-founders of Foundation Capital, and sadly passed away a few years ago from cancer. But she has this great quote, which basically says, it boils down to, in her belief, it's not the calls you

take as a VC that make your career. It's the calls you make. She had a great way with words, but I don't have the quote exact quote in front of me, but, um,

She said, you know, if you kind of catalog the 10 smartest people you know, and you just make a habit of always regularly calling them, at any given point in time, one or two of them is going to be starting a company. And you could just like roll with that and do very well in your venture career. I would describe us as a thematic at PSL. We're like...

Obviously, we're Pacific Northwest based because there's a few key things we believe very strongly that this region will be good at. And we have these three sort of themes within there. So I wouldn't call us fully generalist. I'd put us like most people you're alluding to, David, somewhere in the middle in being thematic. When people ask, how do you find founders for the studio? And I know I'm probably jumping ahead a little bit here, but the question that my partner, Greg, who David obviously know very well from Rover and Madrona, always responds with is, yeah,

Who is the person that if they came to you and said, I'm starting a company, you would say, I'm in with my personal cash to be an angel investor. But.

before I know the idea like it's it's a very similar concept I think to like keep up with those 10 people regularly at some point catch them when they're starting a company it's it's it's this idea that years before they start a company you want to sort of know in your head like okay who do I think is going to be a founder of an amazing company and how can I just sort of keep up with them

Yep. Hang around the hoop. And there are a bunch of other different tactics around outbound we'll go into, but yeah, that's just...

I always think of Catherine when I think of outbound. Okay, next bucket is referral. So this is somebody referring you a deal. Could be another entrepreneur, could be another VC, could be somebody else entirely. But I bucket that separately from inbound and outbound. And then the last one that, Ben, you are a world expert on and is in many ways the

The most highly, always highly desired yet elusive form of deal flow and sourcing for LPs is the homegrown slash proprietary deal flow. Classically, this was done with things like entrepreneur and residence arrangements, although today that's not even proprietary, but it could range all the way from that up to your running a venture studio in-house, which is

Ben has lots of experience with. That's absolutely one of the sort of benefits to being an investor in PSL Ventures is, David, as you alluded to, the studio creates a handful of companies a year. I think last year was eight. And the fund has some ownership in

every single one of those and can participate in their earliest financing rounds. And so while the venture fund is not leading those deals in the studio companies, uh, it has exposure by default to a sort of proprietary channel of companies as you, as you just described. Anybody who's anywhere been close to, um, private equity investing in any form, uh, is gonna get a smile here. Like proprietary deal flow, the Holy grail. It's, it's,

Good work if you can get it. All right, so let's jump into brass tacks here on tactics of how within these broad categories and strategies, how to go about sourcing. So as part of when I talked to Andy Ratcliffe back when I was at GSB, going hat in hand saying, please give me some knowledge. He gave me six tactics right off the bat. And he said, look, you know,

you should try all of these. You'll figure out which ones you like, which ones you're good at, which ones you're not. But here are kind of like broadly accepted paths. So one, he said, was kind of PR and public presence and kind of back in

Well, certainly his day and even this time, kind of early 2010s when I was talking to him about this, that really meant like PR. You know, blogging was around. Fred Wilson was blogging. But there's been a lot of development since then. Yeah. And I mean, the explosion of the venture ecosystem has also meant the explosion of marketing as a core competency of venture capital firms.

It's sort of assumed now that when you look at these enormous platforms like Andreessen Horowitz, that thought leadership and marketing is a piece of what the job of a venture capitalist is. And that's only recently true. It may not be true of the investing GP, but it may be a core competency of the firm broadly. You think about the A16Z podcast is sort of this great example of it where it's not...

Fred Wilson blogging. It's a program that's developed by a person at the firm as a competency of the firm. But David, you're right. It wasn't that long ago that it was literally like, see if you can get quoted in the Wall Street Journal. Yeah. Maybe hire an outsourced agency to help you do that or go on CNBC or something. Although, actually, it's come full circle going on CNBC now. Look at Chamath and look at Jason. They're making a career out of it. But no, when Andreessen started...

