I had a recent conversation with another fund manager about how we evaluate potential investments and ended up sharing the questions from a survey we send to companies once we start a formal due diligence process.

There is another much more mundane detailed checklist related to legal documents that I will spare everyone but did want to share publicly the kinds of things we want to understand and how we ask them.

So much of pre-seed and seed stage investing is about the people vs. the product so we try to drill in on what makes the founding team want to do this and what they view as success. We even specifically ask what would make them quit which is often the first time a founding team will have an open discussion about this.

The survey results are used for a couple hour session with the founders once it is filled out and then feeds into our investment memo process as we evaluate a potential investment. Thought it would be a good thing to share publicly as much of this is to be expected although it does have our own spin on it. Enjoy!

1. PROBLEM: Please describe the company’s value proposition. What problem do you solve and why is there a compelling reason to buy now.
2. SOLUTION: Please describe the solution. What is it? How is it differentiated from other current offerings or approaches? What is the competitive advantage? Compelling ROI?
3. MARKET: Please define the target market, size of addressable market and reference any associated 3rd party market studies or analysis. Please describe how you will reach this market (sales and marketing tactics) as well as any details on market adoption rates, stage/pace of adoption, etc.
4. TRACTION: Please describe current number of customers, average customer contract/ deal size, and any other associated unit economics. Please provide any relevant year over year, quarter over quarter revenue and/or usage rates. Please provide a 3-5 year forecast of customer acquisition including costs, timing, and profitability. Please provide customer references if possible
5. COMPETITION: Please describe your top 3-5 competitors (including alternatives or doing nothing), how you differentiate, and why you are a more compelling solution. How do the larger companies in the space (who may be partners) view this opportunity and why are they not going after it?
6. FINANCIAL: Please provide most recent financial statements including any comparisons to prior years/quarters as applicable. What is your cash burn rate? What is your current cash balance? What are the largest sources of cash burn and how are you managing them? Based on the capital you are raising, how much runway does this provide? What does the company look like from a cost structure standpoint at $1M in revenue, at $5M? What are the current and expected margins as the company scales? What are the exit scenarios at $50M and $500M exit values? How much capital and time to achieve both of the previous scenarios including key assumptions?
7. TEAM: Explain why you are dedicating your time to solve the problem? Please provide details on yourself, executives and any key employees with specific relevance to this industry, problem, and/or need. Why would you quit and do something else? What will success look like?
8. FUNDING AND OWNERSHIP: How much money has been raised thus far? When and at what terms? Who are the other current investors (if any)? Who else is committed to this round? Please provide most recent capitalization table. All founders/key employees on vesting schedules? All founders/key employees still working on the business full time?
9. IDEAL INVESTOR PROFILE: Please describe your ideal investor. This includes subject matter expertise, level of engagement, specific needs, etc. Many investors in our fund are interested in being of assistance beyond our team and we would like to know the best way to help you.
10. QUESTIONS FOR US: Any open questions? Anything you would like to know about us?

Cross posted on Linkedin

I wrote this email to a friend on the topic of crypto and my take. All disclaimers apply here and will be fun to go back and re-read this a few years from now to see how wrong or maybe right I was…

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Let me start by saying I really have no idea where any of this ends up but do feel it is important to have a defined point of view on this stuff at this point even if it ends up being totally wrong. So not investment advice or advocacy, mostly one dude’s opinion.

Crypto to me starts with a very basic premise:

“I’m me, you’re you, and who owns what when”

Lots to unpack there as it relates to identity, transactions, property rights, audit trail, etc.

What’s fascinating is that there is a way to digitize so much of what has been embedded in commerce and collaboration to provide proof – proof of identity, proof of ownership, proof of compensation due for facilitation of a connection or commercial transaction.

So what is Bitcoin? At its core it is a hash. A unique set of numbers associated with a unit of measure.  My Dad did cryptography in the Navy in the 50s before the NSA was formed for secure messaging and trying to figure out what the Russians were saying. Encrypted, digitally created codes. Dandy, why is it valuable? Because people think it is. Don’t let it be lost on you the Bitcoin as well as other crypto assets are denominated in US Dollars.