They brought on... I can't remember if it was actually... I don't think she was a full-time employee of the firm to start, but quickly she became a partner. Margit Wenmarkers, I think is how she pronounces her last name, who was the founder of the Outcast, a super famous PR agency. They brought her in-house to architect this whole strategy around...

blogging around having part of it being writing in other news outlets. I mean, the Marc Andreessen software is eating the world op-ed in the wall street journal, the op-ed heard around the world, you know, the podcast, all of it. So brilliant has become synonymous with the firm. Totally. And to go meta for a minute, anytime you have something moving from a differentiated product to a commodity, you're,

marketing is going to become more important. And so without demeaning ourselves too much, David, here in the commoditization of startup capital, you know, you have a tremendous abundance of it. You know, a lot of money is just as green as a lot of the other money. And so what do you do to differentiate in the very same way that in the jewelry business or in the consumer package brands business, you know, this window cleaner is the same as that window cleaner.

But the very minute differences probably won't be known by consumers. So the thing that becomes crucially important and how P&G built their entire company is the marketing of these things and the ability to appear differentiated. And so many, many sources of capital are truly differentiated from many others. The person you're working with at a board level is crucially important to a company.

But as it becomes more commoditized than it has been in years past, it makes sense that the 2010s were the year where you need marketing to create the perceived differentiation of capital. Well, I think what's been super cool on this, a lot of people dismissed this whole idea of marketing venture capital firms. It feels tasteless. And when Andreessen started, I mean...

Old school VCs were throwing a lot of bombs and it was very controversial. What's super interesting now, I think, to foreshadow some of the modern sourcing tactics we'll get into, including things like podcasting and this very podcast, it actually has become a self-fulfilling prophecy that I think having...

Well, I'm going to characterize it differently in a minute, but having a strong marketing and everything around that competency as a firm actually helps the companies you invest in because you amplify them. You both amplify them and you gain access to resources that you otherwise wouldn't have gained access to to make those companies better.

Totally. But back in the day, this was PR. Also, did you just imply that this podcast could be content marketing for Venturefront? David, how dare you? No. Well, we're going to talk much more about that in a minute. I'm going to come at you hard in a minute. Okay, you come at me hard. This is definitely not content marketing because I have a whole different category for it.

Okay. So next one that Andy told me is, um, you can be a lab rat as he called it, uh, which is, you know, go hang out in like, uh,

Like today, people would call investors like this deep tech investors. But you want to hang around scientists. You want to hang around computer scientists, whatever your jam is, whether it's physical sciences or engineering or whatever. Just like be a technology sponge and hang out around the people that are at the bleeding edge because they're probably...

some of them are going to be entrepreneurial and want to start companies. Yep. You see a lot of studios actually doing this. A great example is Andrew Ng's AI Fund, or up here in Seattle, AI2. Both have deep connectivity either in their organization or outside the organization with AI researchers and are actively seeking to start companies and invest in the work that those researchers are sort of spinning out.

Yep. Okay. So the next one is pretty specifically tied to the thematic investing strategy, which is just become known as like the investor or the firm in a given space. So like what would be an example of this? Bill Gurley in marketplaces.

Exactly. Bill Gurley and marketplaces. And there are whole firms around this now. Like, you know, I'm thinking of Bolton Hardware or several great fintech firms out there, Ribbit Capital and others. Not only are you narrowing the universe for your sourcing, but you're also broadcasting out to the world. Hey, this is what we do. We're the experts. If you are doing if you're an entrepreneur working in X sector, you're

you need to come talk to us. And it's actually amazing how well this works. Yeah. And the thing that's must be occurring to all listeners now is, well, wait, this sounds sort of like that thing we were talking about earlier around firm strategy. Yes, of course, listeners, you are right. This is something that requires a tremendous amount of alignment. So figuring out from your strategy to your tactics, picking the way in which you are going to sort of

create deal flow for yourself to do this top of funnel sourcing that completely matches up with your sort of chosen strategy that you'd like to invest in and why you think that will generate outsized returns for your investors.

I think that's actually a really good point, Ben. There are, I'm not going to name any names, but there are certainly firms out there that have a strategy around being thematic or certain land, but who are not good at the tactic of that, that matches up with that of making it known to the world that that is what they do, either because they don't see the value in it or they're just not good at it.