But do let it give you pause that why can’t banks process transactions on a weekend, why does it take days to transfer payments, why does it take days and lots of hands to process a securities or real property transaction. That is inefficient and not digitized…but can be.

So what is this? To me, it is an architecture and you should approach it that way. Bitcoin is an application. A currency application and actually the easiest place to start. What Venmo, Cashapp, etc. have done to digitize the movement of dollars but are still burdened by banks, bank infrastructure, clearing, etc.  What is a wire, what is an ACH payment, what is tapping your credit card on a point of sale reader at the grocery store? Electronic bits and bytes that lead to a journal entry of debits and credits.  Expensive, slow, error/fraud prone, single currency denominated (USD). 

Back to “I am me, you are you and who owns what when.”  To me, there are three layers of crypto related to protocols and standards of communication and commerce. Consider what SMTP is to email, HTML is to web pages, and ABA codes are to wires.

Down stack crypto platforms and application tokens are where this gets interesting. Ethereum is essentially the “oil” of crypto. Required to make it go, enable transactions, enable settlements.  All this bullshit around non fungible tokens (NFTs) which is essentially the next evolution of digital rights management and authenticity proof is enabled by Ethereum. Check out what NBA Topshots is doing. Unique, digital assets of f’ing highlight reels. Really? Sure, why not. The local yokel flea market signed player card going digital. Collectibles and their digitization and securitization is a whole additional world like Otis and RallyRoad.  Too much liquidity in the system driving up asset values, but I digress…

Buy the oil/gas, not the car.  Side note – you should watch Duped You on Netflix. Fascinating around art and art fraud but good reinforcing on the former.  “Is it real, is it authentic?”

But it doesn’t stop there. Application tokens are utilized for smart contracts (who owns what when with no question of identity) and other utility functions like search, identity verification, settlement, temporary possession, etc.

The architecture doesn’t belong to Microsoft, Google, or Amazon it is fundamentally distributed. The applications don’t belong to Stripe, Paypal or Visa, they are distributed and enabled.

Should you invest in it? Hell if I know. Have I? Yes, on a small dollar methodical “dollar cost average” approach over the last 3+ years via a Coinbase account. It amounts to what a single angel investment would be and yes, I am up, considerably, but I also know it could tank. Don’t care.  Heavy ETH, some BTC and then a long tail of emerging software platforms and application tokens using what Coinbase lists as the “quality filter.”

Should you?  Don’t know. Maybe take 1% of investable assets and roll into it via Coinbase.  I would focus on down stack platform and tokens. CoinDesk 20 is a nice reference point on building a portfolio.

You will see more brokerages and ETFs emerging in the space which seems an unnecessary layer of fees to add to direct purchase.  Hype and hustlers.  Oh and serious f’ing volatility. What ETFs did to normalize the stock market and reduce volatility is alive and well in crypto.  Big swings. Prepare to lose it all…and gain it back in a day.

Bitcoin is a thing and is valuable because others think it is valuable. It is not the cost per coin as this is fundamentally about math and finite supply.  If you own dollars, pounds, euros, or yen, you should add some bitcoin.  Will you buy your coffee with it tomorrow? Probably not.

Ok, sorry for the manifesto. Key takeaways:

•  I am me, you are you
• Who owns what when
• A distributed architecture for commerce and collaboration that no one entity owns
• It is more speculation than investing although I have tried to have an informed point of view that leads to an investor approach
• Consider it a “meta” portfolio allocation that hedges against inflation, way of life disruption and assets that move between national borders without friction
• I have no f’ing idea what will happen

I’ve spent the past couple days in Salt Lake City, Utah at the Silicon Slopes Summit. This is mostly a “get to know the community” trip although I did have some scheduled meetings while here.

This event is amazing and a testament to the folks who put it together including ringleader Clint Betts.

There is much written and said about building entrepreneurial communities but an accessible and well done event or set of events put on by people in the community is crucial in my opinion. This one is that and more.

That said, there is A LOT going on in Utah around technology. The event had 20,000+ attendees most of whom I did not know.

One of the highlights of the event was an onstage discussion between Bill McDermott, CEO of SAP, and Ryan Smith, CEO of Qualtrics. Qualtrics was just acquired by SAP for $8 billion (with a B) dollars. The “biggest enterprise software company you never heard of” to paraphrase a comment from the stage. Beyond Bill sporting a nice pair of shades on stage (the ultimate ‘deal with it” move), Ryan made a comment that stuck out and I believe is clarifying on the entrepreneurial journey.

“Build it to keep”

Starting a business is hard, building a business is hard, pre-planning a sale is unwise. Yes, entrepreneurs are asked about exit and exit comparables by investors. Mostly this is around wanting to build a comfort level that the money invested can be returned within some time frame most likely via an acquisition. That’s for the outside investor, not for you.

According to Crunchbase, Qualtrics raised $400M. That is quite a lot but not when you consider an $8 billion acquisition and they did not raise anything until they were 10 years old with thousands of customers. That $70M round in 2012 was strategic capital to grow the business not startup capital.

I have not seen or researched how much the founding team and executives owned of the company at sale but I assume quite a lot. This is great. Great for the team, their families, the community, and for the investors who backed an already great and established company.  The word “optionality” is well worn in venture lexicon but the power of having options should not be understated.

Build a business to keep and also understand that when you take outside capital, even later in maturity, there is still an expectation you will pay it back and then some. Qualtrics had filed to go public just before its acquisition so Ryan and team were planning to continue to “build it to keep” while paying back their investors and rewarding their employees but the draw of a global software company with 14,000 sales people to further their vision proved a better option to realize their vision.

Quite a story…

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If you spend enough time in startup world you will eventually, whether a result of your actions or someone else’s, find yourself out of work. It happens and can happen with some frequency. Fail to raise funding, get on the wrong side of a venomous company culture, or even get acquired…then let go.

This existence is odd to those who work for larger companies or operate outside startup circles. After 6 six startups in 20 years, it just doesn’t seem odd to me anymore. My Mom once asked me if my most recent job was going to be it for a while, I said that you need to think of my career as a series of projects. Some last months, some last years. She paused and then asked if my wife knew this. Fortunately, I met my wife at one of those startups.

Usually the best, most competent people are busy. Busy working on their next venture, busy working inside a great company doing great things. But, every once in a while, something happens and that person is available. Maybe they needed a break after achieving and grinding for so many years. Maybe, and we haven’t seen this for a while, a downturn in the economy causes layoffs and a whole mass of very competent and smart people are suddenly available.

That’s when really awesome things can happen because great people stand out from mediocre ones and are really good at creating their next opportunity. Companies and people who are use to dealing with the mediocre instantly see the difference and know they have something special.

So, the next time you get laid off or feel like you are stuck in a situation or job that is intolerable, ask yourself two questions:

1. Are you one of the great ones or are you satisfied with being mediocre?
2. What great opportunities await if you signal your availability?

I consider risk a constant in your professional life. Again, there are things you can control and things you cannot. Startups have an elevated risk profile but they way I look at it is that at least you know that…and can take actions to identify and meet that risk head on. If you believe you are in a job with no down side risk, you will be blindsided when there is a restructuring or a lay off. I learned this many years ago when I left Arthur Andersen. I was in Washington, DC, working with the Business Consulting group, doing well, and just wanted to go do something with a startup. It was circa 1998 so you probably know how the story ends and, yes, come 2001 I was available. My colleagues at Arthur Andersen who lectured me about risk found themselves blindsided and out of work shortly after as the Enron fiasco took down a company that was founded in 1913.

It sill sucked but I was prepared for it because I knew and could see the risk. Being available allowed me to help start a new company from the ashes of the dot com bust and begin a winding career path that led to 5 more startups, a move to the West Coast and eventually finding myself running a small seed fund working with great entrepreneurs.

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The success of any relationship, be it personal or professional, depends heavily on the shared expectations of the people involved. Relationships get strained when there is a divergence in expectations out of the gate or even over time so this is not something to be established once and never revisited.