Okay, next one, tap into specific talent networks. So I would say, you know, this is what founders fund. And actually, in many ways, I think Sequoia has done this to do best is there's a certain population of people where for whatever reason, there's fertile DNA for entrepreneurship. So PayPal mafia, obviously, for whatever reasons, we've covered it a bunch on the show, a certain

whole slew of former employees and other people involved in PayPal went on to start really great big companies. And David, this doesn't have to be just like the big firms that have hundreds of millions or billions under management. I was talking recently with one of the founders of Backend Capital. And it's a super small pre-seed fund that's in their first fund right now. And

One of the founders there, I think both the founders were involved in MHACS, the biggest, I hate to say University of Michigan because it kills me as a Buckeye, but one of the biggest and most successful college hackathons in the world that started...

what, eight, 10, maybe not that long ago, five to eight years ago. And so the talent network that they have there is, you know, organizing thousands and thousands of college hackers to build products and prototypes and side projects. You know, some of them are going to go and create big companies and, and having that sort of, uh, being an existing leader within a community where you can then the, the people who in that community are sort of rising to the top, uh,

You know them already and they trust you and you're an authority figure to them. It makes total sense that they would want your capital and your relationships. Yeah. I mean, I wonder if you could argue that

This was actually Y Combinator's primary and most successful tactic as they were starting, which was talented engineers who were still in college, especially in the Boston area in the first couple of years, but then quickly fanning out all over the country and in the world. They pretty uniquely amongst investors were going at that time, you know, mid to late 2000s,

to that group of people and saying, you can be entrepreneurs. We'll fund you. Yep. Yeah, I think that's a great example. This has been huge for me personally, sort of growing up in the startup weekend movement and being an organizer there. There's been billions and billions of dollars of

market cap and or private company valuation if you sum up all the companies of people that actually started companies at startup weekend like rover or people that were very involved in startup weekend that sort of um teamed up with other startup weekend people and started things like hightower is a great example of this that merged with vts big multi-hundred million dollar merger a few years ago like there's a lot of those types of companies of branch metrics um which is uh

company that I invested in, both because they were my classmates at GSB and because we started a startup weekend. There was a bunch of stuff that happened between the startup weekend and the actual company. But like the core product was... But you know the people, you know, build those relationships by participating in those programs together. And I think doing 30 startup weekends over the course of my 20s, like that was a meaningful part of how I sort of know the people and get to invest in the people that I do. Yeah.

Totally. The other thing, David, I'll point out there is you mentioned knowing them from GSB. Business school is a great talent network. Like I think at some point we'll do a whole episode on should I go to business school or not? That's just a fantastic example of a talent network that I know you've leveraged over and over and over again in your investing career. Not just a talent network, but also just a...

network, period. But that's an episode for another day. Okay. So the last two tactics that Andy gave me are funny in that sort of like the first one, the PR at the time, less so now, but still now, they were viewed as sort of unseemly in the industry. But man, they absolutely work. So the first one is make late stage investments in brand name companies.

companies to kickstart your reputation and become affiliated and associated with those successful companies that you paid up for to get into once it was already clear they were a success and then start to migrate into early yeah we're logo shopping i think yeah logo shopping yeah exactly and you know it's funny this one like the vc industry can be so um

So Insularian sort of... It's like middle school, you know, in a lot of ways. And kind of like petty and mean to its own. I think it's getting better. I think it is getting significantly better. And I think the newer generations are less like this. But yeah, that's sort of viewed as like...

you know, you're cheating or you didn't earn it. It absolutely works though. Well, cause you can't walk around with, with sort of a per company IRR on your website, but you can walk around with the logos on your website. And so, you know, you never get to see like you sure you can do some research and figure out what round, if it was mentioned in a public forum when they invested, but if it wasn't announced that you invested, it's like, who knows what stage and who knows with what check size. And yeah. Yeah. And I think, um,

Obviously, their investors will know if you try and use that for track record, but you can build hype long before you have to show track record. Right. That's talking about fundraising with LPs. That's an infrequent activity. And if you're a more junior VC, that's something you don't need to worry about at all. What you really need to worry about is your reputation with entrepreneurs and

they're not going to know or care that much, but this gets to the, like what's actually valuable about this. Certainly the reputational brand halo from the successful companies is huge, but,

But if you do that, you also get to actually learn from the experiences of those companies. There is real intrinsic value there. There's real intrinsic value. You get to learn. You get exposed to the people within them, which can help build your talent networks. Like this is a really, especially for newer, younger VCs, I think it's a really great way to

to jumpstart your sourcing strategies and tactics. Yeah, totally. Okay, so the last reason on this, why it's a good strategy, especially for younger VCs, is not only are you going to get the learning from the company and the access to the talent networks, but

But if you get to join the board, either as a member or a board observer, you're going to get to learn from the other venture investors on the board. And this is actually something that hugely I benefited from so much in my career, especially

and continue to that I don't think is talked about enough, which is that you learn a lot from other members of your own firm who you spend a lot of time with, but you can learn just as much, if not more from all the board members at other firms who you share boards with because you get exposed to different types of

Yep. I mean, I think we heard this straight from Chathan's mouth on the enterprise investing LP episode where he was saying, I think he was on the elastic board with Peter Fenton or maybe still is. This is when Chathan was at his former firm at EA before he had joined Benchmark. And obviously that learning, that sort of mutual learning from each other led to something much more than just learning where they actually joined forces later at Benchmark. But

That's a very common thing, especially in this sort of mutual context. David, I think you're pointing out like for younger VCs to get to learn from more experienced partners. But I think this is a it's a pretty commonplace thing for people to want to co-invest together to get to work on a company together. Totally. And if you're doing late stage investments, you get a multiplier effect on this. So every investment you're making that's a late stage investment, there might be three, four or five great early and mid stage VCs already on that board.

Well, boom, you just got to build relationships and learn from all of those all at once. Okay. So then the last one that Andy sort of told me tongue in cheek, but also absolutely works is beg. Uh, and he used the example of another famous VC of his kind of vintage who he said, uh, derisively, uh, begged, uh, to get into all of his early hits and then built a reputation. Really? I think what this means is some combination of begging the entrepreneurs, uh,

and also just paying up related to the previous tactic. But this can also work at early stage, which is like if there's a hot deal and you're willing to pay the highest price, well,

there's a good chance you're going to win that deal. David, to get into our next section here, listeners, we wanted to include this section and I hope we would have included this section before everything that's been sort of brought to light and all the protesting that's been happening and rightfully so this last week. But across all these tactics that we just mentioned and across all of them that'll come in our next section, I'm sure many of you

have listened to us talk about this and go, oh my gosh, it's so insular. It's such a echo chamber. Wow, what another great way to fund white males, like talent networks from existing successful tech companies or top tier schools. And I'm putting top tier in quotes here. Like there's so much,

just fishing in the same pond over and over and over again because A, no one gets fired for buying IBM and B, everyone just has a tremendous amount of bias and different amounts of sort of buried lack of desire of getting outside their comfort zone at the very least and most charitable way to describe it. And so...

Every single one of these tactics has ways to break outside of these networks. When you think about the way that you make money in investing as being non-consensus and right, a lot of the things we just described are ways to be consensus-based.

So I think if you go do that same stuff as everyone else, if you're going to try and go blog about how software is eating the world, but doing it worse, or you're going to try and talk about some specific up and coming technology and make that your niche, probably a lot of other people are going to do that too. So are you going to try and invest in the PayPal mafia, but you're not right. Right. It's like what, what,

one really fantastic way to be non-consensus. And we never know if we're going to be right, but find an opportunity to go and, you know, invest in people that, that everyone else isn't rushing to invest into because of how it's been historically. As you can probably tell, David and I are uncomfortable talking about this topic and are trying to, um,

discuss it not in one fell swoop here, but weave it more into our conversation because making yourself uncomfortable is the, is the way that we sort of fix some of the systemic issues that we have. But it would pain me if we didn't discuss it on this episode of, of how do you bring in top of funnel for people to fund, to not sort of bring that to light here in this episode. Amen. I'm so glad you, you said all that and brought it up in. And, um,

It's also great because not all, but most of those old school tactics that we were just talking about, not old school and that they don't work anymore. They certainly do work. There's also something else about them, which is that most of them required you to be at an established VC firm. Like,

It's pretty hard to do something like make late stage investments in branding companies if you aren't at a big established Sandhill venture capital firm that can do that. Or to, you know, have a big PR resources that can help you build out a public presence and get, you know, cameos on CNBC and the like.