I have learned this lesson repeatedly both in personal and professional settings over time. This is as mundane as what a group of friends expects out of an evening out – low key dinner vs. loud bar setting or situations where the stakes are much higher like raising capital for your business from outside investors.

There is a New York Times article “More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost” making the rounds that has caused quite a bit of conversation about venture capital, who it is right for, and that it is but one mechanism to fund the growth of a business.

Any capital you receive that is not yours comes with expectations. This could be in the form of a financial return and/or some say over the decisions you make.   Venture capital has very high expectations or as Josh Kopelman of First Round Capital shared via Twitter “VCs sell jet fuel…”

I have the privilege of interacting with many entrepreneurs these days and do my best to demystify the venture funding process, what to expect, and how decisions are made.

I am fond of saying “you have a business if you can sell it for more than it costs you to make it.” If you’ve nailed that, you are a business and no one is questioning that.

The thing that gets lost often is that an external source of capital like a venture capital firm is working to build the investment case around your business. Smaller funds like ours have a lower hurdle rate because the size of the fund is small and return expectations are not to “return the fund” with just one investment. That means I would only invest in you if I think I can get $3 million in distribution (total size of our current fund) from that investment.   If you are talking to a $100 million dollar venture capital fund, that is your hurdle to build the investment case around.

The other dimension of taking on venture capital is that there is an expectation that you will (most likely) sell your business within a 10 year time horizon at that significant return. Don’t want to think about selling the business you started and love? Don’t take venture funding. Period.

When you raise money, you sell part of your business to someone else and surrender rights in that process – information rights, decision rights, rights about future opportunities, an obligation to provide frequent reports and updates. So often in the urgency to get capital to fund the business, those considerations are lost while setting the foundation of the expectations of the relationship.

Focus on shared expectations as you create new personal or professional relationships and take inventory of your current ones, especially those that are strained, and have an open and direct conversation to level set the expectations going forward.

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I had a conversation with an entrepreneur recently and he was trying to parse investor, advisors, when one can become the other, and how to manage it all.

I sent him the following input via email. This is my opinion for sure but thought worth sharing broadly and he agreed.

Investors:

You receive money and give up rights – ownership, control, decision making. Each dollar has a “cost” to the entrepreneur. The goal is to balance amounts and expectations with what you give up by taking external capital. A true “cost of capital”

Investors can be helpful, provide advice/guidance, etc. but rarely perform operational tasks assigned by the CEO. At the Board level this can formalize a bit more with specific asks/requests by the CEO of certain board members.

Advisors:

Uncompensated ones are fans but should not be expected to perform operational tasks. Compensated advisors should have operational accountability of some sort – that aligns with the CEOs current priorities. If equity compensation, they should vest like the rest of the employees (4yrs, 1 yr cliff) or 2 years in some cases for a very high value advisor. The vesting allows you to not incur unnecessary cost/dilution should it not work out and the value exchange happens over time.

If you feel you need to fill operational gaps with compensated advisors then consider your budget (equity or cash) and treat it like a hiring process. If there is a match between offered skills and operational needs then you can make the “hiring decision.”

Can someone be both?

Yes, an advisor can become an investor and an investor can become an advisor.

If the investor is doing more than being supportive and helpful and has a unique skill set that fills an operational need, then structure a separate and defined advisor role.

If the advisor wants to invest, then treat that process like all fundraising respecting minimums and adhering to current fundraising terms.

Should they be linked in some way?

A current advisor wants to invest

Generally a good thing as long as the CEO has not made the continued advisory role dependent on the investment.

Someone will only invest if you compensate them as an advisor. 

Generally no, unless they have a skill that maps to a current operational need/gap as defined by the CEO. In other words, they should be asked vs. this being a condition of investment.

A current advisor will only invest if you increase or extend the current advisor agreement. 

No. In this case the advisory role is now linked to the funding event and is a condition of investment.

Bottom line – treat them as separate and combine them intentionally and at the CEOs discretion.