even just that contributed to keeping a lot of people who otherwise would have been great investors out of the industry. David, you make a great point. Like this is a, in a lot of ways, these strategies are ways for people or brands who already have

or success or track record of some sort. Some kind of platform. Leverage that to generate more in the future. And yeah, it's this really interesting thing to think about that sort of cold start problem. How do you do either new firm building or new reputation building on your own? Yeah. And so this is what's cool. There's certainly a lot of this dynamic

obviously, obviously that still exists in the industry and, you know, success aggregates to firms and platforms that have already had success and investors who've already had success and all that. But it is so different now than it was in, you know, when was this 2013, 2014, when I was asking Andy for, uh, you know, his tactics, uh, for how to succeed in venture. It's, you know, we'll run through some of these tactics here, but in broad scopes, I think, uh,

it has become not only so much easier, but I think pretty critical these days that you as a person have a voice and use it and have that be part of who you are as a person and as a VC and have that be part of your sourcing strategy. And so you see things like even, you know, even I think Benchmark has done this

uh, accepted this new reality incredibly well. Like you've got benchmark, right? Like the biggest, uh, yeah. Go to their website. If you've never gone to their website to try and understand the level of, uh, quietness that we've talked about and that, that we're trying to refer to their past as, uh,

Yeah. Or I was even going with biggest brand, most successful, biggest platform out there, although part of their brand is being quiet. And I think they are very effective brand marketers of themselves. And part of that strategy is being quiet about the firm. But if you go back...

plus years ago, other than Bill, who was always blogging, going back to his, um, his, uh, heritage and days as an equity research analyst, the partners were pretty quiet and behind the scenes too. Now, all of them are out there all on podcasts, you know, Jason's killing it on Twitter right now.

you know, um, VC Twitter. Is this a sourcing strategy? Oh boy. VC is Twitter, but yes it is. Uh, and this is actually the point I want to make, which is that today between Twitter and,

blogging and medium and podcasting, there are so many ways to put your thoughts out there and have a point of view on things. And sure, yeah, it helps if you are part of... If you are an investor at NEA or Benchmark or Sequoia or Index or whomever, that helps amplify. But

that's not going to get you thousands of followers on Twitter. That's not going to get you a top podcast. That's not going to get you a widely read blog or newsletter. What's going to get you there is actually doing the work and making great content, which is going to get you followers, which is going to bring you to opportunities. It's such a good point. I mean, like the friend of the show, Turner Novak, awesome example of this. Like he's at Gelt VC. It's definitely not sort of a brand in the way that Benchmark or Sequoia are, but like

Yeah. All of these are tactics, whether it's Twitter or blogging or podcasting. Yeah.

They work incredibly well. I think to be a little biased and, and, um, uh, about ourselves here at acquired, I think actually where this is heading is building a community. Um, and I think that's, that's what we really try to do here at acquired, um, with the main show, with the Slack, with the LP show, with the LP calls, with, uh, with everything we do, it's about creating a community around a shared interoperability.

interest and passion for, you know, in the case of acquired understanding and studying and building and learning about great companies. And that's naturally gonna develop its own center of gravity and have great things come out of it. So I kind of think of this as like the most evolved version of this, like it even lives completely on its own. I was okay. I just won the award for like

biggest self-tuning of a horn. Give me like a galaxy brain meme right now. Maybe we should cut this. No, no, it's staying in. No, I love it. Oh, damn it.

No, but David, you make a great point. Like Greg, my partner, an incredible community builder in the tech ecosystem in Seattle over the last 20 years. And I think like all of us who were starting companies at Startup Weekend thought maybe we'll get a meeting with Greg so that he's always the judge at the Startup Weekend. He's always here. He's always at stuff. He's accessible. There's a tremendous amount that sort of comes from being...

being an accessible person who is willing to sort of like have conversations with anyone anytime um i know that's not the brand of lots of ecs there's multiple strategies here you're famously bad at email you don't even answer my emails but like i mean you just sort of pick which where you want to be active not to get you in the chair here but like you just choose in what way you want to engage in community and like the acquired slack is is like a huge one but um

I'm just trying to say you're not accessible by email. That is very true. I think that is defensively. I would put that in actually a separate topic for this. For me, it's just like, I think I find to rabbit hole on my being bad at email is

You know, we're really pulling back the curtain here on this episode. For me, it's that I kind of found over time, like when I first started my career, I was hyper, hyper responsive on email. And I think that served me really well when the primary function of my job was to work

and support other people and help them achieve what they wanted to achieve. But then over time, as that evolved, as it does in any career, but especially once you get into investing and making and leading investments,

I kind of realized that like that, whoa, it's a whole different ballgame now. And for me, at least, as kind of I think about things, I'm like super hyper bad at context switching. And so I need like large blocks of time to...

to focus on whatever it is. It could be mundane stuff, but like, well, stuff like sourcing or stuff like, you know, thinking about a company or a board or a board problem or whatever. I started finding that like by shutting myself out of email and related stuff, like that gave me space to do that. And I think maybe I've gone too far. I think I've just gotten hooked on it. And now I just find excuses to push off doing email for days and days at a time.

Well, it's interesting. I mean, to bring it back to sourcing, it's basically a resource management problem where

you can't do everything. So what are the tactics that you're going to do that best support your strategy? And it's going to be different for everyone. It's going to be different for every strategy. There's only so many hours a day. So like I, similar to the way you've pulled back from email, I've kind of pulled back from events. I think it's important for me to have the evenings to kind of catch up on work and personal relationships. And in a lot of ways, like actually do the work since the days are kind of filled with meetings. You know, I used to go to tons of events and I loved that I sort of was like, you know,

accessible is the wrong word because I think like no one would think it would be hard to access me. But I sort of loved being out there in the community and mingling all the time. And that became an unsustainable thing for me. And so it's like, OK, well, how do you want to allocate the resource that is your time? And what is the highest leverage activities you can perform that will support your strategy? Oh, and by the way, sourcing is only one of many jobs of, you know, a great venture capitalist and a great startup studio person.

You hit the nail on the head there with resource allocation. And I think that's the...

Coming full circle here on sourcing. That's what it is. All of these broader firm strategies, kind of different buckets of sourcing and then individual tactics. They're all tools at your disposal. You got to figure out which ones work for you, which ones you like using and which combination for anybody. It's going to be multiple of these. Hardly anyone has just one tactic that they use for sourcing, but then you need to think about what's going to be, what's going to be most productive. Yeah.

One takeaway that I just don't think I quite realized is it's a funnel like any other, sort of before getting into venture. They're sourcing you will do accidentally and they're sourcing you will do intentionally, but the sum of those things are the only world of possible things that you could invest in.

I do think one other thing that we should dive into here a little bit, we didn't sort of prepare this in the notes, but who does sourcing at a venture firm? I think we've done an episode very early on called How a Venture Firm Works and talked about the roles. But I think it's worth talking about sort of like who does what form of sourcing at venture firms so folks can sort of parse through that.

Yeah. And it's super different at different firms. On one extreme, you have a firm like, say, a benchmark where there's basically only GPs and they're just doing it all themselves. And actually, I think more and more over time, industry.

and firms are operating more like that, even if they have different structures. Then at the other extreme, you've got places like, you know, kind of summit and TA and growth equity sort of pioneered the model of it's the opposite that associates all the way down at the bottom are the ones who are doing all the sourcing. And then the partners are just sifting through, take the final meetings. Yeah, exactly. Do the high level diligence calls, call the CEO of the, you know,

incumbent company ask if they think this is a good investment and an up and comer, but not doing any of the customer diligence or the... We're talking about different jobs to be done of the venture firm right now, but they're sort of structures that come from the private equity world and from the more traditional finance public market investors world. And then there's structures that look completely different, like you described with a benchmark or any firm that is sort of just GPs and the GPs do everything. Yeah.

There's all sorts of things in between that. There's also then the kind of team sourcing model. Well, certainly I think Meritech was like this when I was there. And Madrona was pretty much like this too. As Madrona got bigger, it, I think, became more individual, but still at a very strong team ethos, which was, you know, hey, we're all in this together.

You, Ben, might have more expertise in a given area, but I, David, might meet somebody who or either a company or a person who's right for that. Well, great. Let's do a handoff or let's work on it together. And that can be super fun, too.

Yeah. Yeah. I mean, great example is like whenever I get a pitch for a digital health company, it's like immediately CC my partner TA and I'm like, awesome. TA is one of the best people in the world to talk to about this. I am not like, but in some cases I'm like, because we have a strong relationship, I want to like do this together with TA or if it's a cold email, I'm like, uh, I am of no value here. So straight up handoff.

Yep. Cool. Well, this episode has gone a lot deeper than I think we wanted. Hopefully it's been helpful to LPs. Certainly, actually, it's been helpful to me to kind of codify and think about all these and think about where I'm allocating my time. Like many episodes that we do, and I think like all six or if we decide to

add or subtract five to seven of these VC fundamentals episodes, like everything is going to be on a spectrum and there's every firm is going to do something different. And you just have to decide where you sit on each one of these spectrums. Yeah. Cool. Well, LPs, thanks so much for joining us and we will talk to you next time. Talk to you next time